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Corporate Valuation by Laura Zanetti, Gianfranco Gianfrate, Mario Massari

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Chapter 17Carbon Risk and Corporate Value1

17.1 WHY CARBON RISK MATTERS

As climate change and global warming are addressed by tougher regulation, new emerging technologies, and shifts in consumer behaviors, their materiality on the valuation of many industries and companies appears severe. In some sectors, the shocks are going to be profound. According to some estimates,2 the impact of high carbon price on the cash flow of utilities, industrial companies, and airlines will be substantial and pose serious risks to companies and investors.

As a first step in our analysis, it is necessary to provide a definition of carbon risk(s). Carbon risks principally encompass policy and legal, technology, market and economic factors as well as reputational risks. Those various risks, which have carbon as a common element, may translate to asset risk to financial intermediaries and investors.3 It is worth recalling that the definition of risk in finance is related to the variability of an expected outcome, and that the direction of such variability does not actually matter. Better-than-expected outcomes translate to risk from a financial standpoint just as lower-than-expected ones do.

Source: UNEF

Therefore, carbon risks do exist not only for companies whose performance is negatively affected by an increase of carbon price but also for companies that are positively affected in scenarios with carbon becoming more and more costly (see Exhibit 17.1). As a consequence, there are valuation implications ...

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