WRI Publications Feed: ENVEST: Environmental Intelligence for Tomorrow's Markets

Accounting for Risk: Conceptualizing a Robust Greenhouse Gas Inventory for Financial Institutions

Camilo Ramirez — Fri, 28 Aug 2009 14:16:38 -0400

Report Contents

Executive Summary
The Business Case for Robust GHG Emissions Accounting
Primer on Corporate GHG Accounting
Applications for Financial Institutions
Scope of Products and Services
Calculating and Reporting Emissions, and Using the Inventory
Final Thoughts and Next Steps

Executive Summary

Compiling greenhouse gas (GHG) emissions inventories is no longer the province of only first-mover corporations: Approximately two-thirds of Fortune 500 companies now use the standards developed by the Greenhouse Gas Protocol — an initiative of the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) — to compile their GHG emissions inventories. While the standards set forth by the Greenhouse Gas Protocol Initiative are broadly applicable, the diverse, complex, and service-focused nature of financial services has triggered discussion about the appropriate application methods for financial institution users. Accordingly, financial institutions and their stakeholders are seeking additional clarification on developing and evaluating GHG inventories for financial institutions.

In response, this issue brief draws from the widely used WRI/WBCSD Greenhouse Gas Protocol’s Corporate Accounting and Reporting Standard, Revised Edition, to discuss objectives, options, and challenges for financial institutions and stakeholders to consider when creating and evaluating a GHG emissions inventory.

Approach

Because emissions related to investments and services may contribute to a significant portion of financial institutions’ GHG inventories and potential business risk, this brief discusses such options as

Using an equity share approach to capture emissions from relevant proprietary investments.
Reporting relevant indirect emissions (i.e., emissions that are a consequence of business activities but occur at sources owned or controlled by another entity) related to debt and equity investments and other products, services, and financial contracts.

Given the practical and conceptual complexity in creating an inventory that includes emissions from investments and services, we encourage financial institutions to keep the following business objectives in mind during the development process:

Demonstrating environmental stewardship to stakeholders (i.e. managing reputational risks).
Informing risk management practices for proprietary and managed investments (i.e., helping manage GHG risks in an institution’s own portfolio and fulfilling its fiduciary duty to its clients).

The inventory ultimately should facilitate positive environmental outcomes, namely, the reