Business as usual is changing. Innovest, a strategic research group that
tracks corporate performance on factors excluded by traditional accounting, has
pulled the carbon thread out of the tangle of business activity and turned its
research into a business tool.
It finds that companies acting on the carbon factor consistently post better
results than their peers and that an analysis of how businesses manage it is a
good predictor of overall performance. Across the world, leaders on this issue
exceeded the financial performance of laggards by an annualised rate of return
of 3.06% for the period 2004-07.
Innovest’s findings entitled Carbon BetaTM and Equity Performance suggest
that managers ignore the carbon agenda at their peril. This is not just true in
the heavy emitting industries like mining and utilities, but across at least 30
sectors, the company says.
Penalties can be severe. In a notable case, mining company Xstrata listed on the
London Stock Exchange in 2002, but dropped out of the FTSE-100 a year later. The
listing details had failed to note the link between the company’s high exposure
to coal, which is an intense greenhouse gas emitter, and regulatory risks. Some
months after the IPO, the company was hit by a carbon tax in Japan and stocks
fell by around 8% to 10%.
“The trick is to choose high-performing companies in advance. Our study is,
inevitably, an ex post facto look at who did and didn’t outperform. Our study
suggests that, as an increasingly robust proxy for strategic management quality
in companies, carbon management is a good factor for investors to consider,”
asserts Innovest chief executive Matthew Kiernan.
That linkage exists, he suggests, because the risks and opportunities related
to climate change are rising. Risks are not confined to regulation, but also
include energy prices and market shifts while opportunities include new product
development. If the International Energy Agency’s predictions for 2030 are
correct, greenhouse gas emissions will have jumped 57% from 2005 levels by 2030
under its reference scenario.
Under its alternative scenario, global emissions will be 27% higher in 2030
than in 2005, and will stabilise by 2025. Both scenarios confirm the new agenda,
the first because scientific studies suggest higher temperatures will cause
greater damage. The intriguing question is at what point corporate action on
carbon emissions will become business as usual, as fully integrated into
management thinking as corporate governance or pensions funds.
Innovest’s research points to the fact that most businesses are still off the
rails on this issue, though this may be truer in the US. Xstrata’s blunder may
have happened nearly five years ago, but it could still happen today, at a time
when most carbon legislation has yet to hit home. Businesses in the same sector
are exposed to the risks to a different extent, says Kiernan, depending, for
example, on the countries where they operate. Individual sectors, meanwhile,
show different levels of sensitivities to the risks and opportunities.
The research, which goes beyond assessing disclosure levels, should be viewed as
a complement to conventional equity research, but it is also an attempt to
The company accepts that the reverse of its conclusion is not necessarily true –
in other words, some companies are still doing very well financially without
considering the eco-efficiency scenarios, but for how much longer? Most of these
issues are still externalised by companies and most London-based investment
banks take a qualitative view.
“Companies that are well run have more time and money to invest in this,“
says an analyst at JP Morgan who is not surprised by the findings and who does
consider these questions when rating companies. Others, though, view
sustainability as a public relations issue and the risk as reputational. But as
carbon costs become quantified through the cap-and-trade scheme in operation in
the European Union and around the corner after the US elections, the links with
financial performance will become more visible.
The Association of Chartered Certified Accountants says that the financial
valuation of emissions is likely to be the final outcome of the drive to improve
environmental transparency through better disclosure. That, in turn, will
influence strategic decisions and perhaps usher in the era of environmental
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