Ethical Performance
inside intelligence for responsible business


pressures mount on carbon disclosure

October 2006

Investors are not yet asking companies the right questions about their carbon strategies. As a result, companies are not providing the information needed

Interest in the effects of climate change on the world is growing fast, prompting investors to seek more information on how much companies individually contribute to global warming, and what action each proposes to take.

The latest report from the Carbon Disclosure Project, which was established in 2000 to inform investors of the risks and opportunities presented by climate change and to raise awareness of its potential impact on company value, casts light on the current state of corporate disclosure of climate change risk. Its bullish headline finding (see page one) - that more companies are responding to the CDP's requests for information, and that while there will be losers, sectors such as biofuels will be winners - conceals a less sanguine picture.

Lack of disclosure remains the single biggest problem, the CDP says in its report published last month (others appeared in 2002, 2003 and 2005). The proportion of FT500 respondent companies that disclosed their emissions data this time round actually fell by four per cent to 73 per cent. Overall, the project yielded emissions data for 48 per cent of the FT500, compared with 54 per cent in CDP 3. Among the reasons given are the absence of 'adequate greenhouse gas measurement systems and protocols in the management framework of some companies', and 'lack of legislation requiring emissions disclosure'.

The data also suggests that companies 'may be less willing to publicly disclose details of their emissions profile' because of the growing financial importance of greenhouse gas emissions management for some industrial sectors.

A second problem is the orderless character of company reporting. This is not simply a question of information cropping up in different places, either in the annual or the sustainability report, but of data comparability. 'Emissions reported ranged from simply how much energy was used at company headquarters to a full accounting of direct, indirect and business travel-related emissions ... there still remains a dearth of companies that provide details regarding the boundaries of their emissions reporting,' the CDP says.

Rory Sullivan, head of investor responsibility at Insight Investment, the asset management arm of HBOS, believes the lack of consistency on where reporting boundaries are set is a particular concern. 'Companies frequently do not explicitly state what is included or excluded from the scope of their report,' he says. Some include the emissions of subsidiaries, others do not. Companies commonly provide data for only one part of the world, although they also operate elsewhere.

Verification presents a further challenge. 'A large number of companies either did not comment on the authenticity of their greenhouse gas emissions data or indicated that the data had not been verified, despite being asked,' says the CDP. 'It is virtually impossible to distinguish in any rigorous way those FT500 companies that are reporting emission reductions from those that are actually achieving them.'

Insight recently reviewed the quality of information disclosed by 12 European electricity companies*. Four were verified by a third party, but it was 'unclear how much attention was paid to the companies' carbon dioxide emissions inventories in the verification process, as none of the verifications explicitly stated that the greenhouse gas emissions data contained no material misstatements'. For its part, the CDP says its data is based on 'self-reported, non-verified responses'.

Ultimately, companies will only provide the data needed to assess climate change risk when investors demand it. Emma Howard Boyd, head of socially responsible investment and governance at Jupiter Asset Management, says that aside from retail ethical investment funds - a small fraction of the market - 'progress on encouraging investors to take environmental concerns into account has some way to go to hit the mainstream'.

Sullivan believes that the manner in which companies are called upon to improve their emissions disclosures needs a 'substantial rethink'. Investors need to be clearer what they want. In particular, data should be forward-looking - virtually without exception, company reporting focuses on historical performance. The Global Framework for Carbon Risk Disclosure, an institutional investor initiative, is expected to request forward-looking reports from companies in this area.

Only around 0.1 per cent of assets are currently invested in equity, fixed income or 'alternative' asset class products that incorporate systematic carbon research, according to the CDP. Yet some 40 per cent of those assets could reasonably be described as being at significant risk from climate change, the CDP estimates. As climate change bites, expect this gap to close.

*Climate change disclosure standards and initiatives: have they added value for investors?

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