Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial Markets and Climate Change > Week 2 > Flashcards

Week 2 Flashcards

1
Q

Why is it important to look at emissions within industry?

A

Important to understand the difference in how different industries pollute to understand how scale impacts pollution- idea that large market cap doesn’t always equate to high emissions eg. JP Morgan

The observation that once you control for industry-specific variation - companies that are larger tend to pollute more - economically, it is expected that there should be some kind of relationships like that

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the book to market ratio?

A

ratio of book value assets/equity of the company relative to the market capitalisation of the company

book value of assets the value of the assets

market capitalisation is price x shares outstanding/book value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why is it important to look at the book value?

A

It is the valuation of the company in two forms the assets in place and future growth opportunities

both have to be factored in for forward-looking investors

value created in the future impacts the discount rates or financing in relation to that

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does a high book to market ratio mean?

A

low growth companies - book value dominates the growth opportunities eg. Steel companies about existing infrastructure

Low book to market ratio means market cap values something not reflected in book - must be a growth opp eg. tech companies that derive value from future projects

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the relationship between B2M and emissions? and what are some explanations for this?

A

Companies that have a high B2M (low growth companies) have a positive relationship with emissions (high emissions)

makes sense as emissions come from something ie. production

  1. the more you are relying on the current assets the more you are thinking about the assets and emissions already in the production scheme - why it may be related to higher emissions
  2. old vs new technology - growth is new tech and thus going to be more carbon efficient thus less emissions.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what is the point in looking at firm characteristics and emissions?

A

if we know how companies relate to these characteristics we can predict how responses will change to characteristic changes later on

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is ROE?

A

Return on equity - it is the profitability margin or idea of how much profit you can generate from your own equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the relationship between ROE and emissions? and what are some explanations for this?

A

there is a strong positive relationship between profitability and the level of emissions

  1. if you generate more profit you are going to translate that into more production - cyclical effect
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is leverage?

A

reliance on debt financing. how much companies are using external debt to finance their operations

Cost of capital is lower, require captial to finance debt, run out of resources and turn to external as can no longer rely on my own assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the relationship between leverage and emissions?

A

More leverage = more emissions due to a potential expansion of production capacity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does investment mean in the context of the regression analysis?

A

capital expenditure - spend their money on capital that they have

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the relationship between investment and emissions? What are some possible explanations to this?

A

There is a negative correlation, as investment increases emissions go down when scaled by assets

  1. difference between investment and output - sometimes time lag between investment and output - output will be reflected in future emissions not current emissions
  2. idea of the lifecycle of emissions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What does HHI mean and what does it tell us?

A

HHI= Herfindahl-Hirschman Index

measures the competition within the industry by looking at the share of each company relative to each industry - tells you about the relative importance of each company in the industry

if HHI=1 = then it the company has 100% share of the industry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What kind of company produces more emissions and why? - conglomerates in multiple industries vs single business

A

companies in one business on average have lower emissions

Finance and tech - tend to pollute less and have lower emissions
Could argue that companies like Exxon mobile converting from brown to hybrid/green could have lower emissions due to diversification but this mechanism doesn’t dominate over the first.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does PPE stand for and what does it mean?

A

Property, plants and equipment

the tangible capital - something that is demonstrated by the physical capital that is observed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the relationship between PPE and emissions? What are the possible explanations?

A

This variable is very signficiant and positive

more tangible capital the more likely you are to emit high
Human capital and patents do not produce emissions as much as physical capital does

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does the MSCI variable measure?

A

are you part of the global index or not - companies ie either affiliated or not

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the relationship between MSCI and emissions?

A

the index is usually for larger scales of operations

there is a positive relationship between emissions and MSCI rating

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

How would inclusion of transition risk in company valuation be reflected in company valuations?

A

there would be a higher expected return or higher cost of equity
or
they are discounted today and therefore have a lower price today

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is a carbon premium? and how is it measured?

A

the compensation for the extra compensation required for a particular risk

coefficient of carbon emissions measures identified average carbon premium
- Daniel and Titman 1997
- monthly stock returns, lagged carbon emissions on an annual basis, various firm-level characteristics as controls - fix time and space and provide standard error

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Why and what does the levels of emissions tell you something about the transition risk?

A

Emissions today are an indication of how much you need to do to get to net neutrality

this is the long term risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are some the messages from the carbon premia in terms of levels of emissions?

A
  1. There is a positive relationship between tr and expected return - the higher the transition risk and the higher the expected return –> especially when industry effects are fixed
  2. The industry is an important factor as they can condition different risks types - there can be v specific idiosyncratic risks specific to a certain industry
23
Q

How big is the effect of emissions in terms of economics - what are the two ways of thinking about it?

A
  1. If you looks at the value of companies with 1sd more emissions relative to you - the debt effect is 2-3% per yr
  2. decarbonise - how much do you get if you decarbonise? cost-benfit?
    could be a .5-1% valuation different which can be pretty meaningful
24
Q

Are the scopes of emissions correlated?

