By Ed King
Climate change is an ever-increasing concern for business leaders despite a lack of effective policy direction at a national and international level.
The Carbon Disclosure Project’s (CDP) latest Global 500 report says a growing number of high-level executives are taking direct control of their business’s climate change strategy – in a response to concerns over the effects extreme weather could have on their resilience.
This year 81% of corporations from the Global 500 responded to the CDP questionnaire – with over a third admitting that the risks posed by climate change are seen as a ‘clear and present danger’.
RTCC spoke to CDP chief executive Paul Simpson before the release of the report.
In a wide ranging interview we discussed the role of Environmental Reporting in the UN climate process, the importance of communicating the opportunities from transparency and the potential for encouraging companies in India, China and Russia to disclose more information about their carbon footprints.
RTCC: Give us an idea of where we are with disclosure and reporting around the world?
Paul Simpson (PS): In the last 10 years we’ve seen great attraction in disclosure and reporting – at the CDP we’ve seen a 15 fold interest in number of co reporting on cc in last 10 years, 3600 of the largest last year. At government level it’s a patchwork – there are over 80 regulations around the world on carbon reporting.
It’s not harmonised and consistent and there was a move in Rio to get the UN process to drive sustainability reporting for companies – potentially making it mandatory – there wasn’t great progress and we see with clause 47 on sustainability reporting the UN process is saying they encourage it, they will assist with it, and we’ve since seen a few governments, Brazil, SA, Denmark say they are going to push forward mandatory sustainability reporting – but it’s not clear when that will happen.
RTCC: What countries and sectors most encourage you with regards to reporting?
PS: Those I just mentioned – the UK government in Rio announced it would mandate carbon emissions reporting for all UK listed companies on the LSE from 2013, and it’s the first country to ever do that, so that’s a real leadership position from the UK.
In terms of sectors – there’s a broad range involved, and within each sector you have some who are engaged and others who are trying not to do anything unless forced so there’s not one sector. The energy sector tends to be quite poor, I think they see themselves as only responding to regulation so that’s a sector that stands out as not leading.
RTCC: Is there more scope for stronger regulations forcing companies to report or do you think this is a policy that companies will adopt over time?
PS: I think we’ve seen the markets themselves moving towards this goal – here at the CDP we run a voluntary disclosure system – and we can get great traction. Thousands of companies are doing it because their investors want them to do it but we certainly think there is scope for more regulation – for two real reasons.
One is to create a level playing field for companies. There are some who are still not reporting and they won’t do so unless forced. So we need regulations to create a level playing field, which will probably be at a fairly low level of ambition
Secondly – investors and society need trusted data from companies . Therefore we need regulation to stipulate how companies should measure, what rules they should be using and that this information should be verified and assured, just like financial accounting. We think governments have a role, and it would be very efficient given that companies spread over national boundaries for some kind of UN process to drive a consistent approach to sustainability and climate change reporting globally.
RTCC: It’s often said at the global climate change talks that work has to start at the grassroots – that’s the companies and also individuals.Reporting is clearly a part of the process – but do you think enough is understood about this subject?
PS: I think that if you look at the majority of large multinational corporations they already understand what we are talking about – measuring and reporting is good for business. I think there are some companies in certain sectors in certain countries who really see this as an obstacle that they don’t want – they fear they may have not great results and they don’t want to announce that unless forced to.
I think there’s an unreasonable amount of fear on some boards and also a lack of understanding about sustainability in many company boards. The investors we work with at the CDP will say if a company is not reporting that’s indicative of the company’s management position on sustainability and therefore we think there is more risk…what’s holding companies back is that they seem to be scared about this – they haven’t implemented the right systems and processes, but it’s clear that companies who don’t do that face increased risk and may miss out on the opportunity from addressing sustainability issues.
RTCC: How do you communicate that to boards?
PS: I think one of the things we have been doing at the CDP is working with investors. So every year now we wrote to large companies on behalf of their investors – this year that was 650 investors with 78 trillion dollars of investment under management. They own a lot of shares in the companies. That’s the best way to communicate with boards – to say your shareholders are really interested in this.
Through the CDP supply chain programme we see big purchasing corporations like Walmart, Unilever, Dell and others asking their suppliers for this information. Again it shows that it’s part of doing and winning business.
Clearly in a financially constrained environment as we are now, business is keen on either saving costs or winning more business. And from our experience, by measuring and communicating on this they can do both.
RTCC: I have a pension – how worried should I be by reports that fund managers are ignoring the risks of climate change and placing the money I pay in every month into high-carbon investments…?
PS: I think unless your pension is invested in specific sustainability funds there is no doubt you will be investing in high carbon companies because most pension funds track markets, they invest in the indices of the FTSE all share or the MSCI All Country World Index (ACWI) and those represent what the markets are – and that will have a spectrum of low and high carbon companies.
High carbon companies have been making pretty high financial returns recently because of the supply and demand dynamics of the energy sector, so there’s no doubt that unless you have a specifically focused pension fund it will be invested in high-carbon.
I think there is a sleeping giant here – millions of people have significant investments that they are not thinking about how they are invested…also we need regulation for pension funds – there is some already, but when you get your pension fund in 30 years time do you want the most amount of money in an unsustainable world with 4-5 degrees warming, or do you want an optimal amount of money in a safe, sustainable world without dangerous climate change.
Clearly from my perspective it is the latter – I want to have a reasonable pension but I’d like to have that in a sustainable safe world, and I think pension fund trustees really need to be engaged by government, regulators and us as pension fund holders. If you write to pension fund trustees and ask them about this it can really help, to awake the sleeping giant of pension investments.
