June 2, 2008
Equity analysts divide into three distinct groups based on their climate change perspective, according to a new report from independent research firm Verdantix.
The survey, entitled Equity Analysts Link Climate Change And Company Valuation shows that there are virtually equally sized groups of climate change believers, sceptics and cynics. Believers represent 30% of analysts. These guys already include climate change factors like regulations and risks in their financial models. Sceptics, comprising 28% of the research participants, think that climate change will have a material impact on profitability within 2 to 5 years. Cynics, comprising 30% of analysts, doubt climate change will ever impact valuations.
Verdantix Director David Metcalfe, author of the report, said that the utilities sector thus far is the only industry about which analysts seem to have agreed on a consensus on how to incorporate climate change into financial models. In other sectors such unanimity is lacking. Some oil and gas analysts are in complete denial while others view climate change regulations, risks and strategy as intrinsic to financial valuation. Metcalfe believes this is bound to change. He believes that by 2010 all industries will see a consensus of opinion of analyst.
The Verdantix analysis is based on in-depth interviews with 50 equity analysts who cover 13 different industry sectors and represent 22 investment banks including ABN AMRO, Goldman Sachs, Morgan Stanley and UBS. In addition to the high-level segmentation of analyst perspective, the research found that:
-Analysts suffer from information and knowledge gaps. Thirty-two per cent of analysts (covering industries as diverse as food production, basic resources, retail, oil, gas, media and banks) said they “didn’t know” if firms provide sufficient data on greenhouse gas emissions. Half of the respondents stated that firms didn’t need to verify greenhouse gas emissions although this is essential to establish a baseline for reporting.
-Regulations rank highest among climate change factors. Forty-two per cent of the analysts in the Verdantix survey, from sectors like industrial goods, oil, gas, travel and construction, conducted research into climate change regulatory impacts. The EU’s Emissions Trading Scheme loomed large in analysts’ minds. By contrast, the UK’s Carbon Reduction Commitment was deemed less important.
-Carbon emission reductions and renewable energy ranked lowest. While 32% of analysts had changed a profit forecast due to an energy or fuel efficiency initiative, just 8% did so due to a commitment to reduce carbon emissions and only 6% made an adjustment because a firm committed to buying the majority of energy from renewable sources.
“Climate change is perceived as a corporate branding issue” Metcalfe says. A total of 80% of the surveyed analysts were more or less convinced that brand image is enhanced through climate change initiatives. The report also includes pointers for companies’ corporate communications designed to take advantage of the analyst mindset based on the survey’s results.
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