A

S1 and 3 is correlated but independent.

25
Q

What are the main takeaways from results for level and changes in carbon emissions?

A

LEVEL
- a postive and mostly statistically significant effect of total emissions on future individual stock returns

consistent with the idea that high-emission firms are riskier

CHANGES
- a positive and highly significant effect on future individual stock returns

26
Q

Why is timing important?

A

the lags between end of year disclsure of emissions and the month when returns are realised is important
investors have limited attention and cannot immediately absorb all the new info about carbon emissions
emissions numbers become stale after while and they are subsumed by new numbers
- signal (of emissions) is useful but at some point it looses its value

LEVELS
premium remains large and significant for all the different lags

CHANGES
positive and significant for up to 6 months and becomes insignificant after 12 months, when the new yr on yr emissions changes are reported

27
Q

How do you work out the carbon intensity?

A

total emissions relative to scope of opp/reve of a company

= how much carbon you produce per unit of revenue

28
Q

What is the relationship between carbon intensity and future returns? What are the possible explanations?

A

there is no statistically significant relationship between carbon intensity and stock returns
= investors don’t think of this as being a meaningful metric of transition risk

  1. A reduction in emissions intensity does not mean a reduction in total emissions - could mean increase in emissions and grow faster - form of greenwashing (regulators heating up on this SEC and EC)
  2. dividing emissions by sales revenue introduced noise: when emissions intensity changes it could be because of a change in sales revenue or a change in the level of emissions - with noise results are expected to be less significant
29
Q

How do we know that short term and long term risks are not the same?

A

if they were the same thing they would substitute each other but they produce different results therefore there must be independent variation between them

they are both significant and positive but they are independent of each other

both matter 50/50 to investors so it is not like one is more important than the other

30
Q

What is another way of thinking about how risk is priced other than COE or ER? tell me more about it

A

the valuation of a company today
= if it is riskier, investors are going to be less likely to invest unless they are compensated

We are asking whether companies with higher transition risk have different price multiples compared with companies with lower transition risks - what we would expect is that is this is true, companies with a high transition risk would have lower prices and a higher B2M ratio

31
Q

How do book to market ratio interact with short and long term risk? Some possible explanations to this?

A

LEVELS
positive strong relationship

CHANGES
positive strong but relatively less strong relationship

DCF model tells us to take expected cash flows and discount them to today - in value calculations there is cash flow and discount rate

if we focus more on discount rate this may be more directly related to risks

32
Q

What happens when you control for cash flow effects?

A

The focus is purely on discount rate and effect

Results were stronger for the short term risks relative to their valuation

LT risk discount rate matters and for short term the cash flows matter more
in LR looking at how easy it is to access capital and what the discount rate is
in ST ability to generate cash flows is important

cash flow is sales and long term growth

33
Q

How do we interpret B2M and emissions

A

companies with high emissions have higher B2m ratios

the coefficient LOGS1TOT is statistically significant in the model without industry fixed effects

the link between emissions and B2M is stronger when we add industry fixed effects

Results for scope 1,2 and 3 are comparable in magnitude.

coefficients S1Ch and S3Ch are insignificant in industry fixed effects
why?
- yr to yr changes are not persistent, changes in any given year are averaged out in a discounted cash-flow analysis

34
Q

Why is the focus mainly on Co2 and not the other greenhouse gases?

A

Scientific perspective Co2 is more important to look at
Other ghgs are harder to measure - but they are getting increasing attention in terms of regulation

there is some evidence of a transition risk for methane and HFC but the economic discount is significantly smaller than CO2
why?
- early stage or less of a problem than Co2
CO2 has a longer longevity in the atmosphere than methane

look at price to earnings rather than B2M for non-Co2 - we expect that if the risks are important there would be a negative relationship - companies with high emissions have low price to earnings - mostly found

35
Q

what are the two possible explanations for the pricing effects of transition risk

A

Divestment is a potential channel behind pricing effects

investors with exclusionary preferences drive up the risk premia of the holders

alternative - investors do not screen on carbon emissions but simply reprice the risk due to the transition

36
Q

Does geographic location matter for transition risk?

A

The ST and LT premium is present in most geographic locations globally
- some cross sectional variation in magnitudes –> carbon premium is generally larger in northern America, Europe, Asia than in the souther hemisphere group of countries

all premia especially those that absorb industry-fixed effects are positive and statistically significant

for CHANGE in emissions the coefficients for Europe are smaller than those in northern America and Asia but still positive and significant

  • weaker results for countries from Africa and the Southern Hemisphere - eg. Argentina, Australia, Brazil, Chile, Nigeria and South Africa –> coefficient os S1CHG is insignificant when we add industry fixed effects - these countries are least aligned with carbon neutrality
37
Q

Does the degree of a country’s development matter? is carbon transition risk mainly a developed country issue?

