DWS says carbon intensive corporate capex remains too high in some industries.
The new research from DWS examines the relationship between corporate capex and climate risk across 900 large global stocks using the firm’s Climate Transition Risk and proprietary CROCI11 (cash return on capital invested) data. The research finds:
1) Only 12% of the market capitalization of the largest 900 companies is from companies with high or excessive climate transition risk. Close to 60% of the universe’s earnings by market cap have moderate or low climate risk while, the US and Japan have the lowest earnings’ exposure to climate risks.
2) Companies with high climate risk make up 36% of corporate capex, three times the market cap exposure. More capex is required from an energy company to generate earnings compared to a software company.
3) USD650bn annual capex from carbon intensive companies might need to be reoriented to avoid a dangerous climate future. Carbon intensive capex does not appear to be decreasing and has the longest economic life, expecting to earn a return on that capital until 2042.
4) There is no valuation premium for being invested in low or moderate climate risk stocks.
This may indicate that at an aggregate level, equity markets are still not pricing in transition risks. We believe that this may be due to a combination of public policies not being strong enough or that some investors ignore or give less weight to climate risks.
5) Companies with high and excessive climate transition risk are less profitable and are
destroying shareholder value. A prudent course of action for these high climate transition risk
companies may be to reduce fossil fuel capex, redefine their business strategy to improve
profitability by accelerating the low-carbon transition or just returning capital to shareholders.
6) Investor engagement is strengthening but some asset managers still vote against many
ESG and climate shareholder resolutions. A climate emergency means asset owners being more demanding of asset managers who in turn should be more demanding of companies.