Climate Change

  • Date:01 Dec 2007
  • Type:CompanyDirectorMagazine
Climate change has emerged as the big sleeper issue for boards as they enter 2008. Giles Parkinson reports on Corporate Australia’s rush to get its house in order.

The carbon rush

Michael Molitor has been studying climate change and its potential impact on business for more than two decades, but the views of the former London-based leader of climate change services for PricewaterhouseCooper’s have never been in such demand.

“We’ve got companies knocking on our door,” he says. And they come in two categories: those in a blind panic to protect their businesses and those who are absorbing the implications and identifying opportunities.

“The first group includes those that ask if we have ever heard of a carbon footprint,” says Molitor, who is principal of consultancy firm, CarbonShift. “They might say that their three biggest customers’ accounts are coming up for renewal and they’ve been warned they will lose those accounts if they don’t have a carbon solution. They have very little time to react and if they get it wrong, they are going to take a big whack. They realise they have got a problem. They’re in value-protection mode.

“The second, smaller group includes those who are already integrating the carbon price into their investment decisions. They’ve put carbon into the DNA of their business. They are moving into low carbon solutions and they are capturing market share. They are seeing opportunity.”

Whether you are convinced by the science or not, climate change is emerging as the big sleeper issue for company boards in 2007 and into 2008.

In Australia, carbon emissions trading is likely to be introduced by 2011. Few details of how that trading will be conducted, what emission reduction targets will be set or which sectors may get favourable treatment have been released by either major political party. But it is certain that its impact on the economy and business will be profound.

In the meantime, companies will need to comply with a mandatory carbon reporting scheme that will be introduced from 1 July, 2008. They will also need to respond to the increasing demands of institutional investors, which are placing pressure on company boards to elaborate and account for their carbon strategy in ever greater detail.

A recent survey, dubbed the Climate Disclosure Project, was conducted by the Investor Group on Climate Change (IGCC) in conjunction with Goldman Sachs. The IGCC represents managers of $375 billion of funds in Australia. The project is in its fifth year at a global level and second year in Australia.

The IGCC was disappointed by the response it received from many companies Down Under. While the number of those that responded rose from the previous year, it still accounted for barely 50 per cent of the top 150 companies in Australia and New Zealand. While many of those that did respond recognised the importance of the issue, barely ten per cent could provide a comprehensive emissions profile that could be independently verified.

Andrew Gray, the head of ESG Research at Goldman Sachs JBWere, says there is a gap between an awareness of the issue and a tangible response to the issue. “Going forward there will be no excuses,” he says. “[Investors] expect a tangible response – the ability for companies to clearly spell out strategies for emissions trading, what risks and opportunities they see and what strategies they have in place for reduced energy consumption and therefore reduced emissions.”

John Jutsen, the founder and executive director of consultancy firm Energetics, says he has noticed a big change in the attitude of many companies in the last six to 12 months. “It’s moved from something that is way out there in the future to something that needs to be addressed now.”

Like Molitor, Jutsen says there are those who can be categorised as ‘initial adopters’, another group called the ‘fast follows’ and then a mass of companies that have not even recognised it as an issue. “There are still two schools of thought,” he says. “Most see the future as the same as the past, but with a carbon price (tax) on top.

“Only a handful are thinking of what it might do in terms of markets, customer behaviour, demand for products, staff response and the fact that there could be a serious discontinuity. Only a handful of companies are thinking of the full range of implications around this. Most are still thinking of this in terms of a carbon cost. Most businesses haven’t come to grips with the challenge of de-carbonising the economy.”

Jutsen has been advising companies on climate change issues for many years – Energetics was founded in 1984 – but like Molitor, he says demand and enquiries are now running at extraordinary levels. Most enquiries are often about the implications of an emissions trading scheme and the potential direct costs of energy and carbon and how companies should address that.

Enquirers are also keen to learn about specific reporting mandates and whether their organisation should seek to become ‘carbon neutral’ and how to go about it. There are also enquiries about information management, as most do not have a good handle on their energy, water and carbon emissions, says Jutsen.

Robert Clarke, the head of consultancy Andromeda Group, says business and industry is entering a state of flux as a direct consequence of climate change and as participants seek to define its impacts and what they can do to address them.

