Greenhouse gas cutters gain higher returns

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.”

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