Law and the Environment : Environmental Lawyer & Attorney : Foley Hoag Law Firm : Boston, Washington D.C.

 In the Carbon Disclosure Project's 2011 analysis of the largest 500 companies, the Global 500, there is a very interesting statistical trend -- the companies who were the most strategically focused on accelerating low-carbon growth had returns from January 2005 to May 2011 that doubled the Global 500 as a whole, with returns totaling over 85%, compared to the 42.7% returns for the index.  Even more amazingly, the 13 companies that had been recognized by CDP for this strong focus for the last 3 years outperformed the Global 500 by over 60 percentage points over the same period.  Does monitoring and disclosing a company's carbon footprint and incorporating the risks and opportunities of climate change at executive levels actually lead to increased financial performance?  This report suggests there is a high correlation, at least. 

The report analyzes the responses the Global 500 companies submitted to a questionnaire that has CDP has sent on behalf of institutional investors every year since 2002.  Participation has increased each year -- up to 81% for 2011 -- as has the quality of the companies' answers and reporting, and the targets and goals that companies set for themselves.  This year's results show significant progress by all of the reporting companies in a few key areas, such as 74% of respondents setting greenhouse gas reduction targets, and 59% reporting a payback period of 3 years or less on their emission reduction activities. This year's survey also marked the first time that a majority (68%, up from 48% in 2010) of respondents have integrated carbon reduction efforts into the heart of their business strategies.

The set of 58 companies that doubled the returns of their peers were listed by CDP as part of the Carbon Disclosure Leadership Index (CDLI) (those that scored the highest on carbon emission measurement techniques and subsequent public disclosure) and Carbon Performance Leadership Index (CPLI) (those that fell within the top 10% of respondents when scored on strategic commitment to the business issues related to GHG emissions, energy use, and climate change).  There were 23 companies who made both lists.  Companies in Canada, Japan and the US were under-represented on these lists, compared to their peers in Australia, Germany, Italy, Switzerland and the U.K.  Surprisingly, given the regulatory focus it faces, the energy sector lags behind other sectors with the lowest proportion of companies setting targets (55%) and under-representation on both the CDLI and CPLI.

What did the CDLI and CPLI companies do differently?  As the report highlights, one notable difference between the companies named to the CDLI and those that were not is the practice of setting emissions reduction targets on which the company places significant emphasis -- 96% of the CDLI companies have emissions reduction targets, versus just 70% of the remaining companies.  Also significant seems to be whether the companies dedicated resources and time to identifying the new opportunities, investments and potential partnerships that a low-carbon economy could bring about -- the average score for the CDLI companies on this rubric is 88 (out of 100) compared to 54, across all respondents.  Similarly, all 29 of the CPLI companies have integrated their climate-related risks and opportunities into their business strategy, and used monetary incentives to encourage employees to meet carbon reduction goals.  The CPLI companies also universally submitted their emissions data for adequate verification -- something that only 37% of the remaining companies did, despite the importance of providing investors validated data.

Although the authors of the report argue that this data is a clear indicator that it makes good business sense to manage and reduce carbon emissions, correlation is not necessarily causation.  The companies who are better managing their carbon may just be better managed overall, leading to better performance.  Either way, the fast-rising number of Global 500 companies who are moving to capitalize on these opportunities highlights that more sustainable business models are, increasingly, simply the way business is done.

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Could carbon-intensive industries and businesses overlooking sustainability soon see their credit ratings fall as a result?   Perhaps. According to an article in yesterday’s Daily Environment Report, Standard & Poor’s (S&P) is working on ways to integrate the risks of greenhouse gases into its corporate credit ratings system. The move seems to be driven by factors such as tightening of the EU emissions trading scheme in its third phase, beginning in 2012, but might apply to US companies as well.  The article reports that S&P could include carbon in their credit rating analysis on a global scale, as early as the first half of 2011. 

As the article highlights, developing a methodology to consider emissions directly generated by a company, those indirectly associated with its activities (such as use of electricity, supply chain and employee travel), and the potential for carbon costs to passed through to consumers would be “fiendishly complex,” and the methodology that S&P adopts will have to go through a rigorous review before being put in place. 

One possible option to build from is the Carbon Disclosure Project’s (CDP) questionnaire, which is the only global greenhouse gas reporting system. In September, CDP released its 2010 report on the S&P 500 (as well as reports on many other groupings of the 4,700 companies they ask to complete their questionnaire). That report shows that in 2010, some 70% of the S&P 500 companies responded to the CDP questionnaire, detailing risks and rewards, such as how they plan to capitalize on commercial opportunities related to climate change, and 59% also disclosed their carbon emissions, at least in part.  The CDP reports also show, however, that these US companies are still behind their global peers.

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An update to a development we noted a few weeks ago --  as reported by Climate Wire today, at the national meeting of the National Association of Insurance Commissioners (NAIC) yesterday, regulatory officials from all 50 states, the District of Columbia and five U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands) unanimously voted in favor of rules requiring insurers to disclose the impacts of climate change on their business decisions. 

The mandatory survey's adoption comes shortly after Maplecroft, a British risk management firm, reported that, although third world countries are more likely to experience climate-related fatalities, the US ranks #1 in the study's list of nations facing financial climate risk, and averaged $18 billion annually in economic losses from natural disasters between 1980 and 2008. 

As insurance is regulated by each state independently, the climate risk rules must still be adopted by individual states in order to be enforced.  Nonetheless, given that all members voted in favor of the rules, adoption seems likely.   To ensure that the rules are applied evenly, the NAIC Climate Change Task Force plans to monitor states' actions and collect sample answers from insurers to see how the surveys are completed. 

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Strange as it sounds, the next industry group to take substantive action on climate change might just be insurers.  In Tuesday's key vote by the Climate Change and Global Warming Task Force of the National Association of Insurance Commissioners, 18 state insurance commissioners voted to approve rules requiring insurers to disclose the impacts of climate change on their business decisions. If the rules are approved by the full committee in March, and each state adopts them, reporting could begin as early as May 2010.

The survey approved by yesterday’s vote asks insurers to annually answer eight questions involving what the company is doing to measure and mitigate its own emissions, how it identifies climate risks in its portfolio, how emerging climate risks could affect coverage, whether the company has altered its investment strategies in light of climate change risks, and what the company is or could be doing to change the behavior of millions of Americans, and reduce our overall risk from climate change.  The survey is based on the Carbon Disclosure Project questionnaire, the tool through which over 1550 companies voluntarily reported their emissions in 2008.

The proposed survey is not without controversy. In December, the Task Force agreed to remove a requirement that would have mandated survey answers to be included in each company's annual financial statements, and made the questions more general to avoid requiring companies to disclose confidential competitive information.

The Task Force is also working on guidance to help insurers answer the questions, and examples of how insurers can change their procedures to reach climate change goals. One idea that has been mentioned is pay-as-you-drive insurance, a policy that could reduce car emissions by rewarding motorists for driving less.

The next step for the proposed survey is a final vote by the full association at the national meeting in March. The National Association of Insurance Commissioners is a voluntary organization of the insurance regulatory officials of all 50 states, the District of Columbia and five U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands).  As insurance is actually regulated by each state independently, there is no guarantee all states will adopt the survey. Nonetheless, it seems likely that at least some reporting requirements for insurers are on their way, and with them, probably other companies, too.

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