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Investing in the electric utilities sector: the implications of carbon risk

Author

Listed:
  • Enrico Bernardini

    (Bank of Italy)

  • Johnny Di Giampaolo

    (Bank of Italy)

  • Ivan Faiella

    (Bank of Italy)

  • Riccardo Poli

    (Bank of Italy)

Abstract

The decarbonization process has made the traditional value-creation model of companies operating in the electricity sector (energy utilities - UEN) obsolete, particularly affecting those with a greater share of fossil fuels in their energy mix that have been forced to write down their carbon-intensive activities with a negative impact on operating income, equity and leverage. Institutional investors have a significant exposure to UEN risk capital and debt: if the transition process towards a low-carbon system is faster than expected by the market, the risk that these weaknesses may spread across the financial system shouldn�t be underestimated. Analyses based on risk-premium factor models show that there was a significant low-carbon premium during the years in which the decarbonization process increased; in the period considered, an investment strategy that focused more on low-carbon companies would have delivered higher returns without modifying the overall risk profile.

Suggested Citation

  • Enrico Bernardini & Johnny Di Giampaolo & Ivan Faiella & Riccardo Poli, 2017. "Investing in the electric utilities sector: the implications of carbon risk," Questioni di Economia e Finanza (Occasional Papers) 410, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_410_17
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2017-0410/QEF_410.pdf
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    More about this item

    Keywords

    carbon risk; climate change; factor models;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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