Investors are pricing the future carbon costs into European equities portfolios, but not the cost issuers are already bearing, according to a new study.
A team of researchers from Dutch asset manager Robeco and the UK’s Lancaster University Management School have looked at whether markets reward or penalise firms for their exposure to existing or potential carbon prices.
Using a combination of futures data for the European Union’s Emissions Trading System (EU ETS), and the cost that businesses are already incurring for their emissions under EU ETS, the study explores whether carbon prices are reflected in stock returns.
“We wanted to move beyond conventional metrics like carbon footprinting to explore how carbon transition risks are perceived by markets, and how they materialise in financial performance,” explained Harald Lohre, head of quant equity research at Robeco and co-author of the paper.
“The futures data reflects carbon-market investor expectations about future allowance prices, while firm-level accounting data shows the actual financial burden of EU ETS compliance — how it’s already impacting corporate balance sheets.”
The latter is based on estimating how much a company spent on carbon allowances between 2013 and 2024 – using information from the EU’s official registry and average annual spot prices – in comparison with their financial performance.
“In the financial year of 2023, firms in the top quartile of carbon expense intensity faced carbon expenses greater than or equal to 1.4% of revenue, 5.1% of gross income, and 12.4% of operating income,” concluded the research.
In heavily regulated sectors such as materials, these ratios hit 5%, 17%, and 50%, respectively.
“These magnitudes suggest that for many firms, carbon compliance imposes a non-trivial drag on profitability.”
However, these realised costs “are yet to translate into a discernible risk premium”, noted Lohre, although it is becoming increasingly material.
“While our analysis shows that investors are increasingly pricing these impacts into asset valuations, the trend isn’t yet statistically significant.”
The results for the forward-looking analysis were clearer.
“Our analysis shows that equity market investors are pricing in the risk of future carbon regulation, and this forward-looking signal is statistically significant and economically material,” Lohre told IPE.
“That suggests that markets currently price in the risk of future carbon-pricing regulation.”
Polluting companies also get pricier loans
Last month, the European Central Bank found that companies with polluting assets tended to secure less favourable loans from the region’s banks.
Analysis of the borrowing patterns of more than 5,000 European firms showed that those with assets linked to high carbon emissions or ecotoxicity generally had a lower loan-to-value ratio, meaning banks asked for more collateral for the same debt.
Just like Robeco’s research, the ECB found the strongest correlation in new loans, suggesting the trend was increasing over time.
