A 1% increase in fossil fuel prices can push a company’s share price down by
an average of 0.25%, highlighting the business case for carbon efficiency
policies, a new study reveals.
Using data on the constituents of the Standard & Poor’s 500 index and a
‘fossil fuel beta’ or FFß Tuck School of Business finance professor Anant
Sundaram has worked out the direct correlation between the share price and the
price of fossil fuels.
Sundaram’s research shows aerospace, computer and retail businesses are most
affected by the price of fossil fuels, while machinery and utilities businesses
are the least affected.
There are also variations within industries. Sundaram has estimated that only
five out of nine aerospace companies and two out of four air and transport
businesses will see their share price drop when fuel prices increase. By
enacting energy efficiency policies certain companies are able to break the link
between their fuel usage and share price.
Aerospace group Boeing has a positive FFß of 0.09 by incorporating carbon
reducing policies compared to Rockwell Collins, the aerospace technology
supplier, which has a negative FFß of -0.28.
“Fossil fuels going up and down can cause tremendous volatility to your share
price. A smart company will think about how to decouple the two or insulate
themselves,” says Sundaram.
The findings underline the reasons why businesses need to take seriously
enacting a carbon efficiency policy. Sundaram believes these policies can lead
to a ‘positive’ FFß: one example of a company that has achieved this is
Wal-Mart, which Sundaram says “obsesses about every ounce of fuel it uses”.
He is now in talks to calculate the FFß for large UK businesses.