Lazard has launched its Climate Centre to provide rigorous, data-driven insights on the financial effects of climate change and the energy transition on companies and markets.
The initiative seeks to fill a crucial gap in climate research, which until now has tended to focus on national or sector-level trends as opposed to the impact on specific companies.
The Centre which has a comprehensive data set more than 16,000 global companies from 2016 through 2020 shows that there is a significant relationship between carbon dioxide and a company’s price earnings ratio.
Bigger companies, and those in high-emitting industries such as the energy sector, tend to be the most affected.
For example, on average, a 10% decrease in a large energy company’s emission corresponds with a 3.9% and 8.7% increase in the company’s price-to-earnings ratio in the US and Europe, respectively.
It also noted that debt markets are starting to price higher emissions. For small companies especially in Europe, higher emissions are associated with higher credit default swap spreads.
The valuation effect is also shown to be impacted by regulatory changes, suggesting that future policies (many of which are currently being crafted) could amplify the financial incentive for companies to engage in decarbonisation.
In addition, the research is the first to find that other greenhouse gases, such as methane and hydrofluorocarbons, can have an impact on valuation multiples.
“Climate change affects all sectors of our global economy and creates new, evolving risks for companies as well as for investors,” said Peter Orszag, Chief Executive Officer of Lazard’s Financial Advisory business.
“Lazard looks forward to being a driving force in data-driven insights as business leaders, investors and policy makers tackle the climate crisis in the years and decades to come.”
“The work of the Lazard Climate Centre will complement our ESG research capabilities, which are integrated across all of our investment processes,” said Ashish Bhutani, Chief Executive Officer of Lazard Asset Management. “We expect it to add value to our asset management platforms and customized client solutions in the future.”
Future research directions include investigating the effects of emissions profiles on M&A transactions, exploring linkages between firm valuation and climate sentiment in news and earnings reports, and evaluating the implications of the growing carbon offsets market.
©Markets Media Europe 2021