Carbon emissions tied to stock valuations?


There is growing evidence to suggest green investments can help boost a company's share price

After a report from the CDP last month found a correlation between high scores in reducing carbon emissions and increased stock prices, investors are adding a new calculation to their stock valuation and pricing schemes.

While advanced environmental initiatives have been long heralded as an expense that must be kept down to keep a company profitable, there is substantial evidence that in reality it is in investment a company can choose to increase its stock value and performance. The reasons for this are many and complicated but the resulting increase in value and long-term benefit to the environment is not.

What is pushing stock prices higher?
Traditional stock valuations are all about price to earnings ratios, net profits, and corporate debt or obligations. Using strictly this narrow scope of criteria, it can be argued (and often is) that additional regulation increases costs, causing businesses to be less competitive and reducing both profits and stock prices. But the actual facts do correspond to these assertions, regardless of the simple logic behind them. There are numerous reasons why the unexpected result.

Speculation on future energy costs- Carbon emissions are measured in numerous ways. The direct correlation between energy efficiency and lower carbon emissions makes it easy to presume companies with lower carbon emissions also will have lower future energy costs. Since there is no easy way to track exactly how much energy or how energy efficient a corporation is for considering the implications of future energy cost increases, carbon emissions make for an easily tracked and measured way to estimate. There is little no energy costs will continue to rapidly increase, but low carbon corporations may be presumed to be in a better position to deal with future increases in cost.

Cost of compliance with future regulations - Rather than placing the emphasis on the current cost of compliance, investors are working off the presumption that regulatory requirements will become ever more stringent in future. Corporations which are already ahead of the curve will be well placed to absorb these future costs with minimal impact. Companies that are marginal now have very predictable large compliance costs coming in the future that depresses their future value.

Sign of innovation and technological advantage - While every company boasts that it invests in infrastructure and the best technology available in its field, it is difficult for anybody but a true insider in the specific industry that has access to the plants and facilities to determine if that is a factual statement or simply words on a press release. Lower carbon emissions is a clear indicator that there is fact supporting that claim and that basic infrastructure and machinery is modern and up to date.

Investor price support - There is an ever growing segment of affluent investors and well capitalised investment groups which place an emphasis on green investing. The CDP Global 500 Report as an example lists 571 investment groups with over $70tr in assets that make green technology and performance a key indicator in stock and investment selection. While that is the biggest compiled set, many mutual funds and many private investors have made it their own priority as well. That type of financial backing is having an effect.

With stock values increase for major companies and corporations that not only adhere to but are proactive to regulation, when combined by the thousands of jobs created by the smaller companies like Mark Group that perform work with businesses and individuals to reduce carbon emissions and increase energy efficiency, it is a clear indicator that these regulations may be a net positive to national and global economies as opposed to the drain many have claimed.

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