Climate Change Compass: The Road to Copenhagen

8/14/2019 Climate Change Compass: The Road to Copenhagen

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www.eiris.org

Key findings

Some improvements, but furthermomentum needed - 33% of companies have unmitigated

climate change risk (down from 34%in 2008)

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

- 91% of high and very high impactcompanies disclose absolute CO 2 orGHG emissions data (73% in 2008)

Opportunities at Copenhagen - the

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

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

IntroductionClimate 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 todays(and tomorrows) asset owners and assetmanagers. But what should investors bedoing?

Building on last years 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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www.eiris.org EIRIS August 2009

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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 and

Forest 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 markets

as 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 binding

targets 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:

Regulatory challenges - national

and 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 when

determining risks and opportunitiesregarding investing in companieswith exposure to climate change.Environmental taxes and compliancecosts now need to be factored intocompanies' operational costs.

Changing market dynamics -higher and fluctuating energy costspresent a significant impact, inparticular for energy-intensiveindustries. However, changing

consumer attitudes and demandpatterns open up opportunities fornew technology, products andmarkets.


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Changing w eather patterns thephysical risks of climate change includedamage to assets as a result of floodingand extreme weather events.

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

Tracking the global 300EIRIS has analysed the impact andresponse of some of the worlds 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 EIRIS

published in 2008. Key findings arehighlighted below.

1) High level of unmitigated riskamongst global top 300EIRIS 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 change

impact.

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 sectorsprojected growth, beneficial impact of the

sector, 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 management

response.EIRIS indicators cover aspects such as:

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

Strategy e.g. has the companyset targets

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

Performance e.g. year on yearreduction in GHG emissions, ortransformational initiatives such aslarge scale investment in carboncapture and storage

EIRIS 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 companies

in the global 300 are classified as high orvery high impact for climate change.

However, for a complete picture of acompanys 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 compared

with 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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the practices of some of the companiesincluded in last years report as well as thegood strategies of newcomers to the groupof 300 largest cap companies. This isencouraging. However, some sectors, suchas Industrial metals, Food producers andOil & gas producers have a greaterproportion of companies with unmitigatedrisk compared with last year.

Fig 2. Global 300 - percentage mitigated r isk bymarket cap

20082009

Unmitigated Risk Mitigated Risk

Figure 2 illustrates a slight decrease (33%against 34.2%) in the number of companies in the global 300 considered tohave unmitigated risk.

Performance varies considerably somesectors are making progress towardstackling the issue, whereas others have ahigh percentage of companies withunmitigated risk.

Table 1. Percen tage mitigated risk for aselection of high impact sectors (bynumber)

Sector % global

30 0

% mitigatedrisk(% variation)

Chemicals 3% 77.8% (+23.4%)Construction& materials 1% 25% (+25%)

Electricity 3% 30.0% (+21.7%)FoodProducers 3% 50.0% (-20.4%)

IndustrialMetals 2% 0% (-24.3% )

Mining 4% 18.2% (2.4%)Oil & gasproducers 9% 3.6% (-6.2% )

Many large cap companies are impacted byclimate change. Investors should

understand the effect these impacts willhave on their portfolios.

2) High risk companies areimproving but there is still a longw ay to goSome of the highest risk companies forclimate change are not adequatelyresponding to risks and opportunities.

In general, the quality of companies management response to climate changeissues has improved since the lastreport. Less than a fifth (19%) of veryhigh and high risk companies (bynumber of companies) have no or alimited response to climate change. Thisis an improvement from over a third (34%)in 2008.

All but one of the companies (99%) witha high or very high climate change

Fig 2. Global 300 - percentage mitigated risk bymarket cap

20082009

Unmitigated Risk Mitigated Risk

Fig 3. Climate change response by No. ofcompanies - global 300 (very high & high)

20082009

Advanced Good Intermediate Limited No evidence

Fig 4. Governance performance(% very high & high impact companies)

0% 20% 40% 60% 80% 100%

2009

2008

2009

2008

2009

2008

Yes No

Climatechange policy

Policy context

Remunerationlink


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impact has a corporate-wide climatechange commitment (in comparison with84% in 2008). This can be explained by anumber of drivers coming into playincluding the increasing activity of investors. Almost three quarters (73%compared with 61% last year) havereferenced the wider policy context byreferring to international targets,regulations or the scientific imperative. Thisis good news. However, only 21% (14% in2008) of companies have integrated thiscommitment by linking board or seniormanagement remuneration to GHGemission reductions or equivalent climatechange strategies. Investors may want tofocus on this area when developing theirengagement strategies or when exercisingvoting rights.

