VIEWS & RESEARCH

Thought Leadership

Counting down carbon: Higher share prices through lower emissions

24 January 2022

Authors: Rahil Ram, Iancu Daramus

The ESG for Investors platform provides investors with tools to better help them maximise the impact and risk-adjusted returns, including an ‘engagement maximiser’ to identify the most material ESG factors that, if addressed, could make a positive impact on a company’s share price. In this post, we look more closely at the factor that this research has found to have the highest upside across all sectors – addressing CO2 emissions.

The chart below shows the median (in blue) and maximum (in orange) potential share price appreciation if companies within each GICS sector were to bring their emissions performance in line with their peers in the top decile. 

What does this mean for investors? We identify three main implications.

1. Largest emitting sectors have the largest gap between leaders and laggards

Company action on climate is often presented as an insurance policy – if and when policy-makers introduce a global carbon price, companies may face significantly higher costs, which early action can reduce or avoid. This framing can be misleading, by placing the emphasis on a single future event (which may or may not happen). But the reality on the ground, today, is already more nuanced.

First, whilst short of a single, planetary price, the reach of carbon pricing is growing (currently covering 21% of global GHG emissions), as are the linkages between the various sub-, supra- and national pricing initiatives, and the price levels (with the EU carbon price offering the most dramatic illustration).

Second, as the chart illustrates, carbon re-rating is not a speculative scenario, but is already happening: this research suggests that companies which are the top-performers in terms of addressing their emissions are rewarded by the market with higher multiples. The median potential share price increase was at least 3% across all sectors¹. This result reinforces our belief that climate change represents a first-order investment issue, with risks and opportunities facing all sectors.

2. Largest emitting sectors have the largest gap between leaders and laggards

Emission reduction matters to all sectors, but not in the same way. The sectors whose business model is most directly linked to extracting or burning fossil fuels (utilities, energy and materials) show the highest median potential upside from reducing emissions (22%, 14%, and 13%, respectively). This makes intuitive sense, as the largest emitters also have the highest room to reduce emissions. However, more interestingly, this means that investors can benefit from using their capital to lead to immediate emission reductions within these sectors, given the high divergence between the leaders and laggards.

3. There is room for improvement across all sectors

Another important insight of the research is the need to look beyond the ‘usual suspects’ such as fossil fuel companies. Consumer discretionary, IT and real estate companies, on average, face a potential upside of 5% by addressing their emissions – with opportunities available across all sectors. Climate change is an issue that can only be solved if all sectors do their part.

Admittedly, the narrower gap between the median and the maximum uplift suggests there are fewer low-hanging fruit in lower-emissions sectors, but this should not be an excuse for complacency. Indeed, the growing discussions of the carbon footprint of everything from burgers to cryptocurrencies, points to increased public and regulatory ESG scrutiny that is spreading beyond the ‘usual suspects’ – and also to increased consumer demand for more sustainable goods and products.

In summary

More broadly, we believe these results provide a positive incentive for action across all GICS sectors – one of the reasons why Fulcrum supports CDP’s campaign calling on over 1600 large companies to set Science-Based Targets, and why we are encouraging companies to set science-based emission reduction targets.

The time to tackle emissions is now, helping companies and investors unlock value without locking in an unsustainable future for the planet.

About the Authors

Rahil Ram

Rahil is a Director at Fulcrum Asset Management and is involved in portfolio strategy, portfolio implementation, research, sustainability and idea generation for the discretionary macro and thematic strategies. Prior to joining Fulcrum, Rahil was a strategist within the Asset Allocation team at Legal & General Investment Management for five years, during which time he completed his Masters’ in Actuarial Management from Cass Business School and qualified as an Actuary in 2017.

Iancu Daramus

Iancu works on the development of Fulcrum’s responsible investment capabilities. Prior to joining Fulcrum in 2021, Iancu was at Legal & General Investment Management where he led the stewardship team’s work in the energy sector and advised institutional clients on low-carbon investment solutions. Iancu graduated from the London School of Economics and holds degrees in philosophy and public policy.

Source: [1] with the exception of financials, who are not included in the analysis

This content is provided for informational purposes and is directed at professional clients as defined in Directive 2011/61/EU (AIFMD) and Directive 2014/65/EU (MiFID II) Annex II Section I or Section II or an investor with an equivalent status as defined by your local jurisdiction.  Fulcrum Asset Management LLP (“Fulcrum”) does not produce independent Investment Research and any content disseminated is not prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be deemed as marketing communications.  This document is also considered to be a minor non-monetary (‘MNMB’) benefit under Directive 2014/65/EU on Markets in Financial Instruments Directive (‘MiFID II’) which transposed into UK domestic law under the Financial Services and Markets Act 2000 (as amended). Fulcrum defines MNMBs as documentation relating to a financial instrument or an investment service which is generic in nature and may be simultaneously made available to any investment firm wishing to receive it or to the general public. The following information may have been disseminated in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service provided by Fulcrum.Any views and opinions expressed are for informational and/or similarly educational purposes only and are a reflection of the author’s best judgment, based upon information available at the time obtained from sources believed to be reliable and providing information in good faith, but no responsibility is accepted for any errors or omissions. Charts and graphs provided herein are for illustrative purposes only. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Some of the statements may be forward-looking statements or statements of future expectations based on the currently available information. Accordingly, such statements are subject to risks and uncertainties. For example, factors such as the development of macroeconomic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. In no case whatsoever will Fulcrum be liable to anyone for any decision made or action taken in conjunction with the information and/or statements in this press release or for any related damages. Reproduction of this material in whole or in part is strictly prohibited without prior written permission of Fulcrum Copyright © Fulcrum Asset Management LLP 2024. All rights reserved.

Share this article

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email
Your privacy

Cookies are data files that are stored on your computer or other smart device by a website’s server. Each cookie is unique to your web browser. It will contain some anonymous information such as a unique identifier, website’s domain name, and some digits and numbers. Cookies are useful as they allow us to recognise a user’s device and its preferences in order to ensure that our website works properly. By continuing to use this website, you consent to the use of our cookies.

 

You can find out the different types of cookies used on our website in our Cookies and Data Privacy Policies.

Necessary cookies