Market News

 October 04, 2006
Is Canadian business ready for climate change?

 Vancouver, Canada (GLOBE-Net) -- Climate change awareness has increased greatly concludes a report released last week by the Carbon Disclosure Project (CDP), a coalition of international investors with $31.4 million in assets. However, while most of the Canadian companies that responded to a recent CDP survey recognize the business strategy implications of climate change, most have not addressed the financial or strategic risks involved, and do not have emissions reduction plans in place. This raises the question of whether Canada's private sector is ready - or willing - to deal with climate change.

This year's survey marks the fourth year for the Carbon Disclosure Project (CDP4), and as evidenced by the increased participation of some of the world's leading investors, climate change is now an mainstream issue for the financial community. With the addition of AIG, Goldman Sachs, and other notables, signatories with more than $10 trillion in assets were added since last year's report.

Also added was a Canadian version. For last year's report, only 21 Canadian companies were surveyed. For the 2006 report, 280 publicly traded Canadian companies received a survey seeking responses to ten questions on greenhouse gas emissions, climate change risks and opportunities, adaptation and mitigation strategies, and climate change related technologies in use.

Canadian financial institutions participating as signatories to the CDP4 request included some of the country's largest banks, as well as mutual fund managers and public pension plans, representing more than $1 trillion in assets. Combined, the Canadian signatories own 13 percent of the market capitalization of the 280 firms that were questioned.

A lack of response

On the whole, this year's global CDP achieved its highest response rate ever, with 72 percent of the Financial Times top 500 companies (FT500) responding - up from 47 percent of the companies that responded in 2003. Of the 280 Canadian companies that were sent the questionnaire, only 72 companies provided information. Compared to countries such as Japan, Australia, Brazil, Germany and France, as well as the FT 500 and the S&P 500 indices, the Canadian response rate was the lowest. Fifty-eight percent of US companies answered the questions, compared to less than 30 percent of Canadian firms. However, response rates for the largest 100 Canadian companies were comparable with other jurisdictions, while mid-sized and small corporations were less forthcoming.

One-third of the companies in emissions-intensive sectors (oil and gas, energy utilities, industrial, etc.) responded, while more than 40 percent gave no response, reports the Conference Board of Canada, which analysed the Canadian submissions in its "Canada 280" report. Some firms that declined to participate are major greenhouse gas emitters.

A full list of Canadian firms questioned and copies of available responses can be found click here.

Awareness, but no Action

Of the Canadian firms that did respond, 77 percent indicated that climate change represented a matter of commercial risk, while sixty-three percent identified business opportunities related to climate change. Some firms expressly indicated that emissions management will be a competitive issue in the future and noted that firms with progressive policies in this area will have a competitive advantage, particularly in emissions-intensive sectors.

One-third of companies that responded did not address fully the CDP questions, or provided incomplete information, possibly indicating a lack of capacity to evaluate the business implications of climate change. The quality of reporting varied greatly, and many companies failed to report levels of emissions intensity (emissions per unit of output) as requested.

Most worrying however, was the fact that eighty-two percent of respondents did not address the financial significance of the impact of climate change, and long term strategic information was largely absent from the report.

In terms of planning, only 36 percent of responding companies indicated they had a greenhouse gas reduction plan, and only one-fifth had established formal reduction targets with timelines.

Of possible actions to take, energy efficiency was seen as a "no-regrets" initiative that could yield direct financial benefits while reducing emissions. Seventy-three percent of respondents said improving energy efficiency was a top business action for cutting greenhouse gas releases. Fifty-three per cent of respondents provided data on energy costs and most included commentary on their exposure to rising energy prices.

Most respondents have implemented emissions reducing technologies such as renewable energy, alternative fuels, coal gasification, or carbon capture. Eighty percent of companies in emissions-intensive sectors responded that such 'clean' technologies are part of their greenhouse gas management practices, compared with 58 percent of firms in low-emissions sectors. Almost half of all companies and more than sixty percent of emissions-intensive firms are monitoring developing carbon markets, while 19 percent of all firms and one-third of emissions-intensive firms are exploring credit trading.

Overall however, "There is a gap in all groups of companies between their awareness and the dedicated action plans they need to achieve GHG reductions. Without plans, targets and timelines, investors can't assess how companies are translating risk and opportunity awareness into sound management strategies," concludes the Conference Board report.

The full "Canada 280" report can be found on the Conference Board's website. The global report for CDP4 can be found at the Carbon Disclosure Project's website.

Regulatory uncertainty a key barrier

The changing regulatory landscape, and uncertainty over future climate change legislation, including emissions caps and carbon trading, was identified by survey responders as a key barrier against the implementation of long-term strategies to deal with climate change related risks and opportunities. One quarter of all firms, and 40 percent of those in emissions-intensive sectors said that uncertainty associated with the first phase of the Kyoto Protocol was a barrier to estimating emissions reduction costs.

