Energy dinosaurs feel the fossil fuel effect
Companies that ignore energy efficiency and environmental policies could see their share price drop if the price of fossil fuel rises, new research has revealed
Anant Sundaram, a finance professor from the Tuck School of Business in
Dartmouth, New Hampshire, analysed the top 500 US companies to understand the
impact of fossil fuel price swings on a company’s share price.
He found that companies with no environmental policies or strategies such
as fuel efficient company cars and targets to reduce energy use by employees
see their share price drop if oil and gas prices increase.
But with the right policies on energy efficiency, even fuel-heavy industries
can ‘de-couple’ the link between fuel price volatility and a movement in share
prices, meaning their share price won’t drop if there is a spike in the price of
oil.
Sundaram who has been in talks with the
London Stock
Exchange to use its data to formulate a similar calculation for large listed
companies in the UK calculated this exact co-relation in a formula he has
called the fossil fuel beta (FFb).
By enacting energy efficiency policies, Boeing, the aeroplane maker, has a
positive FFb of 0.09, meaning that when fossil fuel prices go up, its share
price increases marginally or remains flat.
But Boeing’s rival Rockwell Collins has a negative FFb, meaning that when
fuel increases by 1%, its share price decreases by just over a quarter of a per
cent.
The findings will be of interest to company boards as they try to cut costs
within their business amid the global economic downturn.
‘As a finance director or chief financial officer, you have to worry about
these issues and its affects on the company’s share price and bottom line
impact,’ said Sundaram.
Alan McGill, sustainability and climate change partner at
PricewaterhouseCoopers, said:
‘It is becoming increasingly important to understand climate change’s impact on
profitability in an organisation.’
‘As climate change is starting to be taken a lot more seriously, boards are
taking a more strategic view’
added McGill.
This article was taken from the February edition of Accountancy Age’s
sister magazine,
Financial
Director