On January 23, we organized a round table devoted to financial innovations in the energy transition, with François Meunier on carbon invoicing and Yann Leriche, CEO, and Géraldine Périchon, CFO of GetLink, on the decarbonized margin published for the first time by this group in 2023.

For those of you who weren't able to attend, here's a transcript of the discussion.

François, can you tell us about carbon invoicing and the idea you put forward with a few friends?

A few comrades, of course, but it's more than just an echo, since it's being considered in the United States, United Kingdom and Germany. The Bundesbank is soon to hold a conference on financial stability, which will look at carbon measurement and how to account for it.

In a nutshell, it's very easy. Everyone is aware of the need to measure carbon. We can't manage without knowing the figures. Today, for many companies, this will be an obligation from 2025. In the United States, S&P 500 groups now calculate carbon balances, i.e. they have their inputs, their intermediate purchases, put a figure on the carbon content of direct and indirect production, i.e. scope 1, scope 2 and scope 3, and add them up to obtain the carbon balance.

Carbon accounting reverses this logic: it's not up to the buyer to come up with these figures, it's up to the suppliers to provide them; and when this logic is applied, everything is reversed: the supplier gives his buyer valuable information: the carbon content of the inputs purchased; and reciprocally, the downstream buyer gives this information back to his own customers, so we have a whole cascade system. It's worth noting that it's surprisingly similar to VAT, since VAT is declared by the supplier, paid by the buyer who reimburses it to his own buyer, etc... We therefore progressively have carbon information that goes all the way down the value chain to the end consumer.

The principle is extremely simple. What we add to it is two things, obviously:

• the best way to pass on the information is via the invoice, and tomorrow, as you know, invoices will be electronic;
• there's still a job to be done in terms of the company's current situation, i.e. to pass on the carbon content of its inputs to its products, to its own products; so there's a job for management controllers.

That's the principle, no more difficult than that. It's the implementation that may well be more complicated.

Yann, how about a presentation of decarbonated EBITDA?

We call it the decarbonized margin, but it's really a decarbonized EBITDA, which simply consists of taking the Getlink group's classic EBITDA and subtracting a virtual bill.

At this stage, we calculate it as follows: we take our greenhouse gas emissions, i.e. CO2 and equivalent gases, and apply a unit cost per tonne of CO2. We chose €197 per tonne for the first year, based on the work of the US Environment Agency (updated every year). We subtract this virtual bill from our EBITDA to calculate a decarbonized EBITDA.

This helps us understand whether or not the day we actually have to pay our carbon bill will be a sustainable one for the company. The effective invoicing of carbon is being implemented at European level with the implementation of the "polluter pays" principle, carbon being considered as a negative externality, the markets and others are in the process of putting a price on carbon. This is a strategic issue. If, by making this calculation, we derive a negative EBITDA, it means that our business model poses a problem, and is at risk the day carbon is invoiced.  If EBITDA remains positive, but only very slightly positive, this also jeopardizes the future and raises questions. If, on the other hand, EBITDA remains fairly close to conventional financial EBITDA, it shows that we're a player armed to face up to the energy transition.

At Getlink, we're relatively fortunate in that our businesses are quite green. Our main activity is the Channel Tunnel, which uses electric trains. We also have an electric cable and other freight activities elsewhere in Europe. Our carbon-free margin is only 3% lower than our financial EBITDA.

François, you were talking about a chain effect, with each player passing on to the next the carbon bill or the amount of carbon it generates. How do you start this chain? It sounds very complicated.

It all takes time, of course, and the switchover can't be made in one go.

First of all, you need to bear in mind that there are major suppliers of energy, and therefore generally of greenhouse gases, CO2 etc... an EDF, an Engie etc... These are the 0.05% of companies that emit the majority of carbon. So it would be a priority for these companies to inform their customers about the carbon content of what they deliver.

The second thing is to have the discipline for companies like Getlink, which are already involved in carbon footprint issues, to offer cost accounting and thus pass on the information downstream.

Then, very, very far down the line, well, there'll be a regulatory broom wagon.

Things are more difficult for SMEs, of course, but it's important to remember that they generally buy from large groups. So it's easier for them to make their carbon footprint, to have this information prepared by their suppliers.

The last point, which is more technical, is that we realize that in reality it's not necessary to have all the carbon content, all the footprints, it's enough to have some of them, and the system naturally converges towards true carbon estimates.

