Comment: Carbon commitment – get with it

Comment: Carbon commitment – get with it

After the hottest US summer on record, fires in Russia (as well as in the US) and flooding in the UK, Japan and Thailand, among other events, the corporate world is beginning to acknowledge the threat posed by climate change.
 
Something has changed. Before it was possible to say, “I hear what the scientists say but I won’t invest to change what we do until climate change is more, well, tangible.”

Recent weather extremes, like the unprecedented summer ice cap melt, might be a blip. But there’s so much expensive change (in terms of human and financial capital cost) that man’s involvement in climate change is getting difficult to ignore.

According to the Carbon Disclosure Project (CDP) Global 500 Climate Change report released this week, 81% of reporting companies now identify physical risk from climate change, with 37% perceiving these risks as a real and present danger, up from 10% in 2010.

The CDP report, co-written by PwC on behalf of 655 institutional investors representing $78trn in assets, provides an annual update on greenhouse gas emissions data and climate change strategies at the world’s largest public corporations.

The CDP report features emissions data from 379 companies and rates them according to their climate change transparency with the best disclosers entering CDP’s Carbon Disclosure Leadership Index (CDLI). CDP then assesses companies according to the scale and quality of their emissions reductions and strategies, and ranks these according to performance bands.

The indices are used by investors to assess corporate preparedness for national or international emissions regulation and to guide investment decisions.

Analysis of the companies that have entered the CDLI and CPLI in the past suggests that organizations achieving leadership positions on climate change generate superior stock performance.

This year has seen a 10% increase (year-on-year) in companies integrating climate change into their business strategies (2012: 78%, 2011: 68%), contributing to a 13.8% reduction in reported corporate greenhouse gas emissions from 3.6 billion metric tons in 2009 as the financial slowdown began to take hold, to 3.1 billion metric tons in 2012. The fall is equivalent to closing 227 gas-fired power stations or taking 138 million cars off the road, CDP says. A third of companies (31%) however reported no emissions reductions at all.

From an insurance perspective, Allianz is one of the overall top 10 corporations in terms of performance and disclosure. In the leader group, two companies achieved the maximum carbon disclosures scores of 100: German pharmaceuticals company Bayer and the Swiss food giant Nestle.

Insurance and reinsurance holding company Berkshire Hathaway, on the other hand, is identified as being among the world’s largest non-responders to CDP’s request for emissions this year. In the same group were Apple Inc., Royal Bank of Canada, Caterpillar Inc., Amazon.com, Comcast Corporation, America Movil, Lukoil, Bank of China, National Oilwell Varco, Inc.

Paul Simpson, CEO of the Carbon Disclosure Project, says that extreme weather events are causing significant financial damage to markets and that investors therefore expect corporations to think more about climate resilience. “There are still leaders and laggards but the economic driver for action is growing, as is the number of investors requesting emissions data. Governments seeking to build strong economies should take note,” he says.

Insurers and reinsurers are big investors in corporations and are likely to increase their investments as they become more diversified in their holdings in the flat financial markets.

But unlike other investors they also have a stake in climate resilience on the liability side of the balance sheet. So perhaps insurers and reinsurers should start asking their insureds for more data on their emissions to contribute to managing the risks around climate change. There is a micro and a macro risk element, after all. For example, corporations could face regulatory risk if they ignore emissions rules.

In addition, people, communities and even whole nations are increasingly exploring the possibility of suing individual companies. Energy companies especially have been hit with “climate change litigation”. None has succeeded yet, but the fact that it is happening shows which way the wind is blowing.

Big business seems to be in denial however. The average longer-term target for companies’ emissions reductions is currently only 1% per year, well below the 4% required by countries to limit global warming to 2 degrees, according to PWC.

A further round of government talks to reduce carbon emissions long-term will take place at the end of November in Doha, Qatar. (That’s a good place to hold the talks because Qatar has the biggest carbon footprint in the world, per capita, according to the WWF.)

Malcolm Preston, global lead, sustainability and climate change, at PWC says: “Even with progress year on year, the reality is the level of corporate and national ambition on emissions reduction is nowhere near what is required. The new ‘normal’ for businesses is a period of high uncertainty, subdued growth and volatile commodity prices. If the regulatory certainty that tips significant long term investment decisions doesn’t come soon, businesses’ ability to plan and act, particularly around energy, supply chain and risk could be anything but ‘normal’.”

 

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