Change is in the air: carbon disclosure and the materiality of climate change to asset risk

01 Dec 2009Archived News Climate Change Matters

To ensure an assets carbon disclosure is utilised to maximise positive investor response and capital growth opportunities, that disclosure should not just feed into and report on strategy, but be itself strategically managed.

  • Business faces physical, regulatory, financial and fiduciary climate change risk.
  • The perception of the materiality of that risk to assets is growing within the investor community.
  • Mandatory reporting provides the opportunity to develop robust data. It does not however allow for contextual information. This leaves data open for interpretation by others and removes control from the asset owner/operator, resulting in disclosure risk.
  • Provision of contextual information, through investor-led initiatives such as the Carbon Disclosure Project, enables assets to manage that risk.
  • Disclosure, if undertaken strategically, can maximise opportunities from the investor community.

Climate change risk

Physical risk

If one accepts climate change is a reality (human-induced or not), business faces a number of risks including:

  • Increasing scarcity of resources, in particular energy and water;
  • Assets stranded through the effects of changing weather patterns, both on those assets and on supporting infrastructure;
  • Impairment of operations; and of course,
  • Costs associated with the above.

Regulatory and financial risk

If one accepts human-induced climate change is a reality, it is a short step to understanding it represents a quite catastrophic market failure. If one understands this, then it is an even shorter step to realising this failure must be corrected. Whether this occurs through a market mechanism, such as the CPRS, environmental regulations or a tax is, in the broader sense, irrelevant; business, somehow, somewhere, sometime will have to pay and so too, by extension, will the consumer.

Fiduciary risk

Businesses and company directors who do not plan and account for the above, and disclose this publicly may also fail in their fiduciary duties.

Section 299A of the Corporations Act, 2001, requires that the director’s report for a financial year include information that members of the company would reasonably require to make an informed assessment of the operations… position…….and the entity’s business strategies and prospects for future financial years.

As the perception of the materiality of climate change to an asset’s prospects grows, analysts are demanding inclusion of climate change related information in assessments of an asset’s business strategies and financial prospects. Assets that do not disclose the risks and opportunities the market value of an asset is exposed to may be deemed to be breaching their duty of care.

Further, Section 1013D of the Act also requires that, a Product Disclosure Statement, must, if the product has an investment component,……report on….the extent to which…..environmental…..considerations are taken into account in the selection, retention or realisation of the investment. That is, investors are required to disclose, during the sale of their products, consideration of environmental factors. It is therefore reasonable that investors, in executing their fiduciary role, demand disclosure of climate change risk and opportunities of their assets and undertake analysis of these.

Carbon disclosure

Mandatory reporting

Larger Australian energy users, or producers, and greenhouse gas emitters have just submitted their first mandatory report to the National Greenhouse and Energy Reporting (NGER) System.

In all, 680 companies registered to report under the System, almost all of whom triggered the 1st year (FY09) thresholds. (Source: Energy and greenhouse data submitted to the government will be made publicly available at the company level. This will enable analysis by investors, competitors, NGOs etc. However, contextual information that may explain sudden shifts in energy use or emissions will not be published, nor will carbon reduction and risk minimisation strategies. Accordingly, those that report to NGER only, are leaving this data open for interpretation by others and will inevitably have little control as to how that data will be used.

Voluntary reporting

In contrast to the above, investor-led initiatives request significant quantities of contextual information. This enables them, and increasingly others, to generate publicly available analyses and, in doing so, realise their fiduciary obligations. Some of these initiatives include:

  • The Investor Group on Climate Change (Australia and New Zealand)

The IGCC represents institutional investors, with total funds under management of approximately $500 billion, and others in the investment community interested in the impact of climate change on the financial value of investments. (Source:

  • The Institutional Investors Group on Climate Change (European)

The IIGCC is a forum for collaboration on climate change for European investors. The group currently has over 50 members, including some of the largest pension funds and asset managers in Europe, and represents assets of around €4trillion. (Source:

  • The Investors Network on Climate Risk (international, mainly US and Europe)

The Investor Network on Climate Risk was launched at the first Institutional Investor Summit on Climate Risk at the United Nations in November 2003. INCR’s membership includes over 80 investors managing more than $8 trillion of assets. (Source:

  • The US Securities Exchange Commission (US)

Recently, following a number of investor lawsuits against emissions-intensive companies and intense lobbying from the investor community, the US SEC released a Staff Legal Guidance. This Guidance stated that it was changing the method by which companies' "no-action" requests on shareholder proposals relating to environmental, financial or health risks are assessed. (Source: Further, it is reported that the agency is separately considering giving new guidance requiring greater carbon disclosure in regular filings with the Commission. (Source: Talley, I. (2009) ‘SEC Guidance May Lead To CO2 Policy Risk Disclosure’, in Dow Jones Corporate Governance, New York: Nov 4, 2009.)

