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New Study on Carbon Risk

New Study on Carbon Risk

Published 08-06-07

Submitted by Centre Info Ltd. - Sustainable Investment Consulting

August 6, 2007 - In collaboration with Centre Info, Societe Generale Equity Research conducted a study over the long-term impact of carbon emissions on investment. This study, "CREAM-ing Carbon Risk" and released in June 2007, is based on envIMPACT(R), an analysis tool developed by Centre Info that measures the carbon intensity of companies over the entire life cycle of their products.

If countries having signed the Kyoto protocol might hope to catch up with their commitment, they will have no other choice than to sharply increase the prices of the emissions permits they deliver to companies. We can also foresee that additional restrictions will be implemented in order to foster technological change and to diminish our use of high-CO2 emitting energies.

On a micro-economic level, companies that burn much fossil energy and that won't be able to decrease their consumption will need to acquire additional emission rights on the CO2 market, not mentioning the upward trend on energy prices due to higher demand and scarcer resources. The result will inevitably be cost increases, higher prices and depressed margins. As for companies that produce fossil energy-consuming goods, they will face a decrease of the demand.

The approach of Societe Generale is to measure the risk supported by the investor who would remain invested in highly carbon-intensive equities (so called Business as Usual - BAU). The factors considered are:

  • data by industries and by companies from envIMPACT,

  • earnings before interests, taxes, depreciation and amortisation (EBITDA),

  • estimated long-term cost of the emission right for one ton of CO2,

  • quantity of CO2 authorised by branch (or targeted),

  • the estimated ability of the company to transfer the cost increase to the final consumer.

    The model of Societe Generale based on these variables measures the impact of the cost of CO2 emission rights and its evolution over the financial results of companies. It differentiates potentially "good" equities from the potentially "bad" ones.

    Download the full study: http://www.centreinfo.ch/doc/doc_site/application_of_envimpact_by_sg_en.pdf

    More information on envIMPACT(R): http://www.centreinfo.ch/index.php/en/envimpact-91.htm

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    Centre Info Ltd. - Sustainable Investment Consulting

    Centre Info Ltd. - Sustainable Investment Consulting

    Founded in 1990, Centre Info offers solutions to SRI and mainstream investors who whish to integrate ESG issues into their investment processes. Centre Info SA also provides advice on SRI product concept and design, on SRI investment strategy formulation and undertakes specific research projects related to sustainability and ESG issues.

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