Companies in the forefront of reducing their carbon emissions tend to provide higher returns than their peer group, according to the 2011 report by the Carbon Disclosure Project.
Companies in the CDP’s Carbon Performance Leadership Index returned 85.7 per cent between January 2005 and May 2011, compared with 42.7 per cent for the 500 companies in the FTSE Global Equity Index.
The report also reveals a significant increase in the proportion of respondents that claim to be integrating climate change initiatives into their core business strategies, rising to 68 per cent from 48 per cent in 2010.
“There has been a shift in the level of understanding that climate change is something all companies need to be paying attention to,” says Paul Simpson, chief executive of the CDP.
The outperformance the report found “warrants further investigation by the investment community”, he adds, as it suggests “companies that are tackling climate change will perform better over time”.
The stronger performance may be linked to the fact that 59 per cent of companies in the survey reported their emissions reduction activities delivered payback within three years.
While much of the investment by companies in cutting emissions helps to reduce their climate change impact, it is also being driven by factors such as increasingly high and volatile energy prices, resource scarcity and fears over security of supply, which “have focused minds on how to do more with less”, according to Mr Simpson.
Such measures were praised at the launch of the report by Christina Figueres, executive secretary of the United Nations Framework Convention on Climate Change, the body that oversees the Kyoto Protocol process. However, she said the moves were essentially “at the margins”.
“What is really needed is to go into . . . serious investment in new technologies, new materials, new business models. That’s where we’re going to get the quantum leap.”
Yet business is reluctant to go beyond the easy, win-win actions that pay back relatively quickly in a world where most investors are still focused on short-term returns and most governments still do not have long-term climate policy frameworks to incentivise investment.
Part of the problem, according to Ms Figueres, is that while some companies are focused on dealing with their environmental impacts, “there is a serious group of companies that have a voice that is much louder, better funded, that operates much more in unison and that is still stuck in the technologies and the fuels of yesterday.
“So if we don’t have on the other side of the ledger a voice that is equally orchestrated, with arguments at least equally compelling, then governments are going to be taking very timid decisions and they’re not going to be tipping the scale,” she added.
And just as some companies are not addressing the issue, the need to cut emissions similarly is not being integrated into the thinking of many investors, says Mr Simpson. “Asset owners and asset managers need to consider this – they are lagging behind business in their understanding of climate change.”
The external costs of greenhouse gas emissions will become internalised into company cash flows and profitability, according to Steve Waygood, head of sustainability research & engagement at Aviva Investors.
“Managing greenhouse gas emissions is essential to delivering sustainable shareholder returns.”
This view ties in with the launch last week of a discussion paper by the International Integrated Reporting Committee, which says the type of information needed “to assess the past and current performance of organisations and their future resilience is much wider than is provided for by the existing business reporting model”.
“Historical financial performance is being exposed by climate change as an outdated model to assess long-term business profitability and growth, when you consider the much wider range of financial and non-financial risks associated with business today,” adds Alan McGill, a partner in the sustainability and climate change unit at PwC.
“Today’s investors have different information needs, which are leading to tougher verification regimes, more emphasis on executive and staffing responsibilities and incentives, and much more unforgiving examinations of the contribution of business to society. We are accelerating towards newer reporting models that better balance financial and non–financial performance.”
