Net zero pledges have become all the rage in Corporate America. Big banks, steel companies and even (mostly European) oil companies are pledging to wipe out their carbon emissions over time.
Cynics may see these environmental announcements as mere marketing ploys designed to win brownie points from climate-nervous consumers. But there may be another force at play: keeping Wall Street happy.
New research suggests that investors really do care about these climate goals and crave transparency about the carbon footprints of the companies they back.
That’s especially true in the dirtiest sectors: energy, utilities and industrials. While those three sectors make up less than 15% of the S&P 500’s market value, they account for a staggering 70% of direct and indirect emissions, according to Bank of America.
And within those heavy emitting sectors, the companies that have set net zero target dates trade at a “significant premium” to those that have not, Bank of America found.
The average 12-month forward price-to-earnings ratio for companies that have a set timeline for achieving carbon neutrality is 32.4. But that closely-watched valuation metric plummets to 20.3 for companies with no emissions targets.
“It pays to set a date,” Bank of America concluded.
Alaska Airlines and US Steel join the net zero parade
And now companies are increasingly doing just that. US Steel (X)pledged Wednesday to reach net-zero carbon emissions by 2050 by using electric arc furnaces, carbon-free energy sources and carbon capture techniques.
Visa (V), Pepsi (PEP), Heineken (HEINY), Alaska Airlines (ALK) and 49 other companies this week signed on to Amazon’s Climate Pledge, promising to achieve net-zero carbon by 2040 or sooner. Companies that have signed the pledge generate more than $1.4 trillion in annual sales and employ more than 5 million workers.
Even the oil industry is on board, with European leaders BP, Total and Royal Dutch Shell announcing net zero targets last year as they embrace a shift to cleaner energy.
Most US oil companies, by contrast, have taken a much more cautious approach, preferring to focus instead on carbon capture technology. Neither ExxonMobil (XOM) nor Chevron (CVX), the largest US oil companies, have announced net zero goals.
“It’s easier to justify owning a stock that has a plan to get better than to own a stock that emits a lot and doesn’t have a publicly-stated plan,” Savita Subramanian, Bank of America’s head of US equity strategy and head of global ESG research, told CNN Business.
‘They understand this is real’
Moreover, net zero goals may be viewed as a proxy for good management – quality leadership that guides companies through not just climate disruption but the everyday crises that confront CEOs.
“If companies’ quality of management is high, they understand this is real and these regulations are coming,” said Nicholas Colas, co-founder of DataTrek Research. “Good management gets ahead of the curve.”
Not surprisingly, utilities are among the biggest polluters as most still rely on coal-fired power plants to keep the lights on.
Interestingly, Bank of America found that half of all S&P 500 utilities have committed to carbon neutrality, more than any other sector. Xcel Energy, PSEG, Duke Energy and other power companies have promised by 2050 to zero out their emissions by retiring coal plants and rapidly building out their wind and solar capabilities.
‘Transparency is paramount’
In recent years, Wall Street has begun penalizing companies viewed as part of the climate problem – and rewarding those that are part of the solution.
Tesla (TSLA) is now one of the world’s most valuable companies and solar stocks have skyrocketed, while oil-and-gas firms have badly lagged behind. Last year, ExxonMobil was briefly dethroned as America’s most valuable energy company by wind and solar giant NextEra Energy. (NEE)
Companies with relatively high emissions trade at a 15% discount to companies with low emissions, Bank of America found. S&P 500 companies with below median emissions sport a median price-to-book value of 5.1, compared with 4.3 for firms with high emissions.
But what is really telling is that companies that don’t disclose their carbon footprints are valued even less, trading at a median price-to-book of just 4.2, Bank of America said.
“Saying something bad is better than saying nothing,” the report said.
Under pressure from shareholders, firms have begun to open up about their carbon footprints. The vast majority – 90% – of S&P 500 companies now release sustainability reports, according to Bank of America. That’s up from just 20% a decade ago.
“Transparency is paramount,” Subramanian said. “If you don’t provide transparency, investors will assume the worst and ding you for it.”
ESG 2.0
All of this shows the evolution in thinking around environmental risks on Wall Street.
During the early years of the ESG movement, environmentally-conscious investors simply dumped high-emissions stocks and piled into clean energy ones. But that trade has become crowded.
Green companies now trade at a nearly 30% premium to brown ones, Subramanian said, adding that these are “quite extreme levels.”
“That story is arguably already in the stocks,” she said. “Now it’s all about looking for companies that might not look great today, but will be in a better place in the future.”
