According to a recent report by Lazard, investors prioritize disclosure when it comes to climate risk. The study found that companies that voluntarily disclose their greenhouse gas emissions face less stock penalties than those that do not. The United States regulators are currently developing rules that require companies to provide information on their impact on the environment. This is part of a broader effort to mitigate climate change caused by activities like the use of fossil fuels.
Between 2011 and 2020, investors relied on "a patchwork of voluntary climate-related communications." The study found that companies that are upfront about their emissions fare better than those that are not. Specifically, firms with 10% higher greenhouse gas emissions from their own operations, or Scope 1 emissions, could expect a reduction of just over 1% in their price-to-earnings (P/E) ratio, a commonly used measure of a stock's value. However, disclosing Scope 1 emissions would increase the company's P/E ratio by 0.6%, offsetting 48% of the discount that had been applied due to higher emissions. Energy companies benefited more from disclosure, with their P/E ratio increasing by 0.8%.
The report suggests that a lack of disclosure prompts investors to price in the uncertainty of an estimate they may have to make on their own. This may lead them to assume the worst, particularly if companies do not disclose their emissions. Peter Orszag, chief executive of financial advisory at Lazard, stated that "people might assume the worst if you don't disclose."
Many companies have pledged to reduce their carbon emissions in recent years. However, the report found that these pledges had little observable impact on their valuations. This is due in part to the fact that more than half the companies sampled are not on track to meet their own targets. The study suggests that investors may not view these pledges as bearing material weight but rather as a way of bolstering public relations.
Overall, the report emphasizes the importance of disclosure for investors when it comes to climate risk. Companies that are upfront about their emissions face less stock penalties, and investors are more likely to discount their shares when they do not disclose their emissions. This highlights the need for a standardized system of disclosure and regulation that requires companies to provide information about their impact on the environment.
