Authors: 1Erik Salz | 2Marieke van der Poel | 3Bettina Wittneben
RSM Erasmus University, Department of Financial Management
Nowadays, climate change is considered an important issue in many of society’s domains. The Stern Review recently concluded that climate change presents a serious global risk and demands urgent global response (Stern, 2007). Corporations have an important stake in this issue. As some businesses are among the biggest emitters of carbon -or greenhouse gases-, companies across all industries are demanded to reduce their emission levels. Carbon pricing by trading or taxation is, or will be initiated to stimulate corporations to reduce their emissions. These measures will initially increase the costs for doing business. The more corporations are required to drive down their carbon emissions the more important a firm’s carbon exposure becomes as a management problem. Corporate managers have to align carbon reducing activities with their objective to create shareholder value. This thesis attempts to describe the effects of carbon exposure from a shareholder value perspective. Do investors care for active carbon management? This research aims to examine if corporations who actively manage their carbon exposure and disclose related information to the public, are more appreciated by investors than corporations who do less or do nothing. This research is relevant for today’s business studies. By reviewing the position of the investor, this thesis contributes to the public debate on climate change and the role of business. A debate in which many participants have conflicting interests. Politicians, public opinion makers, ‘experts’, non-governmental organizations, business leaders and so on, all have their own opinions and interests regarding climate change. Overall it seems that most stakeholders in the discussion agree that a response to climate change is needed. However, the way in which responsibility should be taken differs. Fact is that businesses are increasingly demanded to pay for the negative external effects that their operations have on the environment. Depending on the country specific policies, companies have to acquire emissions rights in a trading system or face particular taxations due to their emissions. The internalization of emission costs affects a business’s financial performance. Increasing expenses reduce the amount of money which is left for a company’s financiers. The investor is the residual claimant of a corporation. This means that after all other financial claimants are paid (e.g. debt holders) and internal investments are completed, investors obtain their share in the company’s return; the free cash flow. Investors always decide if they expect to obtain enough return on a certain investment. The investor’s expectations of the return on investment of a particular company can be seen as an assessment of all aspects of a certain business and its implications for the future. Including the carbon and environmental strategies of the company. Implicitly, investors hereby decide on the intensity of carbon and/or environmental policies of corporations. From the investors perspective these policies should be in line with shareholder value creation. The investors’ interest in the return on investment is a key aspect when evaluating climate change policies for business. Solid understanding of the investor’s position is important for understanding the climate change debate.
Keywords: Carbon Exposure, Shareholder Value