A new analysis indicates 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. The analysis also finds that the greenhouse gas emissions from companies in the S&P 500 total more than all the car, truck, bus and aircraft emissions in the United States.
These 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” analyzes the potential financial implications of applying a carbon price to global emissions for companies listed on the index. The analysis compares companies and sectors on absolute emissions and carbon intensity, as well the potential carbon costs relative to revenue.
The research findings come as legislation moves through the U.S. Congress to combat climate change by reducing the amount of greenhouse gases emitted into the atmosphere from American power plants and industrial processes. Highlights of the report include:
- Carbon costs would total over $92.8 billion if a market price of $28.24–Trucost’s estimate of the carbon market price in 2012–were applied to each metric ton of emissions from companies in the S&P 500 and their direct suppliers such as electricity providers. This represents more than 1% of revenue from these companies, and some 5.5% of combined EBITDA.
- 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.
Carbon costs currently are not reflected on a company’s financial statements because there is no charge for emissions. However, the proposed cap-and-trade legislation under consideration by the U.S. Congress would make new carbon costs explicit. This adds urgency to the need for investors 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 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. “The analysis makes clear that a cap-and-trade system is a real game changer. A number of companies will have to reform how they think about carbon emissions and the associated costs, or their bottom line will suffer greatly,” Lukomnik said.
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. Investors would be wise to watch closely as the Congress continues its consideration of the American Clean Energy and Security Act of 2009. The legislation is considered highly complex, and could have profound, long-lasting impacts on company balance sheets.”
The full report is available at the link below.
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