Climate Change Compass - The Road to Copenhagen

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Key findings

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Some improvements, but furthermomentum needed

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33% of companies have unmitigatedclimate change risk (down from 34%in 2008)

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55% have short-term targets onclimate change (48% in 2008)

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91% of high and very high impactcompanies disclose absolute CO

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orGHG emissions data (73% in 2008)

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Opportunities at Copenhagen

- theUN Climate Change Conference maycreate significant opportunities forcompanies – linked to the developmentof green stimulus packages or a clearerregulatory framework.

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Engagement is key -

many large capcompanies face significant climatechange risks and opportunities.Investors must understand the impactthese issues will have on theirportfolios and integrate climate changeinto their engagement strategies orwhen exercising voting rights.

Climate Change Compass: The road to Copenhagen

Introduction

Climate change is now widely recognisedas one of the most significant challengesfacing the global economy. The projectedimpacts on the environment and societyare unprecedented. Climate change isundoubtedly a critical theme for today’s(and tomorrow’s) asset owners and assetmanagers. But what should investors bedoing?Building on last year’s analysis, EIRISreviewed the 300 largest globalcompanies by market capitalisation listedon the FTSE All World Index to assessthe current state of corporate responsesto climate change. This report highlightsthe direction companies are taking withregard to the issue and examines itsimplications for investors.Against a backdrop of the recent globalfinancial crisis and growing evidence of the significant physical effects of climatechange, the outcome of the UnitedNations Climate Change Conference inCopenhagen will set the direction for afinancial and policy framework for futureclimate change investment forgovernments, corporations andinvestors.In December 2009, Copenhagen will hostthe most important climate change-related meeting since 1997. The meetingof environment ministers and officialswill include the negotiation of a post-Kyoto deal on climate change. If successful, this deal will lock the worldinto emissions reductions of around80%. International agreement is soughtfor issues such as the willingness of industrialised countries to reduce theiremissions and developing countries tolimit the growth of their emissions andthe degree of support given todeveloping countries to reduce theiremissions and adapt to the impacts of climate change. The difficulties facingthe negotiators include the requirementfor high emissions cuts and theperception that industrialised nations areoutsourcing carbon emissions todeveloping nations through theirpurchase of carbon-intensivemanufactured goods. A key difference inthe lead up to the negotiations atCopenhagen compared with Kyoto is thebroad acceptance of the scientificevidence on climate change. Additionally,momentum has been gathering with achange of direction on burden-sharingfor developing countries from bindingemission cuts to other actions such asthe adoption of energy efficiencystandards and the take-up of renewableenergies instead, which could make anagreement more likely.

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A myriad of international meetings havepreceded the conference in Copenhagen inrecent months. From the Poznan climatechange conference, via the G20 summitand the Bonn climate talks to the G8summit in Italy. The latter witnessed theemergence of a consensus amongstindustrialised countries for the need foraction in the face of scientific evidence.This was reflected in a statement in whichindustrialised countries reiterated theirwillingness to share with all countries thegoal of achieving a 50% reduction of globalemissions by 2050 and for developedcountries to reduce their emissions, inaggregate, by 80% by 2050 based on 1990levels. A number of innovative initiativeshave been discussed such as green fundspaid for by countries according to a formulareflecting their economic size, greenhousegas (GHG) emissions and population; aglobal cap-and-trade or ETS (EmissionTrading Schemes), technologies such asCCS (Carbon Capture and Storage),investment funds focused on reducing theimpact of forest degradation such as theUnited Nations Collaborative Programme onReducing Emissions from Deforestation andForest Degradation in Developing Countries(UN-REDD Programme), use of agriculturalland for generation of renewable energy,and levies on developed economyinternational flights and shipping fuel tofund climate change adaptation in poorercountries.The economic downturn brings a number of risks and opportunities. There are risksassociated with near-frozen capital marketsas well as uncertainty and opportunitieslinked to government stimulus packagesfocused on energy efficiency, cleanertechnologies, renewable energies, taxationand forest protection. The ‘green stimulus’ packages support a low-carbon economyaimed at generating new jobs andbusinesses through ‘green’ growth. Thesewere often launched against a backdrop of new regulations, such as the UK ClimateChange Bill which introduced legally bindingtargets to cut greenhouse gas emissions by80% by 2050.The goal of achieving a low-carboneconomy will favour low-carbonactivities. At a time when global capitalis in short supply, businesses whocontinue to pursue unmanaged high-carbon strategies will be risking theirinvestments as well as the climate.Business leaders gearing up for a low-carbon economy understand thenormative motives of reducing emissionsas well as the long-term economicbenefits of such action. It is importantthat ‘green’ industries have access tocapital even in these times of tightenedcredit.

