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Concept
Fossil Fuel Beta
Summary
Fossil Fuel Beta (FFß) measures the percent change in excess (market-adjusted) stock returns for every 1 percent increase in fossil fuel prices.
For example, if a company (or industry) has an FFß of –0.20, then a 1 percent increase in fossil fuel prices should produce, on average, a 0.2% decline in the firm's stock price over and above the impact arising from fossil fuel price swing on the stock market as a whole. (Conversely, a 1 percent decrease in fossil fuel prices should produce, on average, an equivalent increase in stock price.)
Converting the FFß into a hypothetical ‘Earnings per share-equivalent’ based on a fixed percent change in fossil fuel prices, it is possible to compare earnings-at-risk for individual companies with their competitors, or even industries with each other.
Three common fossil fuels — coal, petroleum and natural gas — produce more than four-fifths of all carbon dioxide (CO2) emissions. Achieving meaningful reductions in greenhouse gas (GHG) emissions requires abating CO2 emissions.
In countries such as the US, companies are the largest emitters of CO2. By linking earnings-per-share (EPS) to fossil fuel price volatility, FFß highlights a potential economic payoff for reducing or hedging the use of fossil fuels, and hence CO2 emissions. FFß can also underscore adverse economic consequences to companies that fail to manage carbon footprints.
The FFß was created by Professor Anant Sundaram of the Tuck School of Business at Dartmouth College, with support from the Allwin Initiative for Corporate Citizenship.
CFO Magazine (a division of the Economist) published the first FFß scorecard in its December 2008 issue. The scorecard was computed for 135 S&P 500 firms in ten industries, using a simple market model in which a firm's excess returns are calculated by subtracting aggregate market returns from the firm's returns. A slightly more sophisticated analysis calculates the firm's excess returns by subtracting returns predicted by an asset pricing model such as the Capital Asset Pricing Model, or CAPM.
Official source
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