Welcome to the Climate Impact Institute. Today we are going to talk about improved measures for the exposure or the sensitivity of stocks returns with respect to changes in carbon prices. You remember that we expect that whenever the transition to a low carbon economy will materialize in higher carbon prices, and thus higher carbon prices will reflect an effort for internalizing these negative externality that represents the emission of carbon in the atmosphere. That is the main driving factors for global warming. Whenever this mechanism comes into play, it will involve a substantial increase in carbon prices. What we know is that this increase in carbon prices will in turn have a big impact. Very strong potentially impact on balance sheet and income statement for most companies, especially those companies that are heavily involved in emitting lots of carbon emissions. What we would like to do is to try and obtain a good statistical measure of the sensitivity of stock returns with respect to these changes in carbon prices. One of the problems here is that if you run a simple statistical analysis, well you don't obtain much of a relationship. The key problem being that these straightforward analysis is backward-looking in nature. In other words, you look at past stock returns and you're looking at whether when carbon prices go up, does it translate into an increase or perhaps a decrease in stock returns? There's not much of an effect to be found. This does not necessarily say that looking forward, if and when the transition to the low carbon economy will become closer in investor's mind, then these will not eventually materialize in terms of impact. Now, the other problem that we have with the standard statistical procedures is that they do not incorporate information about carbon footprint or carbon intensity for those firms. From an intuitive standpoint, we do expect that the firms with the highest degree of carbon intensity, we expect them to be more at risk, more exposed to the risk of increases in carbon prices. Yet, when we ran these basic statistical procedures, this is not exactly what we find. We find almost no relationship whatsoever in terms of carbon exposure on the one hand and carbon intensity on the other hand. Now, to try and address these concerns, what we are going to do is we're going to move away from the standard statistical procedure that basically consistent branding, linear regression of stock returns on the left-hand side of the equation onto market returns as a control variables, perhaps all returns as a control variables as well and eventually on changes in carbon prices here denoted by or CO2. As opposed to be doing this and measuring the beta parameter. From the straightforward multiple regression analysis. What we are going to do is we are going to make this beta parameter. We are going to allow it to be a function of carbon intensity of these observable attribute that tells us whether a given firm as a higher level of emission per unit of revenues. Now when we do so, we find an interesting outcome which is presented here. We do so for two sectors, energy and materials. These are sectors that are very prominent when it comes to carbon emissions. There are sectors where, at least from a scope one, scope two perspective. These are some of the most carbon intensive sectors. What we find as expected, we find now a negative relationship between carbon prices and carbon intensity. In other words, what we find is for the firms that are on the left-hand side of the x axis, these are the firms with low carbon intensity. What we find here is they tend to have a positive carbon beta, which means that they tend to be helped by these positive carbon beta translates that when there's a positive shocks on carbon prices, when carbon prices goes up, this translates into positive stock returns. On the other hand, when we look at firms that have a high carbon intensity, then we find the negative relationship as expected. In other words, for those firms that are on the right-hand side of the x-axis, we find that those firms have mostly a negative exposure to changes in carbon prices. In other words, in increase in carbon prices is bad news for those firms. It translates into negative returns. Now, let me perhaps emphasize here that we are using not a row carbon intensity as a measure, but we are using net carbon intensity, which is the carbon emission of the firm minus carbon emission targets that are being set by the regulators. What we find here is that firms that emit more than they should be emitting. Well, those firms have very visible statistical exposure from the purely statistical standpoint. Now that we recognize that carbon footprint plays or carbon intensity plays an important role in this mechanism, we do confirm that those firms that they need more than they should be. Well, they have a negative beta with respect to changes in carbon prices. Meaning if and when carbon prices go up, these will translate into negative returns for those companies.