by
R obert P reer
G r ee n Tec h R epor t
Accounting Professor Paul Griffin Unravels Impact on Company Valuations
The Bottom Line on Cutting How would the allocation of carbon credits affect the value of publicly traded companies? Does the amount of greenhouse gases a firm produces affect how much the firm is worth? How much do investors want or need to know about a company’s environmental balance sheet? Professor Paul A. Griffin has been investigating these and other questions that arise at the intersection of business and the environment. In his research, Griffin uses mathematical models and extensive firm-specific data to gain an understanding of how proposed climate change legislation and greenhouse gas emissions affect both companies and investors. Among Griffin’s findings: The United States does not have an established way of calculating the value of carbon credits, which companies would be issued if cap and trade becomes law. In the absence of formal rules, companies would be free to adopt different methods, which could yield dramatically different results and leave investors in the dark about true company values. Under the terms of climate change legislation passed by the House of Representatives last year, U.S. companies would receive $34 billion in climate change allowances. But using the U.S. Federal Energy Regulatory Commission’s accounting procedure, the balance sheets would show only the benefits purchased, which would be substantially less. Companies that have low greenhouse gas emissions tend to have higher valuations, all else being equal. Doing good by the environment, it turns out, means doing well financially— at least as far as greenhouse gases are concerned. “If a large company invests in technology and reduces its greenhouse gas emissions, then there should be a beneficial effect on the value of the company,” Griffin says. This research into greenhouse gas emissions and firm values is still a work in progress, according to Griffin. He is collaborating on the project with researchers from the University of California, Berkeley, and the University of Otago in New Zealand, and he expects the findings to be published in early 2011.
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If a connection can be demonstrated between stock values and greenhouse gas emissions, then publicly traded firms may have to disclose their emission levels. The Securities and Exchange Commission requires firms to disclose all information material to stock values. Some firms do report carbon emissions voluntarily now, but many do not. Griffin also has looked closely at the issue of how greenhouse gas allowances or carbon credits might be accounted for on company balance sheets. Under the cap-and-trade bill passed by the House but defeated in the Senate this summer, total greenhouse emissions would be capped, and companies would receive government allowances to emit specified amounts annually. Firms with emissions under set amounts could sell their allowances to firms over the limit. The bill thus would create incentives for buyers and sellers of credits to cut emissions. President Obama and congressional Democrats have vowed to press again for climate change legislation in 2011 when a new session of Congress begins. Federal accounting regulators have not adopted a uniform method of accounting for carbon credits, and without set standards, companies would choose from a number of possible methods, according to Griffin. “There will be confusion,” he says. “The average public investor will be at a disadvantage relative to a professional investor like Goldman Sachs.”