A

LEVELS
The level of a country’s developement DOES NOT differentially affect long term transition risk

Insignficant for the interaction between GDP and LEVEl, share of manufacturing and LEVEL (emerging markets tend to have a larger share of manufacturing sectors) and per capita health expenditures and the level of emissions - advanced economies have a larger share of health expenditure

difference in development do not appear to explain much of the variation in LR carbon premia across countries

CHANGES
firms location in more developed countries are exposed to SMALLER short term transition risks

interaction changes with emissions - they are significant for firms located in countries with higher GDP per capita and larger health expenditures have statistically smaller stock returns

38
Q

What aspect of transition risk matter for asset price and in St or Lt?

A
  • technology (energy mix changes) - production mix matters for ST risk
  • policy environment - matters for ST risk
  • Climate-related policy tightness - domestic policy matters for LT risks
  • Investor awareness - matters for LT risks
39
Q

How does the energy structure interact with emissions

A

countries with higher relience on renewables are more developed and further along the carbon transition

short term tr are priced lower in these countries - interaction with S1CH is negative

international with energy use ENINT is positive

40
Q

How do carbon premia and social norms interact?

A

Socio-political factors only appear to matter for investors carbon transition risk perception in the ST

  • rule of law and CHANGEs and voice and CHANGES are highly significant and negative

the carbon premia is lower in countries with better rule of law, more democratic political institutions and more economic equality

why
- greater social harmony induces less climate policy uncertainty - effects are for short turn risk, socio-economic environment can evolve, and current conditions are seen s having a transitory impact on policy uncertainty by investors

41
Q

What is the relationship between policy risk and carbon premia

A

Domestic climate policy
- LT risk - interaction term for LEVEL is statistically significant for s3 emissions but insignificant for changes

carbon policies are seen by investors as permanent shocks to carbon-transition risks - investors believe that climate policies are already in place and are largely irreversible

domestic policies have a bigger effect on the carbon premium than international agreements that are seen as less binding - unless implemented through domestic policy changes

42
Q

What about reputational risk and carbon premia?

A

results are v similar when salient industries are excluded - transport, energy, utilities

no special reputational risk for companies operating in these salient industries

43
Q

KSS survey in what order to prof investors rank: regulatory, physical and technological risks?

A

Regualtory

physical

technological

44
Q

How do you measure investor awareness and carbon premia

A

use COP 21/ Paris Agreement as a shock to awarenes

2014-2015 pre period
2016-2017 - post period

45
Q

What is the relationship between investors awarenes and carbon premia?

A

there is NO signficant premium associated with the level of scope 1 emissions before Paris

there is a significantly large positive premium after Paris

significant increase in the premium for the level of scope 3

changes in emissions are significant pre and post Paris

investors updated their awairness about long term transitions risks after Paris

the pairs agreement has been particularly important in reshaping investor awareness about forthcoming climate-related policies

46
Q

What is the long term premium unrelated to

A

economic development

energy mix

social environment

more related to domestic policy implementation

47
Q

What is the short term premium associated with?

A

technology risk and social environment - less so to policy implementation

importance of changing investor awareness especially post Paris

48
Q

Why do we look at insitutional investors?

A
  • Magnitude
    they hold most of the ownership - 82-85% of all equitities
  • they are information savvy and react in a real way
  • they have a fiduciary duty. institutions are different in the context of ESG - they have some pre-specific mandate or a delegaotr of some ideas that their shareholders emulate
  • Ii cannot hide
49
Q

What is the hypothesis if ii are divesting? What does the data say about it what are some potential explanations for this?

A

companies with higher levels of transition risks should be held less by institutional owners - if they are divesting based on transition risk you should expect that the institutional owernshhip should be lower

the relationship between investment and levelof emissions is positive so this is hypothesis is not correct, on average they hold more of the companies with high emissions
- could be that high emitters have higher returns - might have a preference for high returns and thus hold these stocks

50
Q

What is the hypothesis if ii are divesting? What does the data say about it what are some potential explanations for this?

A

companies with higher levels of transition risks should be held less by institutional owners - if they are divesting based on transition risk you should expect that the institutional owernshhip should be lower

the relationship between investment and levelof emissions is positive so this is hypothesis is not correct, on average they hold more of the companies with high emissions
- could be that high emitters have higher returns - might have a preference for high returns and thus hold these stocks
- could be that investors are divesting more in smaller companies - little to do with the emissions but the institutions themselves

51
Q

What is the idea behind home bias?

A

local investors would prefer to invest in local over global companies
- know more about the economy, easier to exploit information advantage rather than somewhere else
- patriotic - US investors have a strong preference for US companies

52
Q

What is the relationship between long term transition risk and global variation?

A

long term transition risk is priced all over the world

  • investors are global investors and they think it to be important to recognise the risks in the global markets and not just the local markets
53
Q

how does scope 3 interact with policy?

A

for domestic polich there is a positive effect for scope 3 - long term - stricter legisiltion you have a higher transition risk therefore this has to be priced

Financial Markets and Climate Change (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions