Professors At UPenn Wharton School Of Business Discover Hidden Metric That Could Threaten The Value Of Any Stock By 30% Or More

Researchers with the University of Pennsylvania's Wharton Business School have identified a major factor that could render certain companies worth far less than their stock price or market cap indicates. The report, published by UPenn professors Robert Stambaugh and Luke Taylor, puts a monetary value on an individual company's "carbon burden."

The carbon burden refers to how much carbon pollution a company generates daily. The "burden" the professors are calculating measures how much cost exposure these companies may have to future efforts to combat climate change. Two conclusions are at the heart of the UPenn report.

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The paper's first assumption is straightforward: global temperatures are rising quickly and the size of a company's carbon footprint (or emissions) contributes proportionally to the rising temperatures. The second assumption is that the damage this causes will be felt by society at large for many years into the future.

That will likely translate to companies being exposed to an ever-increasing set of expenses related to mitigating the effects of the company's previous and future carbon emissions. Examples of these expenses include, but are not limited to, the following:

·      Emissions taxes

·      Cost of converting some or all of their operations to fuel sources with lower carbon footprints

·      Defending against legal action or paying out damages for climate-based liabilities

·      Increased production costs

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Whether it is a government-mandated effort (e.g., a polluter or carbon tax) or an initiative that companies take up independently (e.g., converting operations to green energy), the combined cost of these measures will eat into profits, which usually translates to lower stock prices for publicly traded companies. Stambaugh and Taylor see those expenses as rising at a rate proportional to the company's carbon footprint size. That could take a big bite out of energy stocks.

This explains why their report classifies these expenses as a company's potential "carbon burden." All these expenses eat into company profits and negatively affect its stock price. Stambaugh and Taylor believe that the companies with the largest "carbon burdens" are at the highest risk of devaluation. Their report estimates the average company's carbon burden to be 131% of its total value and Stambaugh voiced alarm about this level of financial risk.

He elaborated on his concerns by saying, “For example, consider the risk reflecting uncertainty about how firms’ carbon emissions may be taxed in the future. Firms with large carbon burdens are more exposed to this uncertainty, especially the firms also less able to pass the tax on to price-sensitive customers.” In other words, Stambaugh believes this issue could hurt consumer budgets and the value of the affected company.

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Professor Taylor expressed his surprise at the risk level, adding, “We already knew that climate change is a big problem, but we were still shocked by how large our estimates of the carbon burden are. I didn’t expect firms’ negative value to society through their carbon emissions to be on the same order of magnitude as firms’ financial value to their shareholders.”

If Professors Taylor and Stambaugh's hypothesis is correct, the average company could be overvalued by 30% and the risk factor would be even higher for companies with larger carbon burdens (e.g., oil companies and energy providers). Imagine how quickly a dividend stock could go from paying passive income to zero yield for a company overvalued by 30%. If the authors are half-right, investors may want to consider their long-term holdings and plan accordingly.

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