August 9, 2023

The Impact of Climate Disclosure on Company Valuation

Climate communications can impact your company’s valuation.

Climate communications can impact your company’s valuation. In April 2023, Lazard released a study in collaboration with Imperial College, Columbia, and Harvard finding that corporate climate communication is increasingly impacting investors’ business valuation assessments. There are three main types of climate communication: disclosure, commitments, and soft information dissemination. Disclosure will be the focus of our analysis as it is the most impactful on company valuation.

Increased corporate transparency and disclosure around GHG emissions performance can offset - to a large degree - the 1% Price-to-Earnings (“P/E”) discount observed with higher emitters. Companies in energy-intensive industries are impacted the most by this discount but also benefit the most, showing, on average, a 48% offset to the P/E discount with Scope 1 disclosures. Therefore, evidence suggests that investors reward companies for better environmental performance and transparency with lower costs of capital and higher financial valuations.

Although the aforementioned 1% discount may appear limited, it is highly indicative of the evolving relationship between GHG emissions, regulatory exposure, and company valuations. According to the study, in Europe, where carbon prices are highest, high-emitting industrial companies trade at an 18% discount to their less-emitting peers.

Source: Lazard Study

Recently, the International Sustainability Standards Board (ISSB) released its reporting guidance with both broad sustainability and climate metrics as well as industry-specific guidance. As metrics become more comparable, companies are better positioned to assuage investor concerns around emissions risk.

Climate disclosure metrics have historically not been standardized, auditable, or comparable across companies. Investors may use publicly available and comparable Scope 1 emissions data, such as S&P Trucost, which could overestimate emissions factors in certain industries by as much as 30 to 40%. Companies offering investors a high degree of transparency on their carbon profile, can avoid the penalty of a material valuation discount due to investors potentially assuming the worst.

The Iconic Air platform provides the transparency and optionality that companies reporting across multiple voluntary frameworks need to demonstrate progress while also filing regulatory reports to stay compliant. For example, users can submit US EPA reporting while also reporting to trade organizations like API’s the Environmental Partnership and aligning with international protocols such as ISSB, all in a centralized, accessible platform. When specific questions arise, users can drill down to the asset level to audit data and identify high-emitting areas - the “who,” “what,” “when,” and “how” of a company’s carbon performance.

Source: Iconic Air Platform

Emissions reporting and climate disclosures require:

  • Data transparency and auditability
  • Adherence to varying Scope 1 and 2 boundaries and methodologies
  • Robust digital tools for GHG data, calculation, and reporting

Iconic Air pairs the prescriptive nature of regulatory GHG reporting with the breadth of voluntary climate disclosures in a solution that can withstand 3rd-party verification. The platform transforms carbon reporting from an environmental compliance action to leveraging the controls and visualization of financial performance and analysis. Consistent, auditable, and comparable reporting - and the ability to speak to progress - around Scopes 1, 2, and 3 emissions reduction can have a real impact on company valuations and access to capital.

Source: Iconic Air Platform

The results of the Lazard study affirm Iconic Air’s conviction that proactive carbon management is a source of value creation for companies and not merely a compliance tool. Additional research, which we will cover in a future blog, affirms a clear link between proactive management, reduced climate risk, and better corporate financial performance.

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