“All too often people feel that reduction strategy is the ‘be all and end all’,” says Clarke. “This is potentially dangerous when in fact your operational carbon footprint is a tiny component part of the bigger picture. For example, what are the legal and regulatory issues companies will face over the next five years? How can these, and a capacity to generate carbon credits from efficiency projects in power saving, actually be turned into tremendous marketing opportunities, which in turn have huge knock-on effects for climate change?

“How can companies actually measure and offset their own emissions and positively alter the footprint of thousands of businesses in Australia? What will it cost? Will it in fact become a revenue source? What would the greenwash potential be of only addressing operational issues among staff? All these issues must be clearly understood.”

There are many imperatives to acting. An estimated US$200 billion has been assembled worldwide by fund managers to invest in so called carbon or climate funds. Some of this is being used for direct investment into trading schemes or new technology under the UN Clean Development Mechanism, but much of it is being directed towards ‘climate funds’ that invest in companies perceived as having less exposure to climate risk.

Deutsche Bank, for instance, recently launched its fund in Australia. It has already attracted $6 billion from global investors since its launch last year. “Whether you believe in the science or not, climate change is a major economic force, impacting many parts of the economy, affecting many companies, and investment opportunities,” says Deutsche Bank Asset Management’s head climate change strategist, Mark Fulton.

Innovest, a research and advisory firm that specialises in sustainability matters, says few environmental issues pose such a real, significant and widespread financial threat to investors as climate change.

“International policy responses aimed at cutting greenhouse gas emissions, together with the direct physical impacts of climate change, will require investors and money managers to take a much closer look at how their portfolios might be affected by company ‘carbon’ risks and opportunities,” says Bill Hartnett, who heads Innovest in Australia.

“Since there is now growing and incontrovertible evidence that superior overall environmental performance can in fact improve the risk level, profitability and stock performance of publicly-traded companies. Given the emergence of climate change as arguably the pre-eminent environmental issue of our time, fiduciaries can now be seen to be derelict in their duties if they do not consider climate-driven risks and opportunities where they may be material.”

Hartnett says there is increasing evidence showing that superior performance in managing climate risk is a useful proxy for superior, more strategic corporate management and therefore, for superior financial performance and shareholder value-creation. Because of this, there is strong evidence of dramatic increases in the level of institutional investor concern – and intervention – with climate change issues and their investee companies.

There are signs too that companies are making strategic decisions based on the potential impact and opportunities of climate change. Molitor points to the purchases of TXU and Alcan as two major transactions that were driven at least in part by carbon considerations. He also points to a decision by packing group Visy to change its $5 million-a-year fuel contract from Shell to BP – because of the former’s better carbon offset – as a sign of things to come. And he highlights the embrace by the world’s most successful company, General Electric (GE), of eco-imagination.

“Let’s think what needs to be done,” Molitor says. “If we are going to meet the UN recommended targets, we are going to have to avoid 600 billion tonnes of carbon production. Let’s say the carbon price is $25 a tonne, you get an asset worth $15 trillion. I think the price is more likely to be $80 a tonne. A smart company like GE has been kicking butt for ever. It understands how the world is changing and it is well out in front on this issue.”

Climate change checklist

John Jutsen, the founder and executive director of consultancy firm Energetics, provides some tips on what companies need to do to deal with the challenges of climate change. His advice is to:

  • Understand, from a risk management perspective, your compliance requirements and your likely compliance requirements in regards to emissions.
  • Understand your reputational issues. This includes the way you report and document what you are doing around carbon mitigation. You also need to have better information management.
  • Calculate your carbon footprints, using international methodologies.
  • Look at options to reduce emissions. “It’s safe to look at energy efficiency, it’s safe to look at the use of renewable energy, but it’s less steady ground to buy offsets of any sort,” warns Jutsen. Companies have to make sure that they have recognised offsets that will stand the test of time in a mitigation sense.
  • Understand what potential risks there might be associated with any major new resource development, particularly in light of increased pressure from green lobby groups and the potential threat of litigation.
  • Immediately incorporate a ‘shadow price’ of carbon – Jutsen says this could be $20 or $30 a tonne – on any new projects, be they buildings or any industrial investment.