Investment world paying closer attention to climate change

An increasing number of institutional investors, pension funds, asset management firms, banks and insurance companies are joining the camp of investors who think greenhouse gas emissions and climate changes pose risks to company valuations. Many of these institutions say they want to more accurately assess their exposure to such issues.

Most recently, 225 signatories, representing more than $31 trillion in assets, have signed on to the Carbon Disclosure Project’s fourth annual information request (CDP4) calling for corporate disclosure on greenhouse gas emissions and climate change management.

The aim of the Carbon Disclosure Project is to inform institutional investors about the risks and opportunities presented by climate change. At the same time, the project is intended to provide companies with information about concerns shareholders may have.

Since launching the Carbon Disclosure Project in December 2000, the global initiative has created the world’s largest registry of corporate greenhouse gas emissions data, and an up-to-date information repository for the global investment community. Information requests over the past four years were historically sent to the 500 largest global companies, the FT 500. In 2006 the CDP expanded the information request to 2,180 companies globally, including 280 publicly-traded Canadian firms and 265 of the largest electric utilities in the world.

The report, released on Wednesday, explores the responses submitted to the CDP and the state of climate change disclosure and carbon management strategies of Canadian publicly-traded corporations.

“Institutional investors see risks and opportunities associated with climate change,” the report says. “In the risk category, factors such as future government action to reduce greenhouse gas emissions, risks of extreme weather, energy demand and security pressures all have the potential to affect companies in their portfolios. Climate change is viewed as potentially affecting business operations, financial performance and ultimately, company value.”

The report goes on to point out that response to the CDP4 information request legitimizes the interest. Among the responding Canadian companies surveyed, 77% agreed that climate change poses business risks while 63% can identify climate change related business opportunities.

Disclosure practices vary, making company comparisons a challenge. The report also illustrates a gap between corporate awareness of climate change risks and dedication action plans to achieve greenhouse gas reductions. For instance, only 36% of respondents said they had a greenhouse gas reduction plan, while 20% have formal targets with timelines.

Overall, 63% of respondents provided data on annual greenhouse gas emissions but differing approaches to measurement for reporting makes it difficult to compare company emission profiles. As well, 33% of companies gave responses that either did not fully address the CDP questions or provided incomplete information about how the risks and opportunities of climate changes are being factored into long-term strategic planning, 82% did not address the financial significance of the impact of climate change.

Competitiveness concerns, policy uncertainty and securities disclosure laws were frequently cited by companies as reasons for not disclosing information. Only 19% of respondents said they are building adaptation considerations into their infrastructure and strategic long-term planning beyond their business continuity and disaster preparedness plans.

On the plus side, energy efficiency “is seen as a no regrets business practice,” that yields direct cost-saving benefits and climate changes is on the agenda for senior managers and boards of directors. Of those companies responding, 71% say they have a senior executive or executive management team in charge of climate change risk management while 65% of respondents have elevated climate change to the board level, giving directors the responsibility for overseeing climate change risks.

“The quality of responses varies significantly, perhaps reflecting the newness of the CDP exercise in Canada as well as the nascent state of voluntary, regulatory and securities disclosure regimes pertaining to greenhouse gas emissions measurement and reporting,” say the report’s authors. “Corporate disclosure on climate change would benefit enormously from clear government policy on climate change as well as guidance from securities regulators and accounting bodies.”

Although attaining such support is an ambitious goal, the initiative is not without its supporters. “Investors such as those backing the CDP are specifically responding to a growing body of evidence suggesting that environment risks, especially those relating to climate change, pose threat and opportunities that may affect the performance of companies in which they invest.” Other surveys of international money managers suggest climate change will increase in importance as a material performance factor, and pension fund trustee fiduciary duty definitions are evolving to permit, and sometimes require, consideration of social and environmental issues.

“The CDP has emerged against this backdrop of increasing investor interest,” say the report’s authors. “The Carbon Disclosure Project has facilitated the development of a clear, open and efficient channel of communication between the investor and corporate communities on the issue of climate change.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com