Fig 5. Strategy performance(% very high & high impact companies)

0% 20% 40% 60% 80% 100%

2009

2008

2009

2008

Yes No

Short termtargets

Long termtargets

Targets are an important indicator of corporate climate change strategy and arealso an important indicator of a companyscommitment to achieving GHG emissionsreductions. Over half (55% increased from48% in 2008) of high and very high impactcompanies analysed have a short-term(less than five years) management targeteither publicly stated or as an internaltarget. The proportion of companiesdisclosing a public long-term (at least fiveyears) strategic target has increased to40%, from a quarter in 2008. Although theincreased presence of short-term targets isgood news for investors seeking companiesthat are actively managing their GHGemissions, the lack of long-term targets isa concern and may reflect the uncertainty

regarding the future policy frameworkand longer term caps on GHG emissions.While a number of countries arepublicising national GHG emissionstargets many companies are looking tothe outcome of Copenhagen as a signalfor long-term reduction targets.

Fig 6. Product performance(product-relevant companies)

0% 20% 40% 60% 80% 100%

2009

2008

2009

2008

Yes No

Productstrategy

Product

targets

For many companies their greatestclimate change impact is through theirproducts. Focusing on the subset of

companies with a significant productimpact, over a fifth (22% compared tolast years 18.8%) publicly recognise thecompanys responsibility to address theclimate change impact of their products.However, while only 20% have made apublic commitment or disclosed aquantitative target to reduce the climatechange impact of their products, this is a50% improvement from last years level.Whilst some high impact companies have

made initial steps in terms of high levelcommitments to addressing the risks of climate change through their products,evidence of how these commitments aretranslated into a coherent strategy isless apparent.

3) The quality of q uantitativedisclosure remains a challengeThe proportion of companies in theglobal 300 assessed as having no orlimited disclosure on climate change hasreduced to less than 12% (from 29.4%in 2008). Over four fifths (85%) of veryhigh or high impact companies disclose


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either absolute or normalised data (up from81% in 2008). Impressively, 91% of veryhigh or high impact companies (up from73% in 2008) disclose absolute carbondioxide (CO 2) or GHG emissions data and79% of companies (up from 70% in 2008)disclose normalised data. Over threequarters of these companies (83% from38% in 2008) disclose an indication of scope of data or methodology used andalmost half of this information (48% upfrom 36% in 2008) was verified by anexternal party.

Fig 7. Disclosure performance (%very high & highimpact companies)

20082009

Advanced Good Intermediate Limited No evidence of a

This is an impressive improvement inproportion of companies disclosing dataand an encouraging trend in terms of disclosure of scope or verification of data.However, more does not necessarily equalbetter. A lack of clarity and comparability of quantitative data persists and cancompromise investment decisions basedsolely on the disclosure of quantitativedata. Initiatives such as the CarbonDisclosure Project (CDP) have made asignificant contribution to the amount of data disclosed. Figure 7 shows that over aquarter (26% up from 18% in 2008) of very high and high impact companies areproviding a quantified assessment of thefinancial, regulatory or physical risks oropportunities posed by climate change. Thisis in large part driven by the inclusion of this question in the CDP questionnaire.Disclosure in the area of climate change will

increase as a result of investor, regulatoryand wider stakeholder pressure. The launchof the CDSB (Climate Disclosure Standards

Board) framework for the inclusion of climate change data in mainstreamreports will support the efforts of companies to disclose furtherinformation on their performanceregarding climate change. Theframework clarifies which climate changedata should be reported and providesguidelines designed to streamlinedisclosure procedures. Investors shouldconsider addressing reporting anddisclosure on climate change throughtheir engagement strategies and whenexercising their voting rights.

Hopes for Copenhagen In the run up to Copenhagen we arehearing clear messages from investorsand companies for firm targets and agreater degree of certainty aroundclimate change.

Asset owners and asset managers havean interest in ensuring a robust policyframework to provide a clear andconsistent market signal. To this end, inApril 2009, six networks of globalsustainable and responsible

organizations (ASrIA, Eurosif, RIAA,Social Investment Forum, SIO andUKSIF) approached the world leadersmeeting in London at the G20 to requestfinancial instruments and incentives tobuild the green economy using privateinvestment alongside direct governmentsupport and financial reform measures torequire greater transparency andresponsible ownership.

Likewise, the Copenhagen Call (a wishlist of a large number of corporationsand issued by the World BusinessSummit on Climate Change) asks for:

governments to set out a timelineof emissions reductions targets;

standards and regulations forenergy efficiency;

a standardised method forcompanies to report on their low-carbon progress;

economic incentives to drive thedevelopment, financing andemployment of low-carbontechnology;


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Challenges for investorsThe findings above highlight thefollowing key challenges for investors: High level of unmitigated risk

amongst global top 300 assetowners should demand that theirasset managers integrate climatechange in their investment processand should monitor theirperformance in this regard

High risk companies areimproving but there is still along way to go there is anopportunity for investors toexercise their voting rights and toengage companies to minimize risk

The quality of q uantitativedisclosure remains a challenge investors should demand greatertransparency to evaluate theexposure and performance toclimate change of their portfolios

a rapid scale-up of carbon markets;immediate action to protect forestsand a fund for adaptation.

