The analysis found a ‘carbon risk premium’ in Stone Returns as higher carbon emissions pushed up share prices but in the long run caused severe losses because the government regulated greenhouse gas (GHG) emissions. The new mathematical analysis conducted by researchers at IIT Guwahati and IIM Bangalore has established a link between the carbon footprint of companies and the potential risk of investing in these companies.
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“As the world moves towards a stable future and economies around the world are trying to reduce their carbon footprint, the future of companies dependent on excessive emissions of greenhouse gases (GHGs) remains uncertain,” said a statement from IIT Guwahati.
Researchers at these top organizations analyzed more than 200 of the largest listed companies in the American market. In order to evaluate the carbon footprint of the companies, the direct GHG emissions of the companies and the purchased GHG emissions (in electricity usage or heating) were considered.
The research team consisted of Professor Siddharth Pratim Chakraborty of the Department of Mathematics and Mehta Family School of Data Science and Artificial Intelligence, IIT Guwahati and Professor Shankarshan Basu of the Department of Finance and Accounting, IIM Bangalore and Mr. Suryadeepto Nag. BS-MS students from IISER Pune.
The results of the analysis have been published on the RXV, a platform shared in a smooth research study conducted by a team from Cornell University in the United States.
Researchers have found that most of these companies (.61..6%) showed a reduction in their carbon emissions during the 201 carbon-2019 period. It has been found that carbon footprints have a positive relationship with the size and earnings of companies. However, the relationship with expenditure was found to be slightly lower than that of revenue, which they attributed to the high cost of switching to renewable energy sources.
Professor Siddhartha Pratim Chakraborty said, “Analyzing the annual stock return data including GHG emissions and other financial data (revenue, debt, and book value, among others), it has been found that there is a ‘carbon risk’ in premium stock returns, which means short term. Higher carbon emissions are pushing up stock prices. It has been observed that a higher carbon footprint has given higher returns to investors in the short term. ”
He added that the past few years have seen a lot of research in climate finance and the existence of a carbon risk premium has been independently confirmed by many researchers worldwide. Chakraborty said the existence of such national premiums has been blamed as a ‘carbon transition risk’.
“As the adverse effects of climate change become more pronounced, governments around the world may soon impose regulations on GHG emissions or impose higher tariffs and tariffs on companies that contribute significantly to global warming,” he noted.
If that happens, he said, companies will start losing profits and in the event of a final ruling, they could even go bankrupt and their share price could fall. “It could cause serious losses to investors, and subsequent sell-offs could cause other losses in the broader market,” Chakraborty said.
Although the risk premium has been estimated more than once in the last few years, so far little progress has been made in determining the amount of future risk.
In their research paper, this collaboration found a mathematical relationship between carbon risk premiums and future risk values. Researchers have studied the risks for different situations when regulation or “carbon transitions” may occur and find a formula for the maximum exposure of each firm to the firm at different times in the future.
For one-family arrival processes (models of when the conversion occurs), they discovered that the average stock price of data between them could fall (at most) 20.65% in transitions, if the transition is expected to occur in 10 years from now. Time, and 20 years from now if this infection is expected to occur 41.3%. Statistics relating to most polluting agencies are 45.04% and 90.08%, respectively.
The researchers also looked at different contexts so that investors could also benefit from premium-risk trade-offs and demonstrate that it is more profitable to hold stocks of premiums and where it is more profitable than selling or short-term gains.