Fifth of global company profits at risk from carbon pricing

6th September 2017

Businesses worldwide could see their profits cut by 20% if carbon prices are raised to the levels needed to limit global temperature increases to 2˚C.

In addition, the most exposed sectors like construction, steel, and commodity chemicals, could see their profits cut by 80%, according to a new report from Schroders.

The asset management company said that carbon prices will have to increase from under $5 (£3.8) a tonne currently, to well over $100 in order to incentivise decarbonisation on the scale needed.

“Carbon pricing looks likely to remain a key element of government climate policies for some time to come,” the report says. “Large and widespread effects on competitiveness, cash flows and value are almost inevitable.”

A carbon price is a cost applied to the amount of greenhouse gases firms emit, with economists widely agreeing it is the single most effective way for countries to reduce emissions.

Schroders’ report came as it unveiled its Carbon Value at Risk (carbon VAR) model, designed to help investors more accurately assess the risks higher prices pose for companies, industries, and investment portfolios.

The firm argues that traditional analysis, such as carbon footprints and fossil fuel exposure, assess companies in isolation and fail to reflect how increased prices would affect their profitability in the future.

It says that investment products and funds that rely on simplistic approaches may leave investors more exposed to climate risks than they had originally anticipated.

“Carbon footprints continue to dominate but at best provide an incomplete and, at worst, a misleading picture of the risks carbon pricing presents to investors,” Schroders head of sustainable research, Andy Howard, said.

“Carbon VAR is a new approach. It reflects the way companies make money and how their profits would change if carbon prices rose significantly.

“The results don’t bear much resemblance to carbon footprints, underlining the dangers of assuming funds or portfolios with low footprints will be insulated if policies toughen.”

This comes after the firm released a ‘Climate Progress Dashboard’ in July, designed to help investors make decisions based on outcomes they are likely to see, rather than ones they we would like to see.


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