Investors Are Punishing the Polluters. Here’s ProofAdvisor Perspectives
The corporate sector has a leading role to play in the world’s response to climate change. The data accumulated so far make it clear that the more greenhouse gases a company emits, the lower its stock price relative to its earnings.
This effect — in a sense a climate discount — is influenced by climate risk, by emissions regulations and carbon pricing, and by attention from investors and the public. Those factors lead to larger discounts in some sectors and market-cap sizes than in others. So it’s clear the stock market is already rewarding companies that reduce emissions with higher valuations. And because this investor response will probably grow over time, the market incentive to lower emissions will, too.
Working with leading academics such as Joseph Aldy of the Harvard Kennedy School, Patrick Bolton of Columbia Business School, Marcin Kacperczyk of Imperial College London and Andrew Lo of the Massachusetts Institute of Technology, analysts at Lazard looked at data on more than 16,000 global companies and examined the relationship between each one’s equity value and the amount of greenhouse gases it emitted from 2016 to 2020.
This analysis reveals that, on average, a 10% increase in carbon dioxide emissions is associated with a 0.4% decline in a company’s price-earnings ratio (controlling for a wide array of other factors). But that climate discount average masks wide variations across sectors. The market currently punishes emissions in energy (0.8%) three times as much as those in consumer staples (0.3%), highlighting the role that climate risk and emissions regulations play in driving the discount.
The effect is also much larger for big companies than for small ones — perhaps because investors may pay more attention to bigger corporations and because regulations are more likely to apply to them. Consider industrials, for example. For European industrial companies with a market cap above $50 billion, the price-earnings multiple falls by a whopping 18% for every 10% increase in carbon emissions. For European industrial companies with market caps below $1 billion, which are less affected by regulation and investor pressure, the drop is less than 0.5%.
Read the full article here by Peter R. Orszag, Advisor Perspectives