However, Canadian companies should already have preliminary climate change strategies in place in anticipation of greenhouse gas emissions regulations. Under the previous government's 'Project Green', companies such as electric utilities, oil and gas firms, and other Large Final Emitters (LFEs) would likely now be preparing to reduce overall emissions by as much as 12 percent and participate in a domestic carbon trading market. Further, the current federal government has signalled that its environmental plan will include measures to reduce urban smog and greenhouse gas emissions.

Recent studies of corporate climate change strategies in Canada reveal a worrying level of inaction. A survey by Deloitte showed that while 80 percent of companies rank greenhouse gas emissions as a matter of 'moderate to critical importance', half do not include emissions in their overall risk management policy or strategy. Regulatory uncertainty was again cited as a major barrier in this area.

The Royal Bank of Canada has launched a $50 million Alternative Energy Fund, financing 26 wind farms in Europe and North America with a projected capacity of 1 gigawatt.

Suncor Energy was identified as a 'clear leader' in Management Discussion and Analysis (MD&A) of climate change in its annual reports, with extensive disclosures concerning the anticipated material impacts of Canada's Kyoto Protocol actions, including a compliance cost estimate of $0.20 and $0.27 per barrel of output that would not have a material impact on business.

The Canadian Institute for Chartered Accountants (CICA) has 'taken a leading approach' with the release of its discussion brief "MD&A Disclosure About the Financial Impact of Climate Change and Other Environmental Issues" last fall. The paper acknowledges the potential materiality of climate change issues and provides direction on how and where to include them in corporate financial reports.

Canadian cellulose ethanol pioneer Iogen Corp. was also noted for its receipt of a $30 million investment from Goldman Sachs, a sign that leading investment firms are embracing renewable energy and alternative fuels.

Other Canadian firms are also mentioned in the "Canada 280" report as providing significant strategic business analysis on climate change issues:

Alcan was noted for recognizing the life-cycle impacts of their products on GHG emissions, identifying savings from using lightweight aluminum in transportation and through recycling efforts.

EnCana noted that with its heavy weighting towards clean-burning natural gas, and its expertise in carbon dioxide sequestration through a project underway at its Weyburn oil field in Saskatchewan, it does not expect the costs of future government climate change plans to have a material impact on operations or growth plans.

Four major Canadian emitters (Emera, EPCOR, Suncor, and TransAlta) backed their conclusions on the materiality of climate change with financial data or gave background on financial scenarios that have been contemplated.
The need to adapt to the future

Through initiatives such as the CDP, global investors are signaling that they recognize the materiality of climate change, or 'carbon risk', and the implications it has on their investment decisions. Investors wish to protect their assets against uncertainty, and many are pushing companies to improve greenhouse gas management strategies and disclosure, with the implied suggestion that their investment resources may be reallocated if such actions are deemed insufficient.

With the federal government set to release its environmental plan, companies should be watching closely to see how any climate change announcements will impact their industry. The Clean Air Act is certain to include limits on smog forming pollutants such as sulphur dioxide and nitrous oxide, and will also likely include a strategy for greenhouse gas emissions. Whether the plan includes hard emissions caps or carbon trading remains to be seen, but those instruments are likely in the next decade if not now -- the United States Congress is seriously considering carbon legislation, though perhaps not until after the next federal election.

Even without domestic policies in place, Canadian companies are still able to participate in international carbon trading projects through the Kyoto Protocol. Finding emissions reductions strategies now will help to build capacity for more projects in the future, and can also yield significant cost savings. Counting greenhouse gas emissions as a key business indicator can help to reduce future risks, and also open the door to increased efficiency and best practices.

CDP4 also provides evidence that reducing greenhouse gas emissions will be less costly than expected. At a fixed marginal abatement cost of US $25 per tonne, many companies would be able to reduce their emissions in 2012 to 10 percent below 2005 levels at a cost of less than 1 percent of reported earnings, the CDP4 report notes.

Companies that are strategically prepared will come out on top when greenhouse gas regulations are adopted, reveals a model developed by CDP4 authors Innovest Strategic Value Advisors. The best positioned company would earn windfall revenues of $298 million or 10.6% of 2005 earnings, while the worst could lose 25 percent of earnings to regulatory compliance costs.

Initiatives such as the Carbon Disclosure Project underscore the scientific and economic evidence that shows the material financial impact that climate change will have in the coming decades. Through Canadian-legislated limits or international credit trading in a carbon constrained future, the private sector will increasingly be exposed to climate change-related risks and opportunities.

So far, the 2006 survey would seem to indicate that excluding a few leading firms, the Canadian private sector is unprepared to deal with the business issues associated with greenhouse gas emissions and climate change, despite acknowledging that risks and opportunities do exist. The sooner that companies embrace this emerging issue and adopt progressive strategies, the better they will be able to adapt to future changes.

Time will tell whether Canada's private sector will show the leadership needed to respond to the risks and opportunities of climate change. Leadership is also required from the federal government, and all eyes will be on Ottawa in the upcoming weeks as the new government of Prime Minister Harper responds to the hard hitting report of the Commissioner of the Environment and Sustainable Development which is highly critical of the previous government for its ineffective actions in dealing with climate change.