As you can see, instead of simply having the carbon footprints of companies, we are able to go down to the product level, i.e. to have the direct and indirect carbon footprints of the economy's goods and services. The logic is reversed. It's the supplier who provides the price, the technical documentation, and the supplier who must eventually provide the carbon content. We're going to end up with carbon labelling for every product. Is a plastic bottle more carbon-intensive than a glass bottle?

A major burden will fall on the major retailers, because they themselves consume, so it can't be the producer who puts the carbon content on the label. It has to be displayed by the distributor, so there's a huge burden that will certainly fall on the major retailers.

How do you reconcile carbon reduction targets with financial targets? Because the two are not mixed up in your accounting.

I think the great strength of the decarbonized margin is that it combines profit optimization in conventional euros and carbon optimization in a single indicator. Of course, you have to do both.

We're in a somewhat fictitious world, since it's not a carbon tax, it's a fictitious carbon tax, it doesn't bite into the wallet, so the company doesn't have to adjust its selling prices. We're in an island of eco-friendly companies rather than an eco-friendly universe. So that's just the first round.

It's true that there is a dual dynamic in carbon accounting. In other words, the company must obviously maximize its profit, but must also reduce its carbon footprint, and having these two levers at its disposal changes the attitude a little. It's not just a CFO who's concerned with the company's profitability, it's a lot of teams within the company, the purchasing department, the sales department, the production department who, at every level, say, almost with a moral mobilization, "Ah I'm buying this, well let's see what the carbon footprint of this is. I'm selling this, is this the optimum offer from a carbon point of view?"

Géraldine, what led you at Getlink to set up this decarbonized transport tool?

Several things. Firstly, we wanted to provide a visible indicator that would highlight our efforts. To highlight the fact that we are ready for the transition and that we have a transition tool based on a tool that is very well known to investors, such as EBITDA. This sends out a very strong message, and we've immediately had a very significant response. The aim of the decarbonized margin is to show the extent to which a company is capable of supporting the ecological transition. That's why we've taken into account a carbon price which is the result of a study that will evolve every year, rather upwards, and which is not the price of the carbon market, which is too volatile.

The aim is to illustrate this capacity for resistance and preparation. It's also a way of going against the grain of ESG agencies, which don't always have a very clear way of measuring this type of approach.

Is the low-carbon margin primarily a communication tool, or an internal management tool for the company, or both?

It's obviously a communication tool. We want to let people know that we're committed, and we can see that the younger generations are asking us lots of questions on this subject and want to join us, particularly because we're making efforts on carbon.

We're making real efforts, and we've decided to go much further and be ambitious in this area by turning this tool into a real internal steering tool. When you have too many indicators, you end up not knowing what you're optimizing, which ends up being a problem. The advantage of the decarbonized margin is that once we've integrated the cost of carbon into finance, we end up with an indicator.

Today it's a leading indicator because we don't actually pay our carbon bill, it's a virtual bill. But this carbon price is going to hit us sooner or later. We're not there yet, but one day we will be. So it's important to ask ourselves right now: Are we ready?

When you buy a train, it's for 40 or 50 years. A very concrete choice today is between a classic diesel train, an electric train, a hydrogen train or other technologies. We can ask ourselves the question of buying a diesel train today, but for a line that isn't electrified, we can't buy an electric train and the hydrogen train isn't necessarily ready... So we have to ask ourselves right away what the cost of carbon is going to be tomorrow, and make the best estimates to determine how to spend the right amount of money today, so that we don't end up holding stranded assets tomorrow because we'll be emitting too much carbon; or conversely, so that we don't invest too much money today for something that won't be useful tomorrow, and which will impact our business. The difficulty is that we don't know the reference cost of tomorrow's carbon. We've made an assumption, we don't know if it's the right one, but we used €197 per tonne when we set out. We need to have a vision, just as the European Central Bank targets a given level of inflation. When it comes to carbon, we don't really know, because the market is disconnected from all the socio-economic studies on the value of carbon. We think that we should continue to base ourselves on economic studies, and not on fluctuating markets, particularly because Europe has decided to reduce its CO2 emissions by 55% by 2030, and to achieve this, we need a certain carbon price that can be well estimated.

But it's not unanimous. In fact, I believe you took part in a report on the cost of carbon retained by companies, and the range is quite wide.

