Do a company's carbon emissions affect its value in the market? Is the “carbon bubble” about to burst? Accountancy and Finance Professor David Lont's research is attracting world-wide attention.
The University of Otago is playing a global role in the complex carbon emissions debate; its evidence-based research better informing investors and policy-makers worldwide, particularly when it comes to decisions about divestment in fossil-fuel companies.
Greenhouse gas (GHG) emissions affect more than just the environment; they also have financial and social implications for businesses and communities. The University of Otago is addressing just how emissions are affecting one of the major world markets across two major international research projects.
Professor David Lont from the Otago Business School, working with Professor Paul Griffin of the University of California, Davis, and Yuan Sun of Boston University, has analysed data on Standard & Poor's 500 firms.
The team found GHG emissions do have a negative influence on the value of a business; the greater the carbon emissions produced by a company, the lower its share price.
There was even a negative impact on the value of companies which hadn't disclosed their emissions through the Carbon Disclosure Project Scheme – the most well known depository of GHG emissions.
This suggests investors use alternative assessment channels and that market participants in a wide range of listed USA firms are sophisticated in their analysis.
Businesses in other countries, including New Zealand, are also likely to be using this valuation factor.
Exactly how much the company value is affected is now the key question, with Lont reporting that the current USA estimate may too high.
“We believe we have a better estimate of the implied cost of carbon for USA firms, at an average of $72 per tonne or around two per cent of the firm's value.”
Lont is also involved in a separate study attracting widespread global interest, the market evidence in their findings challenging the prediction of a carbon bubble about to burst.
This research has been assessing how the markets of large USA-listed oil and gas majors respond to the science suggesting the need for a global carbon budget to avoid global warming.
This carbon budget estimate will help the world avoid temperature rises of more than two per cent above pre-industrial levels. If the budget is enforced, it will have long-term implications for the oil, gas and coal industries – potentially they have large amounts of resources they may not ever be able to extract.
The media have widely covered suggestions that fossil-fuel companies could be forced to abandon their reserves, leaving “stranded assets”. Some argue this would mean debt and a market value collapse of oil and gas majors, so current values are therefore mis-priced.
This is termed a “carbon bubble”, Lont explains, and something that has attracted the attention of investment funds, analysts and G20 world leaders. They are concerned that multi-billion dollar investment into the oil and gas companies could be based on false assumptions.
But while it has the potential to cripple the industry, it appears from the analysis that investors have a relatively muted reaction to the science. The predictions assume mis-informed capital markets about unburnable carbon. However, investors have not ignored the science; instead, they have considered multiple factors across a range of possible economic, environments, regulatory and social scenarios.
Lont says some commentators may, therefore, be overstating the effect of unburnable carbon on the value of oil and gas investments.
“It's a much more complex debate than is being portrayed by some. For example, oil and gas demand is likely to stay strong for some time due to a lack of cost-effective alternatives. The stranded reserves may also vary by company due to different types of reserves, regulation and extraction costs.
“Our study helps provide a counter-point by providing an analysis of the market response to the science around stranded assets.”
Companies might also voluntarily help investors by disclosing more information about the extent and uncertain nature of stranded assets, he says.