Introduction
In contrast to ESG ratings which allow users to engage in corporate “virtue-signalling”, IMAG Environmental and Carbon ratings are independently produced by professionals with deep technical and engineering knowledge.
They are designed to take a hard-nosed look at how individual companies are positioned for the coming transition to a more environmentally friendly and carbon-neutral global economy.
For the purposes of producing these ratings, our and the reader’s views on the current state of climate
science or the environment and its regulation are irrelevant. The purpose of the ratings is to take a cold
hard look at where we are today and to trace the differential impact of regulatory actions on various
businesses.
As an example, we can look at carbon pricing — which in Europe has gone from €5/ton to €30/ton in
the last couple of years. This is a large and rapid change and the resulting costs of adjustment will vary
enormously for different corporations ~ depending on how they are positioned.
Some corporations will face significant headwinds in their businesses while some will receive
tailwinds.
To get an intuitive feel for this, we can consider the contrast between a tech company like Google which will easily mitigate the cost of adjusting to an environmentally friendly, carbon-neutral world and companies like US Steel, utilities operating coal-fired power plants or the airline industry. These will be forced to bear very significant costs in order to neutralize their carbon emissions.
Similarly, whereas an electric vehicle company like Tesla might benefit from very significant tailwinds to revenues there will be others like coal miners whose revenue growth may be significantly stunted.
But while it is easy to identify the outliers like Tesla vs coal miners, there is a range of industries and business models in between where it becomes far harder to tell.
Part of the problem is that financial analysts often lack the technical knowledge and understanding to trace the impact of environmental regulation into financial outcomes within the corporation. By contrast, engineers certainly have the technical knowledge but need to funnel that knowledge into a format and style that makes sense to the myriad financial market participants who would benefit from their insights.
This white paper, and IMAG Environmental and Carbon Ratings seek to fill that gap by applying a simple and easy to understand rating methodology to provide a summary of a company’s underlying business exposure to environmental regulation.
In order to do this, we develop a ratings model which seeks to estimate the impact of current and upcoming environmental regulations on the business prospects of certain companies and industries.
We come up with a two-factor rating scale which quantifies the impact of carbon and environmental regulation on two key accounting measures used by financial and other analysts.
The first —a letter score encapsulates the cash cost to the corporation of reducing its environmental and carbon footprint to neutral — where a high rating implies minimal cost and a low rating implies a very high cost — potentially neutralizing all future earnings.
The second — a number score estimates the sensitivity and vulnerability of Companies to short term changes in the costs of operation resulting from current and future environmental regulation. Companies with products and services that will do well have a high number score and those that we can expect to do poorly have a low number score — potentially indicating existential risks.
This framework should allow financial analysts and other market participants to develop with the help of the ratings, a “quick and dirty” method of re-evaluating all those assets where it may well not be obvious or easy for a non-engineer to come to fast conclusions about how the industry or company economics will unfold.
To the extent that capital markets and asset prices provide the key signals as to how and where financial funds ought to flow, we believe that increasingly accurate and well-founded environmental ratings such as IMAG seeks to provide are critical to retooling the global economy for an environmentally friendly and carbon-neutral future.
This is the iteration what will likely be many in order to make IMAG Environmental and Carbon ratings a part of our global financial infrastructure. Like credit-ratings for credit markets, they will be instrumental in making securities markets more efficient and will enable the likely effects of environmental regulations to be traced in a simple to understand framework.
Because of this, we welcome your feedback and comments to us so that we can incorporate them into future iterations of this process.
- Leigh Hackett
[email protected] - Saurabh Kapoor
[email protected] - Guy Spier
[email protected]
