Coming clean on climate change

• Leon Gettler
• Sunday Age, August 10, 2008
• http://business.theage.com.au/business/coming-clean-on-climate-change-20080809-3sqs.html

HALF of Australia's biggest companies are risking cost blow-outs, an increased regulatory burden and reputational damage from climate change, according to an international report.

The report from the London-based Ethical Research Investment Services and the Centre for Australian Ethical Research in Canberra found that 48% of Australia's largest 200 companies are classified as having a high or very high potential impact from climate change. Collectively, these companies account for more than $545 billion in market value.

It also found that Australian companies were doing less about climate change than their global counterparts, with a third of global companies deemed to be at high risk. While one in two big Australian companies were at risk, the global data showed that 35.6% in the global 300 were assessed as being in that camp.

Alarmingly, the report found that more than half (53%) of companies in the S&P/ASX200 were considered to have unmitigated risk. In other words, they had not taken sufficient measures to fix the problem and reduce their riskiness for investors. These businesses combined are worth $605 billion.

Australian companies most at risk are in construction and materials, chemicals, industrial metals, mining, oil and gas production and food and drug retail, the report said.

It does not name any of the high-risk companies. But a report from Citigroup released last month found that Australia's 10 biggest greenhouse gas emitters were BHP Billiton, Rio Tinto, Bluescope Steel, Qantas, AGL, Alumina, Orica, Santos, Origin Energy and Boral.

The ethics report said examples of high-impact sectors were cement production and coal mining. These sectors are deemed to have high levels of what economists call "carbon intensity", generating 125 more greenhouse gas emissions per unit of production than low-impact sectors. High-impact sectors such as car manufacturers are, on average, five times as carbon intensive, while medium-impact sectors such as consumer electrical goods are three times as carbon intensive.

The Australian data shows that few companies at risk are doing anything to tackle climate change and reduce investor risk.

The only sector in which companies had done anything to mitigate the risk was construction and materials. But even there, it only applied to 33% of companies in that sector. The other sectors deemed to be high-risk had not taken sufficient steps to improve their position.

The report found that almost four out of 10 (39%) of high and very high-risk companies, worth a total of $213 billion, had no or only limited response to climate change.

It also found a significant gap between what steps companies claimed they were taking to tackle climate change, and what they were actually doing. Just under two-fifths (39%) of the high and very high-risk companies had a corporate-wide commitment to deal with global warming, but only 18% were basing their efforts on international targets, regulations or scientific research.

And only 4% were showing they were serious by linking board or senior management remuneration to greenhouse gas emission reductions or climate change strategies.

The data showed that 33% of companies that generated a significant impact on climate change claimed they recognised the importance of dealing with global warming. But few were putting their money where their mouths were. Only 5% had made a public commitment or disclosed a quantitative target to reduce the climate change impact of their products.

In terms of disclosure, many companies were seeking to show the market they were coming clean on their greenhouse gas emissions. Still, there are serious doubts about whether their disclosures can be backed up.

The research showed that 39% of Australian companies (compared with 81% of global companies) disclose absolute greenhouse gas emissions data, the total amount of emissions produced. Furthermore, 19% disclose so-called "normalised" data, which allows investors to compare greenhouse gas emissions across companies and sectors.

But a closer look raises serious questions about the truthfulness of their claims. Only 11% of these disclosures are verified by an independent party, and only 25% of companies actually disclosed how they made those calculations.

CAER chief executive officer Duncan Paterson said the difference between the rhetoric of companies on climate change and what they were actually doing was a big concern for investors. "There is clearly a gap," Mr Paterson said. He said Australian companies were more exposed to climate change overall because of the size of the country's resources sector. "These are the companies that tend to have a high climate change impact and are more exposed because of the high amount of energy that goes into the production and refining of metals."

The ethics report follows the release of the Federal Government's green paper last month, which confirmed that the Government would meet extra costs passed on to low-income earners and that some of the hardest-hit industries, such as aluminium and cement, would receive a specified amount of free permits. Australia's Climate Change Minister, Penny Wong, has said that the status quo is no option.

The Citigroup report warns that investors will have to wait until there is more detail on specific emissions caps and permit allocations. "We think the devil is in the detail in terms of actual permit distribution, and thus financial impact on individual companies," Citigroup analyst Elaine Prior said.