Indeed, with the Institut Montaigne, we led an analysis of the internal price of carbon. 18 months ago, we surveyed 2,000 French companies, and the internal carbon price was between €30 and €150. So we're rather above that. When you look at other reports, some said €70 to €80 per tonne, others €500 or €600 per tonne in 2030... Knowing how to calculate the right price per tonne of CO2 is a competitive issue. If we anticipate the wrong price, we run the risk of ending up in heavy industry with assets that we wouldn't have bought at the right price, or that will have a lasting impact tomorrow.

There are several methods that companies have put forward to take their carbon externality into account. Danone, with its growth in decarbonized EPS, and Kering, with its broader ambition of an environmental income statement. Are you aware of any other initiatives?

Kering's approach is an interesting one, but its main difficulties lie in ensuring high-quality monitoring over time, and a fairly straightforward way of steering. For example, when you start mixing externalities (water, waste and others) and you have 5 or 10 parameters per country, it becomes difficult to set trajectories. This is the opposite of what we're trying to do, i.e. to focus on one indicator and one trajectory that aligns the entire organization with one objective.

We've seen that it's quite complicated to keep methods constant. Danone has stopped communicating on carbon or decarbonized EPS growth. Long live Getlink's carbon-free margin, in the hope that this indicator will, why not, be adopted by others. I know you don't want to evangelize with your indicator, but for analysts, having at least a trend on the indicators used would be very useful for evaluating companies.

They are of course trending downwards, with the reversal in valuations due to the rapid rise in interest rates since the beginning of 2022. The impact is all the greater the more mature the company (last fundraising with a venture capital fund). For the time being, pure innovation seems to be less affected, and the wealthiest business angels are not giving up, and even seem capable of postponing the first round with a professional investment fund.

With Simon Gueguen, lecturer-researcher at CY Cergy Paris University

The damage caused by global warming today, and especially in the long term, is a legitimate cause for concern that calls for political decisions. Nearly 200 countries signed the Paris Agreements in 2015, and over 100 of them have committed to aiming for carbon neutrality in the coming decades. The speed of the transition and the nature of the decisions taken are difficult to anticipate. In economic terms, however, the trend is towards the gradual introduction of rules penalizing the use of fossil fuels. As finance anticipates the economy, these prospects are already affecting polluting companies. They will have to bear the cost of the transition, and this anticipated cost is reflected in a discount on the price of their equity. Equally, these companies must provide their shareholders with a higher immediate return, known as the carbon premium, to compensate for the uncertain consequences of the transition. This premium has already been measured in academic studies. The study we present[1] here has one specificity: its sample size. It comprises 14,400 listed companies in 77 countries.

The first result of the study is that the carbon premium is present and significant in all the countries in the sample. The order of magnitude is easy to remember: around one percentage point of premium for one standard deviation of variation in the group's emission rate. Differences between countries are relatively small. Comparing the two biggest carbon emitters, China and the United States, the authors measure 1.18% for the former and 0.95% for the latter. The fact that the premium is slightly higher in China may come as a surprise; this result shows that institutional concern for carbon emissions (higher in the USA) does not translate into a higher premium. Similarly, energy consumption does not affect the level of the premium (only production counts).

The study verifies that this higher profitability linked to the carbon premium does indeed correspond to a lower valuation. For the sample as a whole, and after taking into account differences between countries and sectors, the ratio of balance sheet equity to equity value (market capitalization) is 13.2% higher for one standard deviation of additional emissions. If we prefer, the inverse ratio, i.e. the PBR, is lower, all other things being equal, for companies that issue more.

Finally, the bonus affects all sectors of the economy, not just those associated with the highest emission levels. It takes into account both direct and indirect emissions, i.e. those of customers and suppliers. The authors thus emphasize that the market is capable of identifying carbon emissions across the entire value chain and is not content with company-specific data. They also show that the variation in the emission rate (i.e. the variation in the variation) is also reflected in the level of the premium. This is why the emission premium can be low for companies that are still polluting in relation to their sector but are playing the transition game.

According to the authors, the results suggest that the market plays an important role in transition incentives. If governments find it difficult to coordinate to implement a carbon tax, due to divergent interests and competition problems, the market integrates at least part of the cost of transition into security prices (and therefore into the cost of equity) and does so by taking the entire value chain into account. The difficulties encountered since the Paris agreements in meeting commitments to converge towards carbon neutrality suggest that transition costs will increase. For this reason, the authors believe that the carbon premium observed on equity markets should increase in the coming years.

