The day is fast arriving where an organisation’s emissions will be measured on its balance sheet with an ability to materially affect its value.  Emissions, like pension deficits or surpluses, will affect the pricing of an asset or investment and even investors’ perceptions of a whole industry.

When that day arrives, and in key industries like power generation it already has, then the business world will be faced with a new investment paradigm and will be forced to re-evaluate the value of a whole series of assets and industries.  Industries will also have to revisit, like the fuel surcharge in aviation, pricing structures to reflect new assets or liabilities.  The impact could be dramatic and right now all key industry associations should be lobbying governments to provide a frame work so that as organizations and investors value emissions, an orderly process is in place to reflect the emerging, changing, dynamic and new environment.  Emissions in all industries need to be fairly and relatively set so that industries are able to survive any transition.

While the changes may come quickly, and perhaps not orderly, a lot needs to be settled before organizations can make sense and properly translate what an emissions asset or liability might be to their stakeholders..  Like pensions, a standard which is internationally recognized for balance sheets and accounting purposes needs to be created, accepted and adopted in a form that can be audited.  A job for accountants perhaps but the big question remains who will co-ordinate that and in what time.

  It might be too late for some.

Certain industries may need to move more quickly and adopt their own standards and methodologies.  Already power stations are subject to calculations and price adjustments which are determined by their emission levels and that performance either creates an asset or a liability and by implication with regulation a need for capital investment or not.  So in the power industry, old coal powered power stations will sell at a potentially larger discount and clean coal will sell at a premium and, as government’s change emission targets, values might change.  Perhaps this will not make for the easiest investment environment.

Is assessing emissions as an asset or a liability in an investment context or asset sale a good thing?  The answer is really irrelevant because once a value is attributed to emissions in any context it creates an asset or a liability and if it can be traded, (and that market is not yet transparent or liquid), then it has to be part of any investment decision.  Emissions will be part of the decision making process for capital investment, the location of investment, whether an asset is worth buying or selling and for determining corporate strategy including any influences from investor sentiment.  It will, like the compliance industry, add to costs of running businesses.

Once the concept of emissions as an asset or liability of a business takes hold, and in buying or selling, we are seeing it, then stock markets will begin a processing of re-rating industries and the companies in them.

  As performance and absolute performance is the real driver for stockmarket investment this might mean that investment will be skewed to “emissions light” industries at the expense of “emissions heavy” industries.  So a service company might be preferred as an investment to a heavy engineering group.  This will have unhealthy consequences as investment moves away from say infrastructure investment to banking or restaurants.  It might lead to a need for more thoughtful regulation.  Emissions allowances may then need to be set carefully by Government and in the author’s view, rest like any license fee, probably something not welcomed by the financial markets. 

Emissions will create new values and new balance sheets.  They will create new service industries that will monitor, measure and value an industry’s worth to mankind and therefore to the environment.  Government’s will set emission targets against man’s most valuable industries and it will lead to greater grading of industries and technologies.  Investment and stock markets will view companies differently, government’s will have their own balance sheets with an emissions entry. 

It may like all new developments bring contradictions that make good initiatives now, in the longer bad initiatives unless a more wholesome view of the implications of the balance sheet are thought through.  Investor reaction should be considered and planned for.  Otherwise businesses with an emissions liability, like companies with a pension liability, will attract less investment and will be less able to switch to a cleaner emissions economy.  In that event, government might have to still pick up the tab.