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What are we looking for?

U.S. large-caps that investors may want to avoid if regulation turns more climate-friendly.

The screen

The world emitted roughly 55 billion tonnes of greenhouse gases (GHGs) in 2019, according to the United Nations.

Jurisdictions all over the world have started applying a price to GHGs – either in the form of a carbon tax or a cap-and-trade system – but, according to the World Bank, only 20 per cent of emissions are currently covered by these systems. (The United States, for example, has no national emissions system.)

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Recent analysis by Refinitiv showed that US$28 a tonne is the average price in 2019 on the European Union Emissions Trading System, the world’s oldest and largest carbon trading market. This translates to a total of US$220-billion a year for emissions that are priced/taxed. If all of the world’s emissions were priced/taxed, the range would be US$1.4-trillion to US$1.6-trillion – or 1.5 per cent to 2 per cent of global GDP.

However, the International Monetary Fund has estimated that carbon needs to be priced at US$75 a tonne in order to limit temperature increases to 2 C, which corresponds to a staggering US$4-trillion to US$4.2-trillion, or, 4.5 per cent to 5 per cent of global GDP. This would clearly have an enormous effect on the economy, but will presumably have to happen to avoid catastrophic, irreversible climate change. If pressure from the public pushes regulators in the U.S. to start pricing/taxing carbon, all companies would be hit – but some much more than others. We will identify which large U.S. companies (constituents of the S&P 500) would have their profitability most affected by such a carbon price.

  • First, we look at a companies’ GHG footprint for the latest year. Roughly 60 per cent of S&P 500 companies voluntarily disclose this. Refinitiv estimates the footprint for those that don’t, but for this analysis only company-disclosed figures are used.
  • Next, we see what these emissions would equate to as an expense using both a US$28 and US$75 carbon price.
  • Finally, we see what percentage of pretax income this represents, and we screen for the 10 companies in which it represents the largest percentage.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv’s ESG data cover more than 70 per cent of the world’s public companies by global market capitalization, using more than 400 metrics.

What we found

Out of the top 10, eight are utilities, and five of those would have negative earnings in a US$28 carbon world. All companies listed would be deeply in the red under a US$75 scenario. For the eight utilities shown, renewable energy represents, on average, 13 per cent of the total energy distributed. But for two of these companies – NRG Energy Inc. and FirstEnergy Corp. – it represents less than half of 1 per cent.

Investors are advised to do their own research before trading in any of the securities shown below.

How potential carbon pricing would hit select U.S. large-caps

CompanyTickerSectorMkt. Cap. (US$ Mil.)GHG Emissions (Mil. Tonnes)US$28 Scenario (US$ Mil.)US$75 Scenario ($ Mil.)Net Income Before Taxes (US$ Mil.)US$28 (% of pretax income)US$75 (% of pretax income)Div. Yld., NTM (%)1Y Rtn. (%)
NRG Energy Inc.NRG-NUtilities9,263.7461,2933,4644672777423.1-4.2
EvergyEVRG-NUtilities16,352.1308332,2316051383693.122.7
American Electric PowerAEP-NUtilities50,274.4922,5686,8791,9741303492.933.7
Southern Co.SO-NUtilities73,138.71052,9427,8802,7491072873.848.9
Xcel EnergyXEL-QUtilities35,884.7521,4583,9051,4421012712.732.4
FirstEnergy Corp.FE-NUtilities27,156.1531,4873,9821,512982633.230.8
Williams Cos.WMB-NEnergy26,192.412324868331982626.7-4.0
Alliant EnergyLNT-QUtilities14,139.9195381,440570942532.737.1
CF IndustriesCF-NMaterials8,571.2184931,320547902412.77.3
Duke EnergyDUK-NUtilities72,822.9952,6677,1443,073872324.114.2

Source: Refinitiv

Hugh Smith, CFA, MBA, is director of Refinitiv’s ESG and investment management business for the Americas, and is a director on the board of the Responsible Investment Association.

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