Carbon pricing poses significant risk to future earnings

As the carbon pricing market moves from being nascent to a fully operational mechanism for holding companies to account on climate, some sectors will feel the heat of the financial sanctions introduced on carbon emissions.

Speaking at the Festival of Sustainable Investing, Vincent Denoiseux, chief investment strategist at Amundi ETF, index and smart beta, said that although the current market for carbon prices was fragmented, all projections point to the price of carbon carbon will increase significantly in the next 10 years. 15 years.

Currently only 23% of global carbon emissions are collected through carbon taxes or emissions trading systems (ETS), it said. Carbon was trading at approximately €76 on July 27, 2022.

efficient lever

The International Monetary Fund has previously said that carbon pricing was “the most powerful and efficient way [lever]because it allows businesses and households to find the cheapest ways to reduce energy use and switch to cleaner alternatives.”

Last year he proposed an International Carbon Price Floor (ICPF) agreement that would require the world’s biggest emitters to pay a minimum price of $25 to $75 per tonne of carbon, depending on their economic development.

The Russian invasion of Ukraine has intensified the tension between advancing climate change mitigation and energy affordability.

Amid an ongoing energy crisis and Russian supply cuts, the EU has increasingly sought to overhaul its central emissions reduction tool: the ETS.

Lawmakers reached an agreement on reforms to the market in May, including expanding black plans for a new mechanism to impose CO2 costs on suppliers of fuel for buildings and transport.

Threat of returns

Denoiseux explained that investors needed to be aware of the risk of carbon pricing to fully appreciate the link between climate and the search for optimal returns.

Using data from S&P Global/Trucost, Amundi revealed in an analysis that the cost of unpriced carbon to business – or the difference between the amount a business pays in carbon pricing today and the amount it will pay in the future – represented a significant risk to the earnings of the components of global stock indices.

In a “delayed action” climate scenario, “EBITDA at risk” was particularly notable in the energy, materials and utilities sectors, it said. Utilities alone could lose 50% of their average EBITDA by 2040, subject to changes made to emissions reductions and business models.

In total, 16% of MSCI World Index enterprise value was at risk due to carbon pricing, the analysis revealed.

Role of benchmarks

The Paris-aligned and Climate Transition benchmarks are something of an antidote to that scenario, Denoiseux said, as they aim to immediately reduce carbon emissions for a given exposure by 50% and 30% respectively and align portfolios with a drawdown trajectory of approximately 7%. one year.

According to ETF’s chief investment strategist, as companies cut carbon emissions by 50% according to Paris-aligned benchmarks, profit-at-risk numbers have dropped by 50%.

“We saw a fairly consistent result across regions: if investors start with a climate benchmark, they can see a significant reduction in financial risk in their portfolios on top of the impact they’re having by reducing carbon emissions.

“We see the carbon price news flow every day. Here, we’ve taken a long-term view of what it could mean for the earnings of companies in a portfolio and there’s a very significant impact from a financial perspective for these Business. .

“With a benchmark aligned with Paris, you’re reducing your carbon footprint by 50% and that comes with very significant risk reduction for the long-term horizon.”

This post is funded by Amundi ETF

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