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Datawatch

Companies slashing carbon emissions see 15% rise in market cap

Climate change motivates investors to emphasize decarbonization

Investors are becoming increasingly wary of climate change. (Source photo by Reuters)

TOKYO -- Climate change is having an effect on companies' market capitalization as investors increasingly focus on decarbonization. On Tuesday, 137 global investors that hold $20 trillion in assets called on over 1,800 companies to set science-based targets for cutting emissions. Those companies are the source of 25% of the world's carbon emissions, according to CDP, a non-profit group that coordinated the move.

The investors, including Axa of France and Japan's Nikko Asset Management, acted because if the companies do not, then those putting money in them will also pay a price. "Climate change presents material risks to investments, and companies that are failing to set targets grounded in science risk losing out -- and causing greater damage to the world economy," Emily Kreps, global director of Capital Markets at CDP, wrote in a statement.

More and more investors are calling for action.

The California Public Employees' Retirement System, a major U.S. pension fund, announced in 2019 its commitment to achieving a carbon-neutral investment portfolio by 2050. Some investors have pressured company board members by voting no on their appointments at annual general meetings.

In stock markets carbon emissions have influenced market capitalization.

According to MSCI carbon emissions data by company, the top 30 corporations that slashed carbon emissions from 2014 to 2018 saw their market capitalization increase by 15% as of September this year compared to December 2017. On the other hand, the top 30 companies that increased their carbon emissions from 2014 to 2018 saw their market cap decrease by 12% over the same period.

One such example can be seen in the energy sector.

French oil company Total announced in May its target to reach net-zero emissions by 2050. The company had already reduced 9% of its emissions in the four years until 2018, in contrast with Exxon Mobil, which saw emissions increase by 1% in the same period.

German utility E. ON sold its power plants that use fossil fuel and is now moving to make profits mainly from transmission lines. As a result, the company's emissions fell by 90%. In contrast, Canadian oil and gas pipeline company Enbridge has continued to invest in its pipeline business, resulting in more emissions. In terms of market cap, E. ON's increased by around 30% as of September this year compared with December of 2017, while Enbridge's declined 5%.

In the manufacturing sector, Siemens announced in 2015 its intention to become a carbon-neutral company by 2030. In September the company listed subsidiary Siemens Energy, which makes gas-turbines and transmission equipment, resulting in the removal of Siemens Energy from Siemens' consolidated financial statements. Japan's Hitachi also divested from the gas-turbine business and aims to be carbon neutral by fiscal 2030.

The Task Force on Climate-Related Financial Disclosures, created by the Financial Stability Board, in 2017 recommended that companies and investors develop consistent climate-related financial risk disclosures. That helped make investors realize that climate change is a direct risk for corporate earnings. Akemi Hatano, an analyst at SBI Security, points out that "many companies disclose carbon emissions, so it is easy to compare for investors, which is one of the reasons carbon footprints influence stock prices."

Investment is also flowing into clean energy companies such as NextEra Energy, a U.S. renewable energy utility. NextEra Energy's market cap surpassed oil giant ExxonMobil's in early October. In Japan, the forward price-earnings ratio of Renova, a renewable energy utility, topped 140.

And in the automobile sector, electric vehicle maker Tesla's share price is surging, while Toyota Motor's remains sluggish, proving that many investors are betting on a rapid energy transition.

From 2014 to 2018, total emissions of roughly 2,000 major companies around the world decreased by 5%. The amount for Japanese companies, however, was just 1%, signaling that much still needs to be done. Policies such as cap-and-trade or carbon taxes can spur the energy transition, but the carbon tax in Japan remains low.

The European Union is mulling a carbon border tax, which would hinder Japanese companies in the EU market. The U.S. will implement a more robust clean energy policy if Democratic candidate Joe Biden wins the U.S. presidential election. With more governments and companies fearing climate change, Japan must accelerate its own decarbonization efforts.

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