Low emissions, higher value, report suggests

Companies with lower carbon emissions have, on average, higher valuations and outperform higher emitters over the long term, a new Carbon Report by Forsyth Barr says.

Thursday, December 5th 2019, 7:19PM

The research found that institutional investors were increasingly focused on environmental issues in response to changing investment mandates. The report said more capital was likely to flow into low-emitting companies in the future compared to higher emitters.

The report said there were three reasons for the underperformance: Higher emitters were subject to stranded asset risk, such as coal-fired power generators in Europe; there was regulatory and financial risk for higher emitters that would potentially affect future earnings and valuations; and institutional investor mandates were increasingly focused on sustainability issues.

Fonterra was the the most exposed NZX company to Greenhouse Gas Emissions (GHG) over the longer term due to the risk to its farmer suppliers. It had the highest emissions, followed by Z Energy.

There was some short-term margin pressure on Genesis Energy and Contact Energy, but in the long-term Forsyth Barr expected them to benefit along with other electricity generators from increased electricity demand by transport and industrial processes. Z Energy and aviation-exposed companies Air New Zealand and Auckland Airport faced risks to longer-term volume growth.

The report said the cost of carbon would have little financial impact for NZX companies for the foreseeable future because carbon emissions were generally low, the price of carbon was low and offset and regulatory requirements protected heavy emitters.

If the total cost of New Zealand’s net carbon emissions was based on the current New Zealand emissions trading scheme price of about NZ$25/T, the cost to the New Zealand economy would be ~NZ$1.4 billion annually, relative to current GDP of $330 billion, or 0.5%. Even if compared against Government accounts, it would represent less than 2% of Government revenue.

"While several NZX companies provide excellent emissions disclosure, the general standard is mixed. Many companies do not appear to currently measure their emissions; but plenty are planning to. In addition, reporting is not consistent making comparisons difficult."

While New Zealand's CO2 emissions were "largely irrelevant globally" they were high on a per capita basis. Agriculture was responsible for almost half of emissions. The energy sector, including road transport, made up 41%.

Tags: ESG Forsyth Barr responsible investing