IIT-Guwahati & IIM Bangalore's study reveals ‘carbon risk premium’ stocks of polluting firms

GUWAHATI: A new mathematical analysis conducted by researchers from the Indian Institute of Technology (IIT-Guwahati) and the Indian Institute of Management Bangalore (IIM-Bangalore) has made a breakthrough in pricing ‘Carbon Risk'.

The analysis found a ‘carbon risk premium’ in stock returns, which means in short term, higher carbon emissions inflated stock price but could lead to severe losses in long-term as governments impose regulations on Greenhouse Gases (GHG) emissions.

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Companies that rely on excessive emissions of Greenhouse Gases (GHG) face an uncertain future as the globe strives for a more sustainable future and economies around the world try to reduce their carbon footprint.

The researchers from these top institutions conducted an extensive data analysis of over 200 of the largest companies in the American market.

The research team included Professor Siddhartha Pratim Chakrabarty, department of mathematics and the Mehta Family school of Data Science and Artificial Intelligence, IIT Guwahati along with Professor Sankarshan Basu from the department of finance and accounting, IIM Bangalore, and  Suryadeepto Nag, a BS-MS student from IISER Pune.

The findings of this analysis can be found at: https://arxiv.org/abs/2107.06518

The carbon footprint was discovered to have a positive relationship with company size and revenue.

The correlation between expenses and revenue, on the other hand, was found to be slightly lower, which they explain to the increased costs of converting to renewable energy sources.

Professor Siddhartha Pratim Chakrabarty said, “Many researchers from around the world have independently established the existence of a carbon risk premium in the last few years. The emergence of such a premium has been related to the threat of a "carbon transition."

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He also said,"Governments around the world may soon put controls on GHG emissions or levy greater taxes and levies on companies that contribute significantly to global warming as the negative effects of climate change become more visible."

If this happens, companies will start losing revenue, and in the case of strict laws, they may even go bankrupt, with the value of their shares falling. This might result in significant losses for investors, as well as losses in the broader market as a result of the following sell-offs, Professor Siddhartha Pratim Chakrabarty added.

The team discovers a mathematical relationship between the carbon risk premium and the value of future risk in their paper.

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