RTCC: Do you think that would make a difference?
PS: I think it would. I’ve spoken to pension fund trustees who have said ‘we’ve never had anyone ask us about climate change’. Most pension fund holders don’t even engage with their pension fund trustees who are legally responsible for looking after their pension. There is a great organisation called Fair Pensions which is working to help mobilise mass engagement of pension funds from individuals – so yes – managers have a fiduciary interest to invest in our best interests, and we need to engage with them and tell them what our best interests are.
RTCC: Given their long term outlook – are pensions a useful tool to communicate the issues and concerns over climate change and high-carbon lock-in?
PS: Sadly there’s no one silver bullet, but pension funds are the ultimate long-term investor – investing for 30-40 years. The board member of Cowpers – a Californian public employers retirement system – we asked him the length of his investment horizon…he said ‘in perpetuity, the state of California has no plans to shut down’.
That’s a fantastic answer, they are long term investors who manage significant assets, certainly over 30 Trillion dollars of pension fund assets, in about the 10 largest pension markets in the world, and therefore I think there is a real opportunity to drive pension fund investments into long-term, low carbon infrastructure, technology, research and development – because those returns, which may take longer to realise, will benefit us in later life – and ensure we have a more sustainable world.
RTCC: Back to business and reporting…what kind of efficiency savings could businesses that really embark on a stringent reporting programme make in the long term?
PS: Well – a lot of companies who have gone through this process with us have identified significant savings. Logica is a great example – the UK IT company – when measuring their emissions for the first time they found £10 million of energy efficiency savings just by measuring. They were not accurately focused on measuring their energy use and their emissions.
Walmart, the world’s largest retailer, when first responding to CDP thought the greatest source of emissions was from their trucking fleet, they own 1% of trucks on US roads. Actually they discovered the greatest source was from leaking refrigerants. They were happy about this because they could do something about the refrigerants much easier than taking the trucks off the road…so companies learn a lot about their business, there is real opportunities for cost savings – of the emissions reduction projects reported to CDP in 2011 from the 500 largest companies in the world more than 50% of those payback within 3 years. It makes business sense and it’s a win-win for profits and the environment.
RTCC: Have you found the economic crisis has affected the numbers of companies reporting…?
PS: We’ve been lucky…every year over the last 11 years more investors have been getting engaged and more companies are reporting. We see differences around the world, including the US (70% of the S&P companies report to CDP) even though we haven’t got much regulation in the climate, countries like China, Russia and India are more in the early phases and have a long way to go.
Others like Brazil and SA are showing 80% response rates from the largest indices in the country – so we see a mixed position from emerging markets but generally more and more companies realising every year that this is the future of business. If they want to be a successful business in the future they need to measure and they need to report.
RTCC: Let’s turn to the international climate process. A key debate concerns the transparency and level of emission reporting around the world. China, Russia and India are three countries at the UN talks who some accuse of being unwilling to help develop an effective ‘Measurable, Reportable, and Verifiable’ mechanism. What do you sense are the main blockages and obstacles in the way of creating a transparent MRV framework…?
PS: First thing – it takes time. A few years ago many of these countries were struggling to develop their economies – and an increasing realisation now is that they have to do that in a sustainable way. Certainly we have seen in China a massive change in terms of focus and awareness.
If they are going to have carbon trading schemes they need to have accurate measurements and data to inform such schemes….but to bring in the infrastructure, knowledge amongst some of the people takes time. There’s a lot that can be done on capacity building – we’re working with companies in China and India – but a lot more can be done.
In the intergovernmental process there is a natural tension between saying ‘I don’t want to reveal my information unless you do’ and ‘am I going to be punished if I reveal this’. My personal opinion is that because the US, which is very much the world’s largest economy and emitter until recently, hasn’t shown the leadership – that has slowed down the leadership that China, Russia and others might take…and if only the US would take a greater leadership position I think others would move faster.
To be honest I think China has a bigger leadership position on climate than the US, it realises that it has to change – the current growth of its economy is unsustainable and therefore the only way they will have a successful economy in the future is to decarbonise.
How we get these countries to measure and share this data under the international process will be more challenging but I think finding incentives – as is being constructed under NAMAs (Nationally Appropriate Mitigation Actions) and the Green Climate Fund (GCF), where if you provide addition information you may get extra access to funding or other projects, that’s really great. We saw that with the Clean Development Mechanism (CDM), because countries could measure and report and generate CERs (Certified Emission Reductions) they could sell those CERs on the global market and could really create a lot of capacity in those countries.
RTCC: What are your hopes for the Green Climate Fund?
PS: Firstly – if and when we get the $100 billion it needs to focus on leveraging private sector investment. It sounds like a lot but it’s nowhere near enough for what we need…so I’d really like to see it work with the private sector and understand how they can share risk and also potential gains.
Can they underwrite projects, could they use mechanisms from the CDM to help accelerate the GCF. We’re all concerned that it may take many years to get off the ground, and if it used existing infrastructure and knowledge from the CDM and Joint Implementation systems then we could see it rapidly accelerating.
RTCC: And how can the idea that this is all an opportunity be conveyed on the international level?
PS: Well – it’s pretty clear that if we adopted all currently available technologies we could reduce emissions by a third and still have the same economies…so that’s just by changing technology. The opportunity globally is huge.
In terms of reporting information, climate change is a global challenge, one tonne has the same global warming potential anywhere in the world…so we need to accept that we are only going to protect our own countries by addressing this at the global scale. That needs better information – so if everyone contributes in an accurate and open way as an international govt process and society will come up with the answers much quicker.
As Bill Clinton said at one of our events, the international community has to keep score on climate change.