Climate Investing

9Enhancing the Accuracy of Firm Valuation with Multiples Using Carbon Emissions

Carbon emissions are nowadays an essential driver of the value of a firm. We are the first to analyze the potential of carbon emission data in enhancing the accuracy of firm valuations using the similar public company methodology with multiples. Using carbon emissions can improve firm valuation accuracy in two separate ways. First, we construct multiples based on carbon emissions (CEM) which are able to estimate firm values. Moreover, second, we create more precise peer groups by including carbon emissions (CEPG) in the composition process. To gain deeper insights, we are conducting further analyses, for example, by measuring the accuracy of carbon emission peer groups and carbon emission multiples at valuing carbon-intensive or carbon-inefficient firms. We extend our study by looking at firms in countries with carbon pricing or taking ESG and SDG concerns into account. Overall, we find that CEPG improves the accuracy of firm valuations in more than three-quarters of all cases, whereas CEM have limited use. Therefore, we recommend that analysts, asset managers and investors include carbon emission data in their peer group composition.

In the latest global risk perception survey, climate change mitigation and adaptation failure are ranked first by their impact (World Economic Forum 2021). The awareness of these climate-related financial risks has grown recently, especially since the Paris COP 21 (International ...