Corporations, investors and governments today are faced with a choice: to compete aggressively for finite resources, or to advance towards a low carbon economy that enables sustainable, profitable growth, whilst reducing reliance on increasingly scarce materials.
Last year, global energy-related carbon dioxide emissions reached a record high. The International Energy Agency’s estimates made for bleak reading but compounded the necessity to take bold and decisive action if we are to have any chance of limiting temperature increase to the 2°C level agreed by world leaders to protect against catastrophic climate change.
What’s more, rising energy demands are competing for a limited supply of fossil fuels. The competition for increasingly scarce natural resources is putting pressure on commodity prices and having a growing impact both socially and economically. It is clear that today, more than ever, we must build momentum to decouple economic growth from emissions.
Managing carbon emissions and protecting the business from climate change impacts is fundamental to achieving sustainable and strong shareholder returns. Earlier this year, the investment consultancy Mercer released a report concluding that the best way for institutional investors to manage portfolio risk associated with climate change may be to shift 40% of their portfolios into climate-sensitive assets with an emphasis on those that can adapt to a low carbon environment.
An important part of an investor’s strategy should be to engage with the companies in which they invest to encourage performance improvement. Carbon Action is a new initiative launched by CDP this year. It is driven by a leading group of investors to encourage their portfolio companies to reduce emissions by investing in emissions reduction activities with a satisfactory payback period. Carbon Action reflects a growing recognition that there is a huge range of carbon reduction activities that companies can undertake that have a very clear business case. It is therefore in the interests of all investors, and not just the more active owners of investments, to ensure these actions are taken.
As the management of carbon continues to move into companies’ core business strategies and mainstream investment thinking, demand for primary corporate climate change information grows around the world. As well as working on behalf of 551 institutional investors to gather relevant information from large corporations around the world, CDP is also working with global businesses and governments to strengthen the resilience and sustainability of their supply chains through the CDP Supply Chain program. CDP Cities has launched to help the world’s major cities reduce climate change risk and bolster economic growth, whilst CDP Water Disclosure is now in its second year of working with major global companies to improve water management. A key part of CDP’s strategy is to ensure the effective use of data collected. To assist with this companies are able to obtain tools that help them to measure, report and manage carbon more effectively, through CDP Reporter Services.
It is through partnerships that CDP can achieve the largest impact. We are delighted to be working again this year with PwC, our Global Advisor, as well as with Accenture, Microsoft, SAP and Bloomberg. These and our other partners around the world are integral to the acceleration of CDP’s mission.
Whilst we wait patiently for much needed global regulation, business must continue to forge ahead, innovate and seek out opportunities by doing more with less. The decisions that perpetuate a legitimate, low carbon and high growth economy will bring considerable value to those that have the foresight to make them. The information contained in this report and the companies’ responses assist in illuminating that path.
Carbon Disclosure Project
Commentary for the Carbon Disclosure Project: Douglas Flint, Group Chairman, HSBC Holdings plc
For HSBC, climate change is a cornerstone of our ongoing business strategy, and so it gives me great pleasure to introduce the 2011 Carbon Disclosure Report. The reporting framework that the CDP has pioneered over the past decade has helped us both as respondent and signatory to improve our understanding of the strategic risks and opportunities in this area.
In the past year, we have sought to support financially as well as through advocacy the huge business potential of low carbon growth. Our own research suggests that the low carbon energy market alone will triple in size by 2020 to US$2.2 trillion. We expect the fastest growth will take place in emerging economies. To take one example: China plans to expand the share of seven strategic industries – all with a low carbon dimension – from 3 to 15% of GDP by 2020. This is perhaps the clearest statement yet of the economic growth that could flow from a determined focus on resource efficiency, technological innovation and long-term investment.
For us, “climate business” starts with our clients, and financing lies at the heart of the solution. The technologies and business models needed to deliver clean energy, cut emissions and drive down inefficient resource use can often involve higher upfront capital costs, which are then more than repaid through much lower operating costs. Project finance and equity markets have long been involved in supplying capital to the climate economy. But the full range of capital market instruments will need to be deployed, including fixed income and bonds. To enable HSBC to address this opportunity at a strategic level, a Climate Business Council has been established, which is chaired by Stuart Gulliver, Group Chief Executive, and includes the heads of all our business lines. The Council has already uncovered new ways of enabling our clients to pursue profitable growth in this arena.
But climate change is also serving to intensify the commodity constraints facing the global economy. Food yields have already been hit by warming global temperatures. And the scale and intensity of extreme weather events over the past 12 months have reminded us of the vulnerability of economies and societies to natural hazards. The scientific evidence has also become ever clearer that climate change is increasing the probabilities of these extremes. As the world’s leading emerging markets bank, we are particularly alert to the vulnerability of Asia and Latin America to climate impacts, and our Group Risk, Operations and Sustainability teams are routinely investigating this as yet another stress that the bank needs to weather.
In an uncertain period with pressing concerns about the fate of the global economy, it would be easy - but foolish - to regard climate change as a luxury issue only to be addressed in the good times. Around the world, we are seeing encouraging signs that climate responsive business could drive an investment-led recovery. Governments are responding with new instruments to leverage private capital, such as the UK’s Green Investment Bank, which will start operations in 2012. It is at moments such as these that businesses with a long-term perspective can help shape the contours of the coming revival and thereby accelerate clean and profitable growth.
PwC commentary: Non-Financial Reporting Alan McGill, Partner, PwC
The 2011 responses to the CDP Global 500 Investor questionnaire clearly show that organizations are incorporating sustainability concepts into their business strategies. Corporations are acknowledging the business opportunities presented by a low carbon and sustainable growth environment, and are reporting on a broad range of initiatives to inform investors of their low carbon objectives.
Currently, profit remains the dominant measure of success in our economic system. Increasingly though, there is recognition that historic financial performance is unlikely to be sufficient for an assessment of the long term prospects of a business where the dynamic of wealth creation is changing. In response to this, the business community is disclosing significantly more non-financial information which underpins how value is and will be created. Disclosures include detailed plans for low carbon products and services, and employee incentives to reduce greenhouse gas emissions. This type of additional information gives a broader perspective on a company’s strategy and positioning and reflects a growing recognition that this type of information is important to stakeholders and the ability of a business to retain its long term license to operate.
This shift in thinking is occurring at a time when global reporting frameworks continue to place heavy emphasis on financial disclosure and performance. While financial systems were not designed to capture all of the nonfinancial inputs needed to reflect the contribution of business to society, there is a growing realization that a more progressive reporting model is needed. A few leading companies are beginning to experiment and challenge established boundaries of how performance is measured and reported.
These leading corporations are going so far as to rethink their business and reporting models, how they manage and drive sustainable, profitable growth and how they measure critical non-financial information. In turn, this shift in mindset appears to help corporations envision the future and build competitive advantage – enhancing their brand, influencing consumer behavior and supporting new product development. This is all being achieved in a manner which also helps redefines the business’ overall contribution to society. The examples in this report show how companies are forging ahead in these areas.
These innovations in business cry out for a new reporting model, one that recognizes the importance of non-financial issues such as carbon emissions and climate change. By its nature, regulatory reporting is slow to change but the speed of innovation inside many progressive companies suggests that the regulatory model will adapt more quickly than many believe. The opportunity for most companies is not to wait for regulation but to ensure that their internal reporting is moving forward and remaining ahead of the curve.