Keeping score

On a global basis more and more big investors are making investment decisions that factor in climate-change targets and governance. In September, the US financial-data provider Bloomberg introduced a new feature for users of its data terminals worldwide that offers a whole range of environmental performance indicators - a sure signal of investors' attitude to the risks and opportunities presented by climate change.

While all eyes are on United Nations' Climate-Change Conference in Copenhagen and its likely outcome, any deal agreed is unlikely to have a major impact on investors, who already see this as a global factor to be considered when looking at the values of major companies and the regulatory environments in which they operate.

Meg Brown, climate-change analyst with Citigroup, told the Financial Times in November that the UN climate-change conference was important, but not vital. "If Copenhagen is a disaster at a political level, it doesn't change any of the investment implications for companies that we've identified as being beneficiaries of domestic climate-change regulation," she told the newspaper.

The implications of this phenomenon, and the resulting risks and opportunities, have not escaped the attention of the boards of the world's leading companies, most of which have been signing up to the Carbon Disclosure Project (CDP) in recent years.

The CDP is a worldwide not-for-profit organisation which encourages private- and public-sector organisations to measure, report, manage, and reduce carbon emissions and climate-change impacts. Each year, the CDP writes to the chairs of the boards of major companies, seeking detailed information on behalf of its signatories - 475 global investors, with an estimated combined US$55trn under management. Our own National Pensions Reserve Fund is among the signatories.

It has been doing this since it was set up in 2000 with some considerable success, and this year over 2,400 companies in 58 countries have participated. 2009 saw major Irish companies invited to participate for the first time under the auspices of CDP Ireland, and its director Dick Budden.

“To be clear, a number of Irish businesses had been asked to participate in previous years, either because they are registered in London or New York, or because they are one of the Global 500. AIB, CRH, Diageo, Tullow Oil, for example, have all taken part and led the way," says Budden. "And, of course, a number of Ireland's largest private-sector employers are foreign-owned companies whose parents participate already, whether that be in the US or elsewhere in Europe.

"But this was the first time we approached the 40 largest companies on the Irish Stock Exchange directly, together with a small number of companies not listed that are large emitters of greenhouse gases by virtue of the nature of their operations." The latter, says Budden, are those companies that have received the largest allocations under Ireland's National Allocation Plan for Emissions Trading 2008-2012.

Originally from the UK, Budden spent 18 years with ICI and a further eight years running a textile business in the north of England, before moving to Ireland some 15 years ago to take up the role of managing director of the Irish operations of Wellman International, a multinational fibres and recycling business based in Co Meath. When Wellman was bought out by German private-equity firm Aurelius, Budden left to pursue his interest in the opportunity and challenge of making business sustainable, an interest he had developed during his time with that company. Budden was quick to spot the importance of the CDP, and was soon heading up the Irish arm of the UK-based organisation.

He has spent the past year getting the Irish operation off the ground, and garnering support from the likes of Sustainable Energy Ireland and the Environmental Protection Agency. He is clearly driven by the belief that it just makes good strategic business sense, and that Irish businesses must not get left behind in this global drive towards a low-carbon economy.

Amongst those participating in this the first Irish survey were major players such as C&C, ESB, Smurfit Kappa Group and UTV. In a year that has seen very tough trading conditions for Irish companies, it is probably not altogether surprising that of the 43 companies invited to participate in the Irish CDP process, just 14 answered a detailed questionnaire, resulting in a response rate of 33pc, while a further five companies responded by supplying relevant information.

"This was perhaps the most difficult time imaginable to ask companies to take on the additional management workload required in this kind of reporting," concedes Budden. "However, the Irish companies that did take part this year for the first time have shown real leadership, and that it can be done."

"The companies involved in this project will reap the rewards of their foresight," said the Minister for Energy, Communications and Natural Resources, Eamon Ryan TD, speaking at the official launch of the CDP Ireland report in October, which was penned by KPMG and sponsored by Vodafone. "Energy awareness makes sense, not only for the environment, but for the bottom line."