Finally, it should be noted that, like much of the work on this subject in finance, only carbon-related pollution is taken into account. Other sources of pollution would merit equivalent work, but they are generally more difficult to measure by the market... and by researchers.

[1] P. Bolton et M. Kacperczyk, " Global pricing of carbon-transition risk ", Journal of Finance, vol. 78-6, 2023, pages 3677 à 3754

Yes, for Return On Equity (ROE). In fact, just because whole sections of shareholders' equity have disappeared from the balance sheet, whether contributed by shareholders or left at the company's disposal (profits not paid out as dividends), does not mean that shareholders do not expect a normal rate of return on them. That said, this calculation is rarely made, especially if the losses are long-standing.

We know of one company with a 2023 return on equity of 56%, which obviously raises questions, even when leveraged. This company lost 54% of its current equity in 2020 and 2021. Adjusted for these losses, return on equity falls to 36%, which is already very good, even with some leverage!

For Return On Capital Employed (ROCE), this depends on the nature of the losses. If the losses were caused by massive write-downs of inventories or goodwill, then these must be adjusted to calculate ROCE, by adding them to working capital and fixed assets (i.e., the capital employed that make up the denominator of this profitability). If, on the other hand, losses ultimately have a cash impact, they will reduce cash and cash equivalents, and therefore increase net debt by the same amount as they reduce shareholders' equity. In this case, there is no need to adjust shareholders' equity when calculating ROCE, as this would mean counting the same thing twice (by increasing net debt and then adjusting shareholders' equity).

Regularly on the Vernimmen.com Facebook page^[1] we publish comments on financial news that we deem to be of interest, publish a question and its answer or quote of financial interest. Here are some of our recent comments.

Privatizing France Televisions _{(June 16th)}

In 2023, the France Télévisions group generated sales of €3 bn, including €2.4 bn in public subsidies (the licence fee was abolished in 2022), and €432 m in advertising revenue, taken from a TV advertising market declining by 1.4% a year and totaling €3.5 bn. France Télévisions has €429 m in equity, and negative free cash flow of €67 m in 2023, the same as in 2022. Net income in 2023 was €14 m, compared with a loss of €48 m in 2022. As the Rassemblement National plans to return to the French citizens the €2.4 bn in annual subsidies paid out, an additional €2.4 bn in advertising revenue is needed to break even, representing 69% of the market volume, giving France Télévisions an 80% share of the TV advertising market, with only 29% of the audience.  Even if this feat were achieved, which would mean depriving TF1 and M6 of 90% of their advertising revenues, France Télévisions would still only break even. To justify the €3 bn figure given by Sébastien Chenu as the proceeds from the privatization of France Télévisions, and taking into account the M6 and TF1 P/E of around 8, France Télévisions would have to generate net income of €375 m, which is about the same as the combined net income of TF1 and M6 (€429 m). This is quite coherent, given that €3 bn, the proceeds from the privatization of France Télévisions according to Sébastien Chenu, is roughly the sum of the market capitalization of M6 and TF1.  To reach these €375 m, it would be sufficient to generate €500 m in additional advertising revenue, leading to a 96% share of the TV advertising market, with 29% of the audience. Alternatively, lay off half of France Télévisions' 8,950 employees (salaries of € 1030 m in 2023). As for a takeover of France Télévisions by M6 or TF1 mentioned by Philippe Ballard, spokesman for the Rassemblement National, apart from the fact that it could only be partial and would involve dismantling the company to comply with anti-trust rules (no more than 7 national TV programs for any one person), it does nothing to solve the problem of finding €2.4 bn a year to compensate for the loss of current public subsidies - equivalent to TF1's sales, or 185% of M6's sales. If you find it hard to believe in the feasibility of these business plans, perhaps you're wondering how, in 1987, TF1 was able to be privatized, and survive the absence of licence fees?  Well, the TV advertising market was booming at the time, with annual growth rates of 10-15%, compared with the current 1.4%. This changes everything.

