Regulation. That was the word of the day at the Canadian launch of the 5th annual Carbon Disclosure Project (CDP) report, which took place October 10th in Toronto. Each year, the CDP publishes the results of a voluntary survey tracking the emissions and climate change management strategies of public corporations worldwide. In Canada, the survey was sent to the 200 most valuable companies listed on the Toronto Stock Exchange.
Keynote speakers at the event were clear in their message. First, climate change is already having, and will continue to have, a significant impact on Canadian capital markets. Second, disclosure of climate change risk is necessary but not sufficient for reducing carbon emissions in Canada. Finally, emissions regulation must be implemented immediately in order to minimize investment risk.
Few dispute the reality of climate change, or that it will have an effect (positive or negative) on the earnings and financial performance of Canadian companies. Attention has turned to finding ways to reduce Canadian emissions, mitigate potential risks of climate change, and capitalize on new investment and business opportunities.
The Carbon Disclosure Project is a clear attempt by investors to gather information and analyze the potential effects of climate change. The CDP seeks to shed light on the climate change management strategies and greenhouse gas emissions of 2,400 companies globally, including 200 companies in Canada. Over 300 institutional investors have signed onto the project, representing approximately $41 trillion in global assets. Thirty of those investors are Canadian, and collectively they own 10% or more of 74 out of the 200 Canadian companies surveyed by the CDP in 2006.
The logic behind the CDP is simple: “what gets measured gets managed.” Transparency and disclosure is the first step towards improving performance. According to Paul Dickenson, Chief Executive of the CDP, 95% of corporations that report emissions have put emissions reduction strategies in place.
Speaking in Toronto at the CDP launch, Matthew Kiernan, CEO of Innovest Strategic Value Advisors, described his company’s analysis of stock performance. Innovest found that North American and European companies disclosing climate change emissions and management plans perform better than companies that do not–by approximately 3%. This evidence of financial outperformance should elicit a cheer from shareholders considering climate change in their investment decision-making.
However, while emissions disclosure allows investors to make better-informed investment decisions, the speakers argued that improved disclosure will not bring about emissions reductions on its own. The Canadian government’s ambiguous climate change plan has encouraged companies to take a ‘wait and see’ approach to climate change strategy. David Greenall from the Conference Board of Canada reported a decrease in the number of Canadian companies disclosing formal corporate emissions reduction targets in 2006 as compared with 2005, an unfortunate trend attributed to the uncertain regulatory environment in Canada.
Without clear emissions reductions mandated by government, early adopters risk being penalized for attempting to hit moving emissions targets. In effect, policy uncertainty rewards industry laggards. The solution espoused by Jeffrey Rubin of CIBC World Markets at the CDP event in Toronto is for the government to place a hard cap on emissions and allow the market to set the price of carbon. Intensity targets will not work, and regulation should be coupled with a concerted effort to reduce energy consumption and encourage technological innovation, he argued.
Rubin and other panelists at the CDP event join a growing constituency of Canadian economic decision makers, including the Canadian Council of Chief Executives, calling on the government of Canada to implement clear and decisive climate change regulation.