A key investment issue

Climate change has the potential toseriously impact shareholder value,especially in the medium to long term.Investors need to understand the risks totheir investments and also the role theyshould play in the wider policy debate.For companies and their investorsclimate change presents a number of risks and opportunities:

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Regulatory challenges

- nationaland international policy frameworksfor reducing GHG emissions areproviding an imperative to reduceoperational emissions. The outcomesof the meeting in Copenhagen maybring about a number of changes innational and international legislation.New directives and acts may comeinto effect subsequently. Investorsshould take account of regulationand government incentives whendetermining risks and opportunitiesregarding investing in companieswith exposure to climate change.Environmental taxes and compliancecosts now need to be factored intocompanies' operational costs.

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Changing market dynamics

-higher and fluctuating energy costspresent a significant impact, inparticular for energy-intensiveindustries. However, changingconsumer attitudes and demandpatterns open up opportunities fornew technology, products andmarkets.

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Changing weather patterns

– thephysical risks of climate change includedamage to assets as a result of floodingand extreme weather events.

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Reputational

- customer, employee,investor and societal perceptions arehaving an increasing impact on brandvalue.

Tracking the global 300

EIRIS has analysed the impact andresponse of some of the world’s largest 300companies on the basis of 24 climatechange indicators covering governance,strategy, disclosure and performanceelements. This information was comparedwith the results of the report that EIRISpublished in 2008. Key findings arehighlighted below.

1) High level of unmitigated riskamongst global top 300

EIRIS classifies both the climate changeimpact of a company and its managementresponse. In this way investors canunderstand whether the company has inplace an appropriate management responseto adequately address its climate changeimpact.To profile the climate change impact of acompany EIRIS has classified companiesinto over 50 sectors based on theirbusiness activities to identify their climatechange impact. Each sector is defined asvery high, high, medium or low impactbased on their direct and indirect emissionsalongside other factors such as a sector’sprojected growth, beneficial impact of thesector, allocation of emissions across thevalue chain and contribution to climatechange solutions.With input from investor groups, NGOs andcompanies (including WWF, Climate Group,Carbon Trust and Institutional InvestorsGroup on Climate Change) EIRIS developedindicators to assess how companies shouldbest address their climate change impactsand risks through their managementresponse.EIRIS indicators cover aspects such as:

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Governance

– e.g. does thecompany have a corporate-wideclimate change policy, or is boardremuneration linked to climatechange performance

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Strategy

– e.g. has the companyset targets

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Disclosure

– covering the qualityof carbon data, or quantifieddisclosure risks or opportunities

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Performance

– e.g. year on yearreduction in GHG emissions, ortransformational initiatives such aslarge scale investment in carboncapture and storageEIRIS combines the above indicators intofive management response assessmentlevels which can be used to determinerisk-relative assessments.

Fig 1. Climate change impact by percentagemarket cap of global 300 (2009)

Very high High Medium Low

Figure 1 illustrates a similar profile of climate change impact to that of lastyear. Over a third (35.6%) of companiesin the global 300 are classified as high orvery high impact for climate change.However, for a complete picture of acompany’s risk profile investors shouldlook beyond emissions intensity and alsoconsider how the company is respondingto the challenges of climate change.While a larger number of companies areassessed as appropriately managingtheir climate change impact comparedwith last year there remains a high levelof unmitigated risk amongst the globaltop 300.

This is due to improvements in

Fig 1. Climate change impact by percentagemarket cap of global 300 (2009)

Very high High Medium Low

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