Energy and carbon in corporate risk profiles: the value in disclosure

01 Feb 2012Archived News Climate Change Matters

 

Companies risk profiles have shifted due to:

  • escalating, volatile energy prices
  • the impending introduction of a carbon price, and
  • supply chains impacts - whether incurred directly or indirectly.

These factors are all financial management issues for Australian business.

 

Carbon - fiduciary responsibility of the Board

Carbon management is a fiduciary responsibility of the Board. Shareholders, creditors, analysts and financial regulators are interested in the business response to energy and carbon management. It is imperative that emissions data is accurate and verifiable, and as such forms the basis of a comprehensive risk management strategy.
As a new cost to business, carbon not only requires a new line in business accounts, but reporting rigour – to Boards, to investors and to bodies such as the ASX, and regulatory authorities like the ACCC which monitor to ensure the cost of carbon is fairly distributed through the supply chain. Financial markets also favour organisations that disclose their risks.

The value created by participation in CDP

Carbon Disclosure Project (CDP) compiles a database of “primary corporate climate change information” which is examined by investors. Unlike NGER, companies completing the CDP’s information request have the opportunity to provide information on a range of factors over and above their emissions data. These include physical and regulatory risks and opportunities, emissions reduction plans and investment risks and opportunities. Through the CDP process, the financial community has access to the best available corporate climate change information to help direct investment. In 2010, over 70% of ASX100 companies disclosed through the CDP.

What business value does this create?

  • Addresses investors questions / concerns by managing risk profile
  • Enhances brand and business reputation through participation and disclosure
  • Promotes a proactive management culture – one that understands the market landscape (eg. scope 3 emissions), the strategic response to which is information used by financial markets.
  • Disclosure is a prerequisite for capital access for some financiers

Facts of interest:

  • Companies in the 2011 Carbon Disclosure Leadership Index (CDLI) and Carbon Performance Leadership Index (CPLI) provide approximately double the average total return of the Global 500 between January 2005 and May 2011 suggesting a strong correlation between higher financial performance and good climate change disclosure and performance.
  • 68% (269) of companies are integrating climate change initiatives into their overall business strategy, up from 48% (187) in 2010.
  • 59% of emissions reduction activities reported by Global 500 respondents have a payback period of three years or less and 41% of initiatives have paybacks of over three years. This willingness to invest in activities with a medium to long term payback is evidence that companies regard energy and emissions reduction as an important strategic priority.

The CDLI contains 52 disclosure leaders in 2011 and reports the highest ever scores attained, demonstrating that the quality and completeness of disclosure continues to improve. The main failing of Australian reports has been the lack of external verification.

Energetics encourages its clients to participate in the Carbon Disclosure Project. We have extensive experience in assisting companies to clarify their carbon strategies and prepare documentation for the CDP. We have also helped a number of clients achieve global and sectoral CDP Leadership status. 

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Dr Peter Holt

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