How Equity Analysts Valuate Global Warming Impact On Companies

verdantix.gifEquity analysts divide into three distinct groups based on their climate change perspective, according to a report from independent research firm Verdantix. The survey, entitled Equity Analysts Link Climate Change And Company Valuation shows that there are virtually equally sized groups of believers, sceptics and cynics.

Believers represent 30% of analysts. These guys already have upgraded their financial models to include climate change factors and are hottest on regulatory effects and other climate change related ‘risks’. Sceptics, comprising 28% of the research participants, think that climate change will have a material impact on profitability too. But they put the timing of the impact back with 2 to 5 years from now. Cynics, comprising 30% of the surveyed analysts, doubt climate change will ever impact valuations.
Verdantix Director David Metcalfe, author of the report, said that the utilities sector thus far is the only industry about which analysts seem to have agreed on a consensus on how to incorporate climate change into financial models. In other sectors such unanimity is lacking. Some oil and gas analysts are in complete denial while others view climate change regulations, risks and strategy as intrinsic to financial valuation. Metcalfe believes this is bound to change. He believes that by 2010 all industries will see a consensus of analyst opinion.
The Verdantix analysis is based on in-depth interviews with 50 equity analysts who cover 13 different industry sectors and represent 22 investment banks including ABN AMRO, Goldman Sachs, Morgan Stanley and UBS. The survey’s other findings were that analysts suffer from information and knowledge gaps. “Thirty-two per cent of analysts, covering industries as diverse as food production, basic resources, retail, oil, gas, media and banks said they didn’t know if firms provide sufficient data on greenhouse gas emissions. Half of the respondents stated that firms didn’t need to verify greenhouse gas emissions although this is essential to establish a baseline for reporting”, Metcalfe said.
Another finding was that analysts are most aware of the impact of regulations on businesses. Forty-two per cent of the analysts in the Verdantix survey conducted research into climate change regulatory impacts. Also, the EU’s Emissions Trading Scheme loomed large in analysts’ minds. By contrast, the UK’s Carbon Reduction Commitment was deemed less important.
Carbon emission reductions and renewable energy ranked lowest. While 32% of analysts had changed a profit forecast due to an energy or fuel efficiency initiative, just 8% did so due to a commitment to reduce carbon emissions and only 6% made an adjustment because a firm committed to buying the majority of energy from renewable sources.
“Climate change is perceived as a corporate branding issue” Metcalfe says. A total of 80% of the surveyed analysts were more or less convinced that brand image is enhanced through climate change initiatives. The report also includes pointers for companies’ corporate communications designed to take advantage of the analyst mindset based on the survey’s results.

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