Companies prepare for carbon costs to hit the balance sheets

The Carbon Disclosure Project's third survey into how the world's largest companies are preparing for climate change found higher risk awareness.1 Companies in vulnerable sectors could see significant dents in net income and their liabilities will be revealed by new accounting practices.

There has been a "sea change" in corporate positioning on climate change over the past 18 months, according to the CDP, and "perceptions are changing most noticeably among US-based companies."

In its third survey of the world's largest companies, published on 14 September, the CDP found that a growing number of companies now acknowledge the potential for a carbon-constrained global economy and high carbon costs. Response rates were highest from Europe, Japan and Canada, but US responses passed 60% for the first time.

New accounting rules are shaping corporate attitudes, and climate-linked financial and insurance products are also evolving in line with perceptions of carbon risks.

Launched in 2000, the CDP is backed by institutional investors who want companies to disclose information on greenhouse gas emissions and their response to climate change. It sends questionnaires to the world's largest 500 companies - those listed in the FT500 - asking whether they believe that climate change represents a commercial risk, and seeking information on:

  • Who has responsibility for managing the risk.

  • What technical innovations or processes the company employs to reduce emissions.

  • What strategy they have for emissions trading.

  • How much CO2 the company emits.

  • Whether it estimates indirect and supply chain emissions.

  • Whether an emissions reduction programme is in place.

  • The company's targets on emissions intensity.

  • What proportion of revenue is represented by fossil fuels or electric power.

    In 2000, the first survey was backed by 35 institutional investors with investments of $4,500 billion, and the survey was completed by 47% of companies. Last year, more than half the companies responded (ENDS Report 352, pp 3-4 ). This year's survey was backed by 155 investors representing $21,000 billion, and it was completed by 71% of the 500 companies polled.

    Not all the respondents provided data on their emissions: those that did jointly had emissions of around 2,994 million tonnes, representing 13% of global emissions.

    From now on the project will send out its questionnaire annually, and companies outside the FT500 will be invited to provide similar information via the CDP website.

    Regarding this year's responses, CDP said there was not yet a consensus on climate change, but the debate did not necessarily divide on national or sector lines. Some US-based companies had "publicly asked for greater regulatory certainty on greenhouse gas emissions." Similarly, CDP found sector leaders around the world including Japan and the US as well as Europe.

    Awareness of climate change did not necessarily translate into immediate action. Although 90% of respondents thought climate change represented a risk to their company, only 51% had carried out emissions reductions and only 45% had set a reduction target.

    Just 35% of companies were preparing to participate in emissions trading, although CDP noted that in the two years since its second survey was completed new financial instruments to allow carbon trading had been set up, for example those under the Kyoto Protocol, and carbon funds with assets of $1.5 billion had been launched.

    International accounting standards are also evolving to take account of the cost of carbon: under the International Financial Reporting Standard (IFRS), greenhouse gas emissions are treated as contingent liabilities and carbon allowances as intangible assets, although the detail of their treatment is still under debate (see www.iasb.org). For investors, due diligence would require the costs of emissions liabilities and carbon management to be examined.

    Assessing the costs of climate change for investors has been problematic for CDP. "The single biggest problem is lack of disclosure" - only 54% of the survey respondents provided emissions data - but data compatibility was also a problem.

    CDP calculated the cost of constraining carbon for various sectors at carbon prices of $5 and $20 and constraints of 5% and 20%. Those sectors with the highest costs were metals, mining and minerals and electric power utilities - up to 9% of net income under the stricter scenarios. For the worst-affected in these sectors the cost was dramatic. "The cost of carbon may erode annual net income by as much as 45%," CDP said.

    Among the companies that did not respond to the questionnaire were aerospace business Boeing, tyre manufacturer Bridgestone and media companies Fox Entertainment, Time Warner and News Corp.

    Other culprits included major players in financial services - American Express, Accenture, Morgan Stanley, Fannie Mae and Allied Irish Bank - plus retailers WalMart and Home Depot and IT firms Symantec and Apple.

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