The Carbon Trust, a UK government-funded think tank, makes the case that many companies’ brand value – a key component of the market value measuring intangible assets – is at risk from climate change. The logic is straightforward: UK consumers may be four years away from a tipping point (2010) whereby purchase decisions will be increasingly based on how a company addresses global warming issues (see Part II of this series). At this point, brand value – the % of market value that is based on intangible assets including image/reputation, trust and perceived consumer experience – may erode.
Carbon Trust (CT) forecasts suggest that diverse industries face the prospect of brand value erosion.
CT data suggests that companies with both high operational exposure (measured as the amount of CO2 emitted per $ of EBIDTA) and high % of total market value based on intangible assets are especially at risk of losing significant value. This risk is compounded by the long lead times required to reduce operational exposure (e.g., airlines, oil & gas), as it will be difficult to change course quickly to mitigate lost market value by reducing carbon footprints and reshaping its brand image with consumers.
Somewhat surprisingly, industries such as food & beverages and banking have more market value at risk from climate change than the carbon-intensive airline and oil & gas industries. While airlines may face the prospect of losing 50% of their market value due to climate change issues, it is projected that for banks, the absolute amount of the decline will be significantly higher.
For banks (and other low carbon emitting industries including telecommunications), the critical issue is not whether their own carbon levels will influence consumer purchase behavior – as “the absolute levels are not sufficient to influence mainstream customer choices”. Instead, the issue is whether there are “material indirect effects that are within companies’ control or area of influence”. Brand value, therefore, may rest on whether a company is viewed by consumers (and shareholders) as taking a ‘leadership’ role on climate change issues or as lagging behind its competitors.
For banks, material indirect effects may include its “investment and lending exposure” – especially if consumers view such investments as “irresponsible” given the potential ramifications from climate change. Moreover, shareholders may view bank portfolios as increasingly risky if, for example, they include a high concentration of mortgages for properties located in flood-prone areas.
CT estimates that for a bank, 17% of its market value is derived from its brand. Of the 17%, CT estimates that 6-12% (or 1-2% of overall market value) is potentially at risk due to climate change. Given bank valuations today, even a 1-2% erosion in value would result in a significant decline in market value for its shareholders.
The telecommunications industry faces similar risk based on indirect carbon use. Examples include “computers left permanently on standby to support ‘always-on’ broadband, or mobile phone chargers left plugged in when not in use”. While the industry may not face significant losses in market value from such issues (perhaps a 1% overall decline in market value), the situation may, conversely, provide a leadership opportunity that will help protect, or perhaps enhance, existing market value.
So, marketers and strategists should take note: a tipping point may be approaching which could put brand value at risk. While dynamics in the US market may delay the arrival of this watershed event, its onset may be sudden and rapid and, thus, take companies by surprise. It is interesting to note that many US companies are already preparing for this shift. For example, Goldman Sachs has already committed itself to being carbon neutral while GE, which competes in more carbon-intensive industries, has purposefully repositioned itself as a more eco-friendly brand. It may be prudent for more US companies to consider following suit.