No. 410 - Investing in the electric utilities sector: the implications of carbon risk

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by Enrico Bernardini, Johnny Di Giampaolo, Ivan Faiella and Riccardo Poli November 2017

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.

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