Climate risks and the practice of corporate valuation

Global investors and asset owners are no longer treating climate change as a peripheral issue. From the perspective of seeking superior investment returns and of reducing risks, investors are exploring new ways to capitalize on the opportunities emerging from the transition to a low-carbon economy. The practice of finance, and in particular of corporate valuation, is acknowledging this new context by looking into approaches that could accurately reflect the impact of climate risks on equity value. The development of carbon-related financial products and the growing availability – across industries and jurisdictions – of environmental footprint data are useful ‘ingredients’ to integrate climate risks in corporate valuations. We assess how and to what extent carbon risks can be factored into the most common valuation techniques (i.e., discounted cash flow models) as well as in more sophisticate approaches such as scenario-based valuations, Monte Carlo simulations, decisional trees, and real options.