  • The Carbon Disclosure Project (international)

By far the most significant of these however is the CDP. The CDP acts on behalf of 475 institutional investors, holding $55 trillion in assets under management and some 60 purchasing organizations such as Cadbury, PepsiCo and Walmart. (Source:

In contrast to reporting under NGER, companies completing the CDP’s information request have the opportunity to provide information on a range of factors above and beyond that of data alone. These include: physical and regulatory risks and opportunities; emission reduction plans; and investment risks and opportunities. In essence it provides assets with the opportunity to focus their attention on the development and realisation of a corporate strategy.

Of the ASX200 ‘invited’ to complete an information request in 2009, only 104 companies submitted reports, with 18 declining to participate and 75 providing no response. Of particular concern to investors, given their need to incorporate potential emissions liability into their analysis, was the low response rate from assets in the more greenhouse intensive sectors. These sectors include: utilities, chemicals, construction materials, oil, gas & consumable fuels, metals & mining and transportation firms. Of additional concern was the lack of response by some assets in sectors exposed to the physical risks of climate change, or whose customer bases are exposed to such risk. Such assets are those in the property, food and beverage, mining contractors and finance sectors. (Source:

The value of disclosure to investors

Mandatory AND voluntary disclosure

Unlike NGER, the CDP does not provide detailed methodologies for the reporting of energy and emissions, but rather allows respondents to determine how this will best be achieved. Indeed, this is one of the criticisms of the CDP provided by investors. (Source:

By reporting to both CDP and NGER, Australian companies are providing analysts with a more complete picture including the provision of:

  • Robust data, that is subject to 3rd party verification;
  • Because of standardised methodologies, data (for Australia) that is comparable within and between sectors; and
  • Contextual information around emission reduction plans, climate change risks and opportunities and alignment with business strategy.

Many of these companies will also release data and contextual information in their sustainability or annual reports. Such reports will continue to be accessed by analysts as a primary information source. However, the comparability of information between assets and across sectors is less transparent than that provided through a single reporting mechanism. Further, the level of detail provided in CDP responses often far exceeds information presented in company reports. As the ability of investors to process and integrate this information into their models and systems improves, it is foreseeable that the penetration rate of CDP data by investors will grow from its current level of 69%.

Investor surveys

The market value to investors of carbon disclosure is a measure that is difficult to capture, given the infancy of the field. However, when investor responses to surveys are considered, the significance of disclosure, and the risks associated with non-disclosure, becomes clear.

A recent report published by the Climate Institute, provided responses to a survey of asset owners, including not-for-profit-funds, master trusts and the government backed Future Fund. The survey is the first phase of a partnering between The Australian Institute of Superannuation Trustees and the Climate Institute to establish the Asset Owners Climate Change Initiative. Of those that responded, 83% considered the identification and integration of climate risks and opportunities as part of their trustee responsibilities and consistent with their fiduciary responsibility. Further, 95% have altered……..mandates for investment managers to reflect climate change issues and longer investment horizons.

These findings are mirrored in the Investor Research Project undertaken by the CDP, which found that 77% of respondents factor climate change information into their investment decisions and asset allocations, with general consensus that the materiality of climate change has been increasing over time and would continue to do so. Further, some of the institutions surveyed revealed a willingness to go beyond requesting disclosure on climate change, such as asking companies to reduce their greenhouse gas emissions.
(Source: Ibid.)

Maximising the potential advantage disclosure may generate

To ensure an asset’s carbon disclosure is utilised to maximise positive investor response and capital growth opportunities, that disclosure should not just feed into and report on strategy, but be itself strategically managed. Means by which this can be achieved include:

  • Annual reviews of actual activities implemented compared to targets and goals stated in previous annual or CDP reports;
  • Annual reviews of carbon strategy, and its alignment with business strategy, and the asset’s plans for communicating its positioning to the public;
  • Benchmark analysis of peers’ performance, as assessed in annual or CDP reports, to determine market trends, and also appraise of areas of competitive advantage;
  • Optimisation of reporting language and method to achieve objectives and leadership status; and
  • Ensuring reporting to other voluntary and mandatory reporting programs is consistent – not doing so endangers the achievement of communication objectives.
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