IIT Guwahati, IIM-B teams make breakthrough in pricing carbon risk

Researchers from the Indian Institute of Technology Guwahati IITG and IIM Bangalore have established in a new mathematical analysis a relationship between the carbon footprint of companies and the potential risks of investing in these firmsFor the study the researchers carried out an extensive data analysis of over 200 of the largest listed companies in the American market They also considered direct Greenhouse Gase GHG emissions of the companies and purchased GHG emissions in power consumption or heatThey found that most of these companies 716 per cent showed a decrease in their carbon emissions in the 20162019 period It was found that carbon footprint had a positive correlation with the size of the companies and their revenuesHowever the correlation with expenses was found to be slightly less than that with revenue which they attributed to the higher expenses of switching to renewable energy sources The findings have been published in arXiv a curated researchsharing platformAlso read Eat dal to be ecofriendlyOn analysing the data of annual stock returns along with data of GHG emissions and other financial data revenue debt and book value among others it was found that there exists a carbon risk premium in the stock returns which means that in the short term higher carbon emissions are found to be inflating the price of the stocksIt was found that a higher carbon footprint gave higher returns to investors in the short term said Siddhartha Pratim Chakrabarty from the Department of Mathematics and Mehta Family School of Data Science and Artificial Intelligence at IIT GuwahatiIn their paper the researchers found a mathematical relationship between the carbon risk premium and the value of the future riskThe teams studied the risk for different scenarios when the regulations or carbon transition may happen and found a formula for the maximum exposure of each firm to the transition for different times in the futureFor one family of arrival processes models for when the transition will happen they found that the price of the average stock in their data could fall at most by 2065 per cent at the transition if the transition is expected to happen in 10 years time from now and 413 per cent if the transition is expected to happen in 20 years from now The corresponding figures for most polluting firms are 4504 per cent and 9008 per cent respectivelyThe researchers also demonstrated the different scenarios in which investors could profit from the premiumrisk tradeoff and showed the cases in which it is more profitable to hold on to a stock for the premiums and those where it is more profitable to sell or short the sharesThis story has been sourced from a third party syndicated feed agencies Midday accepts no responsibility or liability for its dependability trustworthiness reliability and data of the text Midday managementmiddaycom reserves the sole right to alter delete or remove without notice the content in its absolute discretion for any reason whatsoever