The Value Relevance of a Firm's Carbon profile

Abstract

This study revisits the valuation relevance of a firm’s carbon profile using a broader notion of a firm’s carbon profile, which includes carbon risk exposure, aside from emissions, and proactive carbon responses (PCRs), identified from publically available information. Initially, we use extant literature and interviews with 28 managers of high carbon emitting firms and five ESG analysts to inform the operationalisation of carbon-risk exposure and identification of PCRs from publically available data. From this, we test the valuation effects of our broader notion of a firm’s carbon profile using a modified Ohlson valuation model and a sample of 51 firms (122 firm-year observations) reporting under the NGER scheme with the necessary financial and market data. We document that, on average, a one standard deviation change in the level of the expanded carbon-risk exposure results in a penalty of 12% of market capitalisation of the sample firms on average. We also find that PCRs partially mitigate the documented penalty on high emitters. The interview results suggest that in terms of PCRs, managers and analysts perceive value in firms developing intangible carbon-related capabilities around adaptability, carbon leadership and stakeholder trust. Our empirical results are consistent with this proposition since we find that adaptability, carbon leadership and stakeholder trust partially mitigate the emissions penalty, whereas emissions reductions do not. Taken together these results are consistent with the argument that capital markets impound the valuation impacts of other carbon-risk exposure, aside from emissions, and PCRs identified from publically available information in firm valuations.