Carbon not priced into equities, warns AXA IM

Carbon not priced into equities, warns AXA IM

Current valuation methods fail to account for the impact of a company's carbon footprint on its share price, argues AXA Investment Managers.


Research from the company's Rosenberg Equities team found evidence that a company's carbon footprint impacted its share price when carbon was modelled as an income statement item and factored in to an analysis.

“When we think about carbon, we can think about it as something companies can spend in pursuit of revenue, it can be thought of as part of their regular operating process,” said AXA Investment Managers director of investment strategy Kathryn McDonald.

“When we treat carbon this way, I’ll jump ahead to the punchline, we do see evidence that it is impacting share price when we hold other things constant.”

The study drew on carbon data from carbon research company Trucost, and looked at share prices for US and Canadian companies between February 2006 and May 2016, Ms McDonald said, with the single geographical region chosen to minimise country and currency effects.

The results highlighted that current methods of analysing potential negative risk associated with greenhouse gas emissions may be insufficient, AXA Investment Managers said.

“The implication of this is that we think that analyses that’s limited to business line is going to miss this independent effect, so while we are accounting for business line, we’re seeing an additional impact from carbon,” Ms McDonald said.

Subsequently, Ms McDonald said investors should give a ‘haircut’ to share valuations for companies with a big carbon footprint, as when all else is equal, “a higher carbon footprint results, by definition, in a slightly lower valuation”.

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Carbon not priced into equities, warns AXA IM
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