Believe, an expert who outclasses the advisory banks _{(May 29th)}

Here's the second thing that left us wondering when we read the offer notes, after the concept of a fair price, but not fair enough to allow expropriation as seen this Saturday. While the consortium has made an offer of €15 to buy back the free float, the valuation of the 2 advisory banks is significantly lower, whereas there is usually little difference between this valuation and the offer price. Here, the opposite is true. The bank advisors arrive at a DCF of €10, where the independent expert is at €17; with the multiples it's a range of €5 to €10, where the independent expert is between €10 and €20... . With advisors valuing the target at €10 using a DCF and between €5 and €10 using multiples, one wonders how the consortium, which is not made up of financial choirboys, could put €15 on the table, and Warner Music articulate a price of €17 ... .  When we look at the details of the banks' valuation, we are struck by the errors made:  1/ The required rate of return estimated from the CAPM model is: risk-free rate + beta x (expected market rate of return - risk-free rate). The figure in brackets is the risk premium. But if we take one in bulk, we make sure that it has been calculated using the same risk-free rate that is also used in the formula, so that we don't have 2 different risk-free rates. In this case, the risk premium taken has no chance of having been calculated with the risk-free rate used (OAT 20 years), as required.  2/ Use the 20-year OAT rate as the risk-free rate, whereas the usual practice is to use the 10-year OAT rate, in the absence of a short-term rate that is truly risk-free. This inflates the discount rate and reduces the value.  3/ Adding consultancy costs not foreseen in the business plan prepared by management, which reduces the value.  4/ Simply taking the multiples of two comparable companies, Warner Music and Universal Music (UMG), and lazily applying them to Believe, pretending to forget that the level of a multiple depends above all on the growth rate, and that by this yardstick, Believe is leaving these two groups behind: + 22% per year from 2019 compared with + 12% by UMG and 6% for Warner.  Just by comparing the multiple calculated by the banks for Warner (14) and UMG (22), the substantial difference between which is explained by the no less substantial difference between the growth rates of these two groups (6% and 12%), we can instantly see that these multiples cannot be applied to Believe, which is growing 2 or 4 times faster. This is exactly what the independent appraiser understood, having done some real thinking and managed to integrate, as she should, the impact of the growth rate into the multiple used to value Believe. Strange.

So, is the offer on Believe fair or not? _{(May 25th)}

A reading of the draft takeover bid prospectus and reply prospectus leaves us wondering about two points. Believe had been floated on the stock exchange in June 2021 at the bottom end of the announced price range, at €19.5. On the first day, the share price fell to €16.1 and continued to slide thereafter. In February 2024, the management, together with one of the funds currently holding shares and a new investment fund, formed a consortium and proposed to delist Believe at €15 by buying back the 28% free float, even though the company was 2 years ahead of its business plan and the stock market index used by Believe (as part of its stock-based compensation policy, the Eurostoxx 600) had risen by 14% since the IPO. Of course, an index hides dispersion, and the rise in interest rates has hit harder those companies whose free cash flow is far in the future, like Believe whose free cash flow is still negative. The independent appraiser's task was going to be an arduous one, since it was not easy to attest to the fairness of an offer under these conditions, which could lead to the expropriation of shareholders, and which was causing quite a stir.  But then a deus ex machina, in the form of Warner Music, appeared and announced for a while that it was considering making an offer at a price of at least €17; then, on reflection, it withdrew. The independent expert had then no problem telling the consortium: "Raise your price to €17 if you want me to certify the fairness of an offer that could lead to expropriation. Response from the consortium: We have already raised it from €14 to €15 at the request of the independent directors, and our price is final. Expert's reply: I cannot attest to its fairness, unless you drop the possibility of a delisting by squeezing out of the remaining minority shareholders if you win over 90% of the shares. Reply from the consortium: We modify our offer and abandon the delisting option. Expert's response: I can then attest to the fairness of an offer that will under no circumstances result in expropriation at €15. It's not the first time we've seen this ballet (cf. SMTPC), and we've ended up with the concept of a price that's fair (€15), but not fair enough to allow expropriation (at €17 or €18?). It's up to each and every one of us to make up our own minds, because being an investor is an activity that, like any profession, requires hard work, and there's little room for dilettantism. The independent expert's report provides a lot of information and arguments for those who want to sell at €15, or who want to continue the adventure. That said, we're not going to complain about an independent expert who didn't let her feet be trodden, and who achieved the essential, avoiding compulsory expropriation at €15, even if she can say, like the minority shareholders: Thank you Warner Music. See you next Saturday for the second element of this operation that leaves us wondering.

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