As Congress grapples with legislation that well may seek to reduce greenhouse emissions by imposing a cap-and-trade program in the U.S, investors are wondering how the possible new law might impact their investment decisions.
A new study reveals that the financial risk to companies in the Standard & Poor's 500-Stock Index would vary greatly under a cap-and trade program requiring the purchase of carbon emission credits. The earnings of most companies would be relatively unaffected, but a few could face costs that could more than offset all their earnings.
Investors have been urged to consider developing a framework to consider climate change issues including: assessing material climate risks to returns; incorporating criteria on carbon disclosure and performance into active ownership practices; and developing the capacity to evaluate carbon exposure in stock selection analysis.
The carbon/S&P findings are contained in a new report released by the not-for-profit Investor Responsibility Research Center Institute and Trucost, a global provider of environmental data and analysis.
"Carbon Risks and Opportunities in the S&P 500" compares companies and sectors on absolute emissions and carbon intensity, as well the potential carbon costs relative to revenue and earnings before interest, tax, depreciation and amortization (EBITDA).
Some highlights:
- The Utilities sector is most carbon-intensive, emitting some 59% of operational greenhouse gases from companies in the S&P 500. This sector faces the highest financial exposure to carbon costs. If the 34 utilities analyzed in the study were to pay for each metric ton of emissions, carbon costs could reduce their combined earnings by 45%. Basic Resources is the second-most exposed sector, followed by the Food & Beverage, Chemicals and Oil & Gas.
- On a company-by-company basis, financial risk varies widely. Earnings could fall between less than 1% and 117% by company, if carbon costs were incurred. Carbon costs would amount to less than 1% of earnings for 203 companies analyzed, while 71 companies could see earnings fall by 10% or more. The greatest variation is in the most carbon-intensive sectors.
Keep in mind that carbon costs currently are not reflected on a company's financial statements because there is no charge for emissions. However the SEC has come under pressure to require such data. The proposed cap-and-trade legislation would make new carbon costs explicit.
"The cost of carbon emissions has been passed to the public and not reflected in the financial statements of companies," said Jon Lukomnik, program director of the IRRC Institute, which commissioned the study. He added, "The report suggests that some companies and investors could be caught off guard. Two-thirds of S&P 500 companies have inadequate greenhouse gas emissions disclosures."
