High Carbon Emissions Could Sink Firm Values

High levels of greenhouse gas emissions can have a negative impact on a firm value, according to a recent study (PDF) that examined companies on Standard and Poor's 500 Index.

A company's value declines on average by $202,000 for every additional thousand metric tons of emissions it produces, according to "Voluntary Disclosures and the Firm-Value Effects of Carbon Emissions."

"This translates into a firm-value penalty of $1.28 billion for firms in the third quartile (in terms of carbon emissions) relative to firms in the first quartile," the report's authors wrote said. "The economic effect of carbon emissions on firm value is large, particularly since the direct costs of carbon emissions have been less than $40 per metric ton in the recent past."

Researchers from the University of Wisconsin-Madison, Georgetown University and the University of Notre Dame believe the report is the first to provide evidence of the price that U.S. capital markets are assigning to emissions.

"The results have significant implications, as federal regulation requiring companies to pay for their carbon emissions continues to be debated," Sandra Vera-Muñoz, one of the authors and a professor at the University of Notre Dame, said in a statement. "Although regulation has yet to be adopted, our results suggest that the markets are already anticipating the effects of the costs of emissions on firm value."

The report also delved into the factors driving companies to voluntarily disclose their emissions. For example, several groups have sprung up calling for firms to disclose their carbon footprints, such as the Carbon Disclosure Project and Ceres. At the same time, investors are becoming increasingly vocal about their desire to know what companies are doing to manage current and emerging climate risks that could impact the bottom line.

Not surprisingly, the study finds that firms with superior environmental performance are more likely to disclose their greenhouse gas emissions. On the flipside, its also finds no association between inferior environmental performance and a liklihood of disclosing emissions. In line with institutional theory, it found that companies are more likely to voluntarily disclose emissions if an increasing proportion of their industry peers do.