By Allen He and Devin Weiss

A growing list of public companies have made a net-zero commitment in the wake of the 2015 Paris Agreement, pledging to transition towards carbon neutrality by 2050. To that goal, hundreds of companies (including large, multinational corporations like Walmart and BP) have joined initiatives like the Carbon Disclosure Project (CDP), Task Force on Climate-Related Financial Disclosures (TCFD), and Science Based Targets Initiative (SBTi). However, many companies wonder whether their long-term climate commitments have had any material impact on their current market value. A material difference in market value following the announcement of a net-zero commitment could suggest that markets may be taking a long-term view towards valuing climate change. Conversely, if the efforts of these commitments are going unaccounted for, capital markets may instead be exhibiting short-term behavior, overly discounting the future impact of such a commitment.

Existing literature suggests that the state of public company decarbonization varies both regionally and by industry. In addition, regardless of materiality, many companies are willing to help achieve crucial Paris benchmarks, and in some cases, are rewarded in doing so. Overall, we find that:

• The EU appears to be ahead of other regions of the world on climate change commitments in action, metrics (EU taxonomy) as well as rhetoric, as exemplified by the percentage of companies in the market with a net-zero commitment (see figure below), local insurers’ stance on coal, and total amount of sustainable bonds issued.¹

2019 Percentage of Companies Committing to a Net-Zero Framework (by country)²

Click to expand

• Studies have shown that low-carbon equity indices performed better than their carbon-intensive counterparts after Paris. Monasterolo and De Angelis (2018) found that the level of systematic risk associated with low-carbon indices decreased significantly while the opposite is true for carbon-intensive indices. In addition, Pham et. al (2019) found that several carbon-intensive industries had negative abnormal returns in the wake of the Paris Agreement.
• On the fixed income side, the popularity of corporate green bonds has exploded in recent years. Since Paris, many high-profile companies including Toyota, Google, and Unilever have entered the mix offering high quality corporate green bonds. To this point, Tiftik et. al. (2019) found that 90% of green bonds are investment grade. Furthermore, demand for green bonds remains high, especially with returns slightly outpacing vanilla bonds.
• On the environmental, social and governance (ESG) side, while having higher ESG ratings doesn’t necessarily equate to higher returns, positive ESG news does lead to positive market returns, and vice versa with negative ESG news, as shown by Serafeim and Yoon (2021). In addition, FCLTGlobal’s previous work on indicators of long-term success has shown that ESG controversies is a key factor associated with lower long-term value creation for a public company.

However, to our knowledge, there has been little attempt to quantify if, and by how much, net-zero commitments have impacted the market value of a company.

As part of our climate research, FCLTGlobal launched work to attempt to identify the value capital markets are currently placing on a public company’s net-zero commitment, testing to see if capital markets currently reflect the long-term nature of such commitments. Using an original dataset identifying companies’ net-zero commitment dates, we plan to test a series of often-heard hypotheses to quantify their value.

Hunting for a market signal naturally comes with some trial-and-error. We intend to evaluate the impact of a net-zero commitment announcement on P/E ratios, abnormal return or volume traded, the shape of the issuer’s yield curve, the cost of capital, impact on the “E” component of an issuer’s ESG rating, among others. It is worth noting that while not every hypothesis may lead to a quantifiable market value impact, even non-significant results can help debunk commonly held beliefs on whether a net-zero commitment results in a material difference in value for a particular market segment. Ultimately, our goal is to put concrete numbers behind the market value (or lack thereof) of a public company’s net-zero commitment and identify which aspects of climate risk can and cannot already be classified as investment risk.

We hope to gather further insights from members and other subject matter experts on whether they know of any existing resources on the topic, and which other hypothesis they may have in quantitatively assessing the impact of a net-zero commitment. If you have insights relevant to quantifying the market value of a net-zero commitment, or any questions about our work, please contact [email protected].

^{1. See figure 20.}

^{2. FCLTGlobal analysis from FactSet using 2019 MSCI ACWI constituent companies and Science Based Targets Initiative (SBTi).}