NZ companies will come under increasing pressure from investors to cut carbon emissions, a new Forsyth Barr study suggests.
The comprehensive Forsyth Barr analysis titled ‘The Carbon Report’, says the “growth in sustainable investing has been significant in recent years”.
“We suggest below that there are valuation consequences for heavy carbon emitters,” the report says.
“… Institutional investors are increasingly focused on environmental issues in response to changing investment mandates. The weight of money into low emitting companies will increase relative to high emitters.”
The study found an already-existing correlation between low carbon emissions and higher price-earning multiples for NZX-listed companies, noting, however, that the link “may be coincidental”.
“Our analysis shows a similar relationship can be observed in international markets,” the Forsyth Barr report says. “Heavy emitters have lower multiples and vice versa. Emissions are clearly not the only driver of valuation; however, the broad relationship across different markets suggest investors are willing to pay more for low emitters.”
Overall, though, NZX firms may escape the worst of the coming carbon storms emissions are “generally low” across the companies on the local bourse, Forsyth Barr says.
As well, the study says the price of carbon in NZ is low while offset commitments and regulations “continue to protect heavy emitters”.
Furthermore, carbon emissions are highly-concentrated in just a handful of NZX firms with Z Energy and Fonterra collectively responsible for over 70 per cent of the total as measured by ‘scope 3’ definitions that include broader environmental impact.
“If we exclude Scope 3, then Air New Zealand and Genesis Energy are the largest emitters,” the report says.
But Forsyth Barr also notes that inconsistent carbon-reporting standards across the NZX with only about half providing some kind of information on the metric.
“We recognise that many of the companies that currently don’t report their emissions reside in low emitting sectors and therefore the financial and regulatory risk to them is low,” the study says.
“However, there are a number of companies in high emitting sectors that don’t report (yet) — these include Mainfreight (MFT), Steel & Tube (STU), and Metro Performance Glass (MPG).”
The study cites Z Energy, Synlait Milk, Air NZ and Contact Energy as example of “excellent” carbon disclosure practices.
While the local energy stocks and Air NZ have substantial carbon exposure, Forsyth Barr says “Fonterra (FSF) will ultimately be the most exposed of the NZX50 companies given the risk to its supply base over the longer term”.
The 43-page report was compiled by a group of Forsyth Barr analysts including Andy Bowley, Andrew Harvey-Green and Chelsea Leadbetter.