March 21, 2011
Increasingly, companies are publishing information about their greenhouse gas emissions, climate change initiatives, and sustainability strategies because they believe that doing so makes them more attractive to investors. This is the carrot.
A number of organizations promote voluntary sustainability disclosure and reporting, such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). The GRI provides guidelines for reporting, while the CDP compiles voluntary disclosures from over 2,500 companies, including 330 members of the U.S. S&P 500, in response to it’s annual questionnaire issued on behalf of hundreds of leading investors.
Some companies already incorporate information about their sustainability initiatives in their annual reports and Securities and Exchange Commission (SEC) filings. The latter has become a necessity for most, given that in February 2010 the SEC clarified that existing disclosure rules requiring companies to report on issues material to investors also cover climate change risks and opportunities. This is the stick.
Which, carrot or stick, does your company respond to?
Many companies still decline to disclose voluntarily or file with the SEC on the issue of climate change. The extent of non-compliance with the SEC requirements was recently highlighted in a report developed with input from Ceres’ Investor Network on Climate Risk, which outlines generally weak climate disclosure by businesses, and proposes steps for improving such disclosure, especially in the annual 10-K financial filings due by March 31, 2011. The Ceres report comes just after Mercer issued a new study warning that climate change could increase investment portfolio risk by 10 percent over the next 20 years.
Sustainability Roundtable EVP of Research, Michael Gresty, observes that “failure to disclose signals either that companies are unwilling to reveal poor performance that will present them in bad light, which is a red flag to investors, or that they have not assessed the risks and opportunities, which is an even bigger red flag. Since real estate assets are the main source of direct and indirect GHG emissions for most companies, and these correlate closely with their cost of energy, we see the sector leaders in our Sustainable Real Estate Roundtable working actively to measure and manage energy and GHG emissions, and to report on their portfolio-wide sustainability initiatives.” (See SRER report Portfolio-wide Sustainability Strategy for more information.)
A proactive response to voluntary (carrot) and SEC mandated (stick) disclosure requirements has created a competitive advantage for companies that develop and implement successful sustainability strategies.
To some companies the underlying driver behind sustainability initiatives is to reduce operating expenses by applying the principles of sustainability that include: improve energy efficiency; utilize better resource management and waste reduction; procure renewable energy sources; and, optimize space through alternative workplace environments that reduce the overall size and cost of the real estate portfolio — for many companies, the OPEX reduction is ‘carrot’ enough. But, as mainstream investors increasingly use broader environmental, social and governance (ESG) research to mitigate risk and seek alpha, those companies that fail to disclose raise doubts about what they may be hiding, and cede the terrain of transparency to their competitors.