Long way to go

However, this relatively low response rate does seem to demonstrate that Irish companies are lagging behind their international counterparts and have some catching up to do. This year, 80pc of the world's largest 500 companies, and of Europe's largest 300 companies, took part in the project, as did the 80 largest-listed companies in Brazil.

"As the report makes plain, Irish business has a very long way to go before we catch up with the countries I mentioned earlier. We need to double the proportion of companies responding if we are to reach the level of participation of the largest companies even in other countries such as South Africa, the Netherlands and Scandinavia. So, that's the task ahead of us."

There were some very positive soundings from those companies that did participate. According to KPMG, which penned the report, over two thirds of Irish companies participating said they assign board-level responsibility to address climate-change business risks and opportunities, and that they see regulatory development as an opportunity, especially in relation to emissions trading and bringing low-carbon products to the market.

Just as importantly, the same number recognised they are exposed to risks relating to the regulatory framework in which their businesses operate.

It seems clear that if our big companies want to play on the international stage, they must get involved in initiatives like this or get left behind. "It is a truly global project now, that covers most of the world's major businesses, and the track record of companies responding is truly impressive," says Budden.

"Today the project provides an unequalled source of information and data on how companies of all kinds and in all regions are assessing and addressing climate change," says Budden.

"What is more, the project has been evolving, and can now make similar requests on behalf of organisations and on behalf of government departments to their chains of suppliers," he adds.

US retail giant Walmart has a supply-chain network of over 60,000 suppliers across hundreds of sectors, and was the first corporation to form such a partnership with CDP in order to establish an emissions strategy for its entire supply chain, and encourage suppliers to report climate change-related information.

"It is a reflection of the fact that measurement of carbon emissions is not just an issue for the major global companies, but that that it will have knock-on implications for all those companies that supply to those major organisations," says Budden.

The CDP will soon be issuing questionnaires to Irish businesses for 2010, and Budden is optimistic that the response rate will be higher this time around. Quite a number of those companies that were not in a position to respond this year indicated to the CDP that they intend to respond next year and beyond.

"If you are managing a major business and not already doing so, you should be thinking about participating in the project next year," says Budden. "Indeed, if you are an investor, a banker, a lawyer, an environmental consultant, or if you are in financial services or an NGO, you should be sharing your knowledge of this project with all the businesses you deal with and with others in your peer group."

Another stakeholder that Budden is keen to get involved is the Government. He points to the executive order signed by US president Barack Obama in October this year, tasking every US federal agency with reducing its emissions and exploring the feasibility of requiring their suppliers to register with a voluntary organisation, such as CDP, to report greenhouse-gas emissions, develop and make available their greenhouse-gas inventories, and describe their efforts to mitigate emissions.

"Government purchases are a major factor in any economy. They can play a major role in driving this initiative forward with Irish businesses that supply to them," he says.

"Around the world, responsible business leaders with strategic sense are participating in this project because it's good business to do so, and because they don't want to be left behind," says Budden. "And Irish business needs to hear that message and respond too.

"Business must show that it can be, and is, part of the solution rather than the problem," he concludes. "And, to quote Bill Clinton: 'It all begins with keeping score'."

Key findings from the CDP Ireland Report:

• Over two thirds (71pc) of respondents see regulatory development as an opportunity, especially in relation to emissions trading and bringing low-carbon products to the market. 
• Fewer companies (43pc) are optimistic about possible business opportunities resulting from physical change, for example, changes in weather patterns impacting operations.
• Nearly two out of three (64pc) of the responding companies consider their business to be exposed to physical risks, such as extreme weather events or changes in weather patterns.
• Over two thirds (71pc) of Irish respondents believe they are exposed to risks relating to the regulatory framework in which their businesses operate.

A PDF version of the CDP report can be downloaded here.

This article is part of the Irish Director Green Economy Report