Carbon-based devaluations could begin in a decade, says study

Carbon-intensive industries risk crippling devaluations within a decade unless they take bold actions to combat climate change, according to Canadian researchers. John Dyer reports from Boston.

The costs of extreme temperatures like stormier weather are mounting. (Image credit: Clinton Naik via Unsplash)

Writing in the Journal of Sustainable Finance & Investment, the researchers believe the costs of climate change coupled with environmental regulations could function as a double-whammy that forces write-downs in companies throughout the world economy but especially in the oil and gas industry where those factors are not yet priced into valuations.

‘Fundamental devaluations’ ahead

“Companies from the carbon-intensive sectors that fail to take proper recognizable emission abatements may be expected to experience fundamental devaluations in their stocks when the climate change risk gets priced correctly by the market,” said Mingyu Fang, a PhD candidate in Waterloo’s Department of Statistics & Actuarial Science, in a press release.

As taxpayers, business owners and individuals face mounting bills from extreme temperatures, governments that had agreed to international agreements to fight climate change might impose bans on oil drilling, for example. “Those companies may find that large portions of the reserves are at risk of being unexploitable for potential economic gains,” said Fang.

Zero emissions is a game changing rule

California, for example, has mandated that its electrical utilities release zero carbon emissions by 2045 – a game changing rule that will likely have ripple effects throughout the American energy sector in the coming decades.

Companies unprepared for those shifts would likely face asset devaluation and stock price depreciation, Fang and his colleagues concluded. “This indirect impact of climate change on investments will effectively be transformed into a political risk affecting particular asset classes, often referred to as the investment carbon risk,” their press release said.

Funded by the Society of Actuaries, the researchers examined the stock returns and market capitalizations of 36 publicly traded large emitters and other data from Europe and North America and cross referenced them with targets under major climate protocols.

Less than one third of emitters prepared

Only 9 of the 36 emitters were taking the future price of carbon into account in their financial statements and/or business models. They also compared carbon emitters with other industries and found they were lacking in preparation and performance relative to those companies.

“This research is intended to develop models and pricing methods, and to create new risk measures and risk management solutions, pertaining to changes with the climate and demographics,” the Society of Actuaries said.

Other sectors ahead of the game

Non-carbon intensive companies are taking action.

Fortune 500 companies saved almost $3.7 billion through renewable and efficient energy changes in 2016, reported the Financial Times.

Fast food chain McDonald’s, for example, is planning on reducing gas emissions by 36 per cent in the next 12 years. The company is investing in LED lighting, green packaging and more efficient kitchens. The company estimates that it will prevent 150 million metric tonnes of carbon dioxide from entering the atmosphere – the carbon footprint of Belgium, the Czech Republic and Vietnam.

Fang will discuss his findings with Bank of Montreal and the Society of Actuaries at the Climate Change, Carbon Risk and Sustainable Investment Webcast on December 4th.

Financial backers need to take action

They study authors said they hoped their work would prompt business leaders and officials to begin to address the potential changes in the market now. If oil, gas and related industries do not do it, then their financial backers will need to take action.

“It is in the best interest of companies in the financial, insurance, and pension industries to price this carbon risk correctly in their asset allocations,” said study co-author Tony Wirjanto, a University of Waterloo mathematician. “Companies have to take climate change into consideration to build an optimal and sustainable portfolio in the long run under the climate change risk.”

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