Investors are penalizing polluters, but not enough: research

By James Langton | April 3, 2023 | Last updated on April 3, 2023
2 min read
Close-up aerial photo of an oil refinery in the Alberta Oilsands, near Fort McMurray

Equity investors are have begun discounting the equity valuations of issuers with large greenhouse gas emissions, according to new research from the Bank of Canada. But those penalties remain small, leaving companies and investors exposed to the risk of a sharp drop in values as climate-related risks materialize.

In a research note, central bank staffers detailed the results of an exercise to assess the impact on firms’ price-to-book ratios of their reported GHG emissions in an effort to determine whether reported emissions are reflected in stock prices.

“Equity investors started applying a discount to [high-emitting] firms’ price-to-book ratio in 2009 and for firms with relatively low emissions a few years later,” they found, also noting that these discounts have been growing over time.

“Overall, our results suggest that equity investors may be becoming increasingly concerned with the future income potential of firms that emit GHGs, particularly for those with emissions above the median,” the paper said.

The report noted that a small number of firms account for a large share of emissions. For instance, it found that the 10 largest emitters accounted for about half of reported emissions, and the 50 largest emitters accounted for 95% of emissions.

The researchers also found that the discount for these high emitters “is more sensitive to further increases in emissions,” as investors may anticipate climate policies having a greater impact on high-emitting firms.

However, researchers also concluded that these discounts aren’t yet “economically meaningful.”

For instance, they estimated that a firm that cut emissions by half would only be rewarded by a 4.4% increase in its price-to-book ratio.

The relatively small financial consequences for hefty emissions potentially leaves companies and investors exposed to an abrupt repricing as climate policies evolve — a risk that has been flagged by the Bank of Canada.

“[T]he risk of a sudden repricing of assets exposed to climate change remains a concern for financial stability,” the paper said.

“This repricing would reflect changes in investors’ beliefs due to shifts in global climate policies or better information on firm-level exposures to climate risks, for example,” it added.

In the meantime, the relatively small stock price impact of emission reductions may reflect the fact that investors expect companies to reduce emissions in a way that doesn’t impact future profits, that they may expect companies to cushion the financial impact of emission cuts by arbitraging climate policies, and that it’s difficult for investors to assess future profitability given the high degree of uncertainty associated with the transition to a low-carbon economy, the report suggested.

The researchers cautioned that their analysis is hampered by “significant data gaps,” including the fact that “many firms do not report emissions, nor are firms required to report their exposure to the physical risks of climate change.”

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.