Updated: August 2007

Emissions Desk

Businesses are catching on about the upside of climate change, both in terms of new products and opportunities, but they’re a bit vague on the details when it comes to downside risks. That’s the main finding in a survey of corporate sustainability reports worldwide by the Global Reporting Initiative and KPMG Global Sustainability Services.

“The demand for focused and effective reporting on the business implications of climate change has continued to grow over the last two years,” the report says. Most companies have responded to this demand by including more climate change-related reporting in their 2006 sustainability reports. That shows companies have begun to view action in the climate arena as a strategic issue and a risk to their reputation as the “public awareness and concern” about climate change continues to increase.
But even though nearly all of the 50 companies in the survey (plucked from the Financial Times 500) said something about climate change in their reports, they tended to get fuzzy on the financial risks their companies might face. Most track their greenhouse gas emissions and set a target for reductions of emissions or energy use. “Where companies reported financial implications of reductions, in almost all cases these showed savings or positive returns on investment.” Half the companies are involved in emissions trading and two-thirds of their reports talk about new business opportunities related to climate change (mostly energy efficiency productions, emissions brokering, carbon funds, etc). The survey found that this was true whether the companies were in countries that signed the Kyoto Protocol or not.

But when it comes to risks, most talked about future regulations that would require emissions trading, and about 20 percent mentioned impacts from “increases in the cost of energy from measures to address climate change,” the survey found. The energy sector gave the most examples, followed by the industrial and mining, pharmaceutical and consumer goods sectors. “None of the companies provided information on how much energy costs could be expected to increase or quantified the relative importance of energy costs to the company compared to other overheads. Companies did provide general information on their response to increasing costs, which was typically to initiate projects to research and improve energy use and efficiency within their operations.”

Few discussed the potential for litigation as a climate-related risk, but GRI says the number of claims and legal actions against companies is increasing. It highlighted last year’s attempt by California to extract compensation from six big American car manufacturers for allegedly inflicting damage on “health, economy and the environment by emissions from their cars.” Only in California.

But the fact that only three out of 50 companies mentioned legal risks of climate change suggests “this does not appear to be a major tend or concern at the moment,” the survey says.

None talked about potential business disruptions or increased insurance costs – a big issue now that reinsurance companies are starting to factor rising sea levels and such into their projections.

It could be that most companies view these risks as long-term – beyond their business planning horizon – or else the companies just haven’t quantified the risks, GRI says. Or it may be that “companies see climate change not only as a threat but also as an opportunity for new products, services and trading,” the survey says.
The good news is that the energy and financial services sectors, which these days are often entwined, are on the climate reporting bandwagon. The 10 energy firms and 12 financial services companies in the survey are directly addressing the climate issue in their sustainability reports, both because the energy generation-GHG emissions link is fairly obvious and because these two sectors are at the forefront of exploring the climate business opportunities. Oil, gas and electricity companies were most likely to talk about business potential related to climate change (about 80 percent discussed it) and financial services firms were second (about 70 percent). About one-half of consumer goods, pharmaceutical firms and companies in the transportation, real estate and services sectors talked about potential business opportunities. The upside potential was mentioned by 40 percent of telecom and IT firms and only 30 percent of industrial and mining companies.

The survey found a couple of noteworthy forward-looking trends. Nearly one-half of the companies are already involved in emissions trading. But of the 15 American and Australian companies in the survey, seven of them -- nearly 50 percent -- are already talking about emissions trading even although they aren’t subject to the Kyoto scheme. Often this was because the companies are big multinationals that have to deal with emissions regulations in other countries that are under Kyoto, but it’s not the only reason, GRI says. Since emissions trading regulations are already being debated in the US and Australia, companies have an incentive to get into the emissions trading game early.

About 20 percent of all of the surveyed companies are talking about becoming suppliers in the emissions trading game, meaning they are planning to physically reduce emissions at their facilities in order to generate carbon credits.

Likewise, companies are more likely to talk about risk management tools for climate change (like weather derivatives and other financial instruments) in terms of developing those tools for the market rather than actually using them to manage their risks. Twenty percent, mostly energy and financial companies, plan to set up carbon funds or emissions brokerages, but the reports said little about the funds “in terms of size, scope or role in overall portfolios.” The survey found that about one-third of the financial firms have some kind of product or service to “exploit the link between investment value or asset management and companies’ exposure and response to climate change.” That could mean actually setting up a fund related to climate change or researching the related risks and opportunities “to assist clients in managing this risk going forward,” the survey said.

Bottom line: “Companies’ exposure and response to climate change can be used by the financial services sector as a differentiator in investment decisions and asset allocations. Companies that anticipate regulatory developments and changes in consumer demand related to climate change, and that respond by developing new products, services and other opportunities may provide fund managers and other investors with higher returns.”

And you thought the ratings agencies’ idea about basing valuations on energy firms’ use of risk management software was a bummer.