The institutionalization and commensuration of carbon disclosure

Dr. Jonatan Pinkse

GRI Conference 2010

Amsterdam

Outline

1. Brief overview of carbon disclosure avenues

2. In-depth analysis of the Carbon Disclosure Project as avenue for carbon reporting and carbon accountingavenue for carbon reporting and carbon accounting

3. Discussion

Three avenues for carbon disclosure

• Sustainability or corporate social responsibility (CSR) reporting

• Filings to the Securities and Exchange Commission • Filings to the Securities and Exchange Commission (SEC), particularly in the United States

• The Carbon Disclosure Project (CDP)

Carbon disclosure in CSR reporting

Research on the Fortune Global 250 shows:

– 57% of the Global 250 addresses the risks of climate change; 64% reports about how to mitigate these risks; and 60% describe business opportunities

Since 1999 type of information provided about climate change has changed:

– In 1999 48% of companies reported on emissions performance related to own – In 1999 48% of companies reported on emissions performance related to own business activities. By 2008, this had risen to 59% and data are more specific.

– Reporting on indirect emissions from the purchase of electricity (33%) and transportation or product use (26%) only emerged in 2005

– Kyoto mechanisms were rather new in 1999, but received explicit attention in 2005: 24% mentioned to explore the consequences of emissions trading

– What has not changed is corporate descriptions of product innovations to address climate change concerns, improve energy efficiency and reduce dependency on fossil fuels

Source: KPMG (1999, 2002, 2005, 2008)

Carbon disclosure in SEC filings (1)

Publicly-listed companies must provide information to the SEC of instances ‘where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial condition or results of operation.’

– In 2001-2005 an increasing number of companies disclosed their carbon – In 2001-2005 an increasing number of companies disclosed their carbon exposure to shareholders via this route

– Non-US-based companies persistently report more than their US counterparts

– Great diversity across the sectors

But, is climate change material?

– In 2005 of the 55 reporting companies, 9 give no information, 5 believe it is not possible estimate the impact, 8 expect a mixed impact, 27 acknowledge an adverse impact, and 5 companies say likely to be an impact, but not material

Source: Chan-Fishel/FoE (2002, 2003, 2004, 2005, 2006)

Carbon disclosure in SEC filings (2)

20

25

30

0

5

10

15

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

automobiles insurance oil & gas petrochemicals utilities

reporting non-reporting

Source: Chan-Fishel/FoE (2002, 2003, 2004, 2005, 2006)

Carbon disclosure in SEC filings (3)

Last January SEC provided interpretative guidance on carbon disclosure, highlighting following areas:

– Impact of legislation and regulation– Impact of legislation and regulation

– Impact of international accords

– Indirect consequences of regulation or business trends

– Physical impacts of climate change

The Carbon Disclosure Project (1)

– CDP is a form of institutional entrepreneurship using the power of investors to urge firms to disclose information about climate change

– Sends out questionnaires to large sets of companies worldwide every year; first time 2003; currently 7th roundyear; first time 2003; currently 7th round

– # of investors grown from 35 (2003) to 475 (2009)

– Asset size: from 4.5 to 55 trillion dollars in these years

– # countries of origin: from 7 (2003) to 30 (2009); initially half of investors from UK, now much more spread globally

The Carbon Disclosure Project (2)

Responses:

– 2003: FT500; 2009: 2,456 companies including FT500

– Response rate FT500: from 46% (2003) to 82% (2009)– Response rate FT500: from 46% (2003) to 82% (2009)

– Apparently successful institutionalization

– European companies most likely to respond, consistently considerably more over the years than:

– North American and Asian companies (catching up lately)

– Companies from BRIC and developing countries (though they are catching up quite substantially recently, esp. Brazil 100% disclosure in 2009)

Geographical variation in CDP response

200

250

300

0

50

100

150

200

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

North America Europe Asia-Pacific Emerging economies

Answer No Answer

A closer look at CDP5 2007: is carbon disclosure useful?

The institutionalization of standardized information disclosure is urgent:

– A channel for accountability to stakeholders

– Enables demanding certain performance levels– Enables demanding certain performance levels

– Enables benchmarking and comparison

– Assess vulnerability to climate-related risks

– Focuses managerial attention on performance outcomes

– Transforming mitigation activities into a common metric is foundation of the carbon market

But is CDP delivering these tasks already at this stage?

Commensuration

Is CDP a successful project of commensuration, in terms of transforming “qualitative relations into quantitaties on a common metric”?

Commensuration is a political process with 3 distinct dimensions:

Technical commensuration:Translate GHG emissions into one common metric tCO2e

Cognitive commensuration:Common understanding what pollution is, who the polluter and involves spatial and temporal aspects

Value commensuration:Attaching price to GHG reductions, e.g. trading scheme or registry

Commensuration of carbon disclosure reporting

Commensuration is less strict for reporting, but should at least enable ranking of companies

But…narrative style of disclosure impedes comparisonnarrative style of disclosure impedes comparisonprovides a platform for showcasing best practicesquestionnaire has changed over timedisclosure of financial impact information is limited– 27 of 380 firms disclose cost savings– 123 firms estimate energy costs– 76 disclose EU-ETS allowances allocated

– Openness about methodology is crucial for comparison, but often not disclosed

Commensuration of carbon accounting

Technical commensuration requires a common methodology

– WBCSD/WRI GHG Protocol dominant (197 firms), but used inconsistently (often combined with complementary methodologies)

– Direct emissions relatively well-reported, but much confusion about indirect emissionsemissions

Cognitive commensuration a huge challenge

– Different consolidation methods to establish organizational boundaries

– Neglect of non-CO2 emissions

– Global emissions not truly global and limited breakdown per country

– Lack or inconsistent use of external verification

Value commensuration only takes place within the boundaries of trading schemes, which are not global yet

Climate Disclosure Standards Board Reporting Framework?Way forward…

Advocates inclusion in mainstream reporting and stronger alignment with financial accounting rules:

– Thus, investors as main users of disclosed information– Thus, investors as main users of disclosed information

– Consolidation of existing standards, i.e. CDP for reporting and GHG Protocol for accounting

– Using the accounting profession as key point of leverage

Discussion

Investor pressure alone does not seem enough to reach adequate levels

Quality of carbon disclosure and this analysis raises doubt about the value of carbon disclosure to investors, NGOs and policymakers at this stage

– What are the prospects of carbon disclosure reaching a level of – What are the prospects of carbon disclosure reaching a level of effective commensuration?

– What does it mean for research and practice that disclosed carbon data remains inconsistent?

– How can one assess whether climate change initiatives actually reduce corporate impact?

– How does carbon disclosure relate to sustainability reporting in general?

Further reading

– Kolk, A., Levy, D., & Pinkse, J. 2008. Corporate responses in an emerging climate regime: the institutionalization and commensuration of carbon disclosure. European Accounting disclosure. European Accounting Review, 17(4): 719-745.

– Pinkse, J., & Kolk, A. 2009. International Business and Global Climate Change. London: Routledge.

j.m.pinkse@uva.nl