These are aimed at generating moreregulatory certainty. Business will need towork closely with governments to createeffective and practical rules to bringforward the low-carbon investments andguarantee sustainability.

ConclusionClimate change will continue to havesignificant physical and economic impacts.As these increase, investors need todevelop mechanisms to factor in the effectof climate change and to secure financialreturns in a carbon-constrained economy.

The Copenhagen meeting could result inbeneficial outcomes for various industrieslinked to the development of stimuluspackages and clearer regulatoryframework. A number of improvementshave been observed in the strategies thatcompanies have put in place with regard totheir climate change impact. A higherproportion of companies have policies and

systems in place while the number of companies that report on their performancehas also increased. However, there areareas where further progress can beachieved such as the involvement of theboard in the companys climate changeinitiatives through linking remuneration toperformance in this area. Likewise, theincreased use of external verification forGHG emissions data will provide investorswith further reassurance on the reliability of

the information published. These are keyareas where investors should focus both onminimising their risk but also on furtherexerting their influence.

Given the importance of Climate Changeand the likely impact of it on future long-term corporate financial performance it isincreasinly seen as an investors fiduciaryresponsibility to integrate consideration of climate change into their investment

strategy as outlined in the UNEP-FIFiduciary II report.

Protecting & enhancinginvestmentsEIRIS has identified the followingsteps investors can take to protect orenhance their investments:

1. Identify portfolio risks Understanding the carbon profileor footprint of your portfolio is animportant first step. But for acomplete picture of a companysrisk profile investors should alsolook beyond emissions intensity tohow the company is responding tothe challenges of climate change.

2. Factor in carbon This involves fully understandingcarbon risks and opportunities -within both the portfolio and thewider economic picture. This isnt

just about divesting from highimpact companies. Investorsshould factor in carbon whenpricing very high and high impactcompanies. Investors should alsoidentify those companies activelymanaging their risks or seeking out


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opportunities (e.g. in terms of establishing a competitive advantage,preparing for future challenges suchas regulation, or adapting theirbusiness model). A focus on investingin climate change solutionscompanies, such as renewable energyor energy efficiency, is another wayto factor in carbon.

3. Engage This includes using investor influenceto engage with companies and thewider policy debate. Companyengagement includes focusing onspecific issues and sectors (e.g.challenging electricity companies tolook at more efficient generation anddistribution), or encouraging

improved disclosure from allcompanies on how they areresponding to climate change.

References of interest: Institutional Investors Group on

Climate Change Report 2008:www.iigcc.org/docs/PDF/Public/2ndAnnualReportInvestorStatementonClimateChange.pdf

UNEP-FI Fiduciary responsibilityreport:www.unepfi.org/fileadmin/documents

/fiduciaryII.pdf Carbon Disclosure Project:

www.cdproject.net UN Climate Change Conference

Copenhagen: http://en.cop15.dk

About EIRISEIRIS is a leading global provider of independent research into the social, environmental governance and ethical

performance of companies. EIRIS, a UK-based organisation with an office in the US together with its internationalresearch partners has a wealth of experience in the field of responsible investment research. EIRIS providescomprehensive research on around 3,000 companies in Europe, North America and the Asia Pacific region. EIRIS isalready retained by 100 institutional clients including pension and retail fund managers, banks, private client brokers,charities and religious institutions across Europe, North America, Australia and Asia. For more information on EIRIS products and services visit www.eiris.org or email: [email protected]

Author: Carlota Garcia-Manas, Assistant H ead of Resea rch

Last climate change briefing: Climate Change Tracker: Asia - see Climate Change Tracker: Asia (2009)Next climate change briefing: Climate Change Tracker: North America

Fu n d e d b y t h e E I R I S Fo u n d a t i o n This briefing has been made possible by a grant from the EIRIS Foundation, registered charity number 1020068. TheEIRIS Foundation is a charity that supports and encourages responsible investment. It promotes research into the socialand ethical aspects of companies and provides other charities with information and advice to enable them to chooseinvestments which do not conflict with their objectives. The Foundation funds specific projects to achieve these aims.

How w e can help EIRIS Climate Change Products for Investors

EIRIS has developed a comprehensive suite of products to help investors assess their portfolios and designinvestment strategies in response to the challenge of a carbon-constrained economy.

EIRIS Carbon Profile - assesses the climate change performance of a portfolio against majormarket indices. It is designed to help investors understand the quantitative climate changeimpact of their portfolios. It provides a qualitative assessment of company responses to climatechange.

EIRIS Carbon Engager helps investors to target their engagement on climate change andidentify key priorities. It provides detailed reports on individual company performance and bestpractice examples to support a variety of engagement approaches.

EIRIS Carbon Risk Factor - quantifies individual company performance on climate change. Itprovides a risk-weighted score based on each companys carbon impact and managementresponse to climate change. It is designed to be easily integrated into analysts models.

For further information contact Lisa Hayles: [email protected] or 020 7840 5727 (direct line)

Climate Change Compass: The Road to Copenhagen

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