How Companies Anticipate The Effects Of Greenhouse Gas Regulations
There are many scare stories out there already about the impact that carbon emissions caps will have on our electricity bills and on company accounts. Company bosses are wondering whether they're duly worried or that it might actually really be about time to pull their heads out of the sand. Best guidelines, in the absence of the regulations, might be analysts' projections.
A story recently published in the New York Times reveals that Wall Street analysts have begun compiling lists of companies whose share prices are going to be impacted by limits to carbon emissions. The lists contain winners and losers based on the possibility of future federal regulations. "All of the leading presidential candidates say they favor such measures, and some kind of legislation affecting utilities is likely at some point after the November election," according to one bank's report quoted in the NYT.
As you would have expected, tipped losers are power companies that depend on coal and the winners are operators of nuclear power plants (who don't emit carbon). But no one is really sure what the real nitty-gritty issues will entail until the actual laws are drawn up. One big if is of course what will classify as a regulated greenhouse gas in future Federal laws. At the moment, California has plans in place to limit emissions on plants that emit not only carbon dioxide but also various other greenhouse gases. In the case of the US Northeast, only carbon dioxide has been regulated.
Innovest, a company which rates companies on management of carbon emissions and analyzes what effects the new environmental social and governance issues will have on company stock prices, believes that it is very unlikely that utilities will be able to pass on the costs to consumers. Instead, they say, shareholders are likely to be affected. That might just be a great development. The reason that utilities likely will not pass on the higher costs to consumers is that state public utility companies have already been forced to raise the retail power price on average almost 30% during the last five years.
Whatever the future holds, it's clear already that companies which have good environmental policies are also outperforming on the stockmarket. Recent research by Innovest reveals that water supply, wastewater treatment and solid waste companies which have high environmental performance also outperformed in terms of shareholder value. Innovest has designed an environmental performance rating model assessing corporate environmental performance, and then uses this analysis as a proxy for management quality to project the stock market returns of individual companies.
"There is a positive link between environmental performance and shareholder value. Companies [in the utility] sector which received above-average EcoValue 21 ratings, when taken as a group, outperformed companies with below-average ratings by 4.5 percentage points over a three-year period," the company's website reports. And a separate study of the electric utility industry found that portfolio managers who screen out companies with poor environmental records outperform others by more than 7% annually.
"These and other findings indicate that in every sector rated by Innovest, companies with above-average environmental performance have consistently outperformed lower-rated companies, as measured by total stock market return," Innovest said. The correlation is thought to exist largely because eco-efficiency is a good proxy for management quality, a key determinant of stock price performance
Companies in the utilities sector which Innovest rates highest include the FPL Group, because of its strategy to reduce greenhouse gas emissions and make huge investments in wind power. PG&E is also favored by Innovest because it is busy rolling out energy efficiency tools and focuses on renewable energy. Consolidated Edison, is particularly hot on taking measures to reduce emissions. By contrast, companies that have poor track records environmentally are rated lowly. They include Allegheny Energy in the South, as well as Ameren Corporation and the Scana Corporation.
Innovest's model assigns companies ratings, ranging from AAA (outperform) to CCC (underperform). Top tier banks and global consultancies have shown an interest in the methodology - further evidence that the approach might make sense.