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

Enrico Bernardini (), Johnny Di Giampaolo (), Ivan Faiella and Riccardo Poli ()
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Enrico Bernardini: Bank of Italy
Johnny Di Giampaolo: Bank of Italy
Riccardo Poli: Bank of Italy

No 410, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: carbon risk; climate change; factor models (search for similar items in EconPapers)
JEL-codes: C58 G11 Q54 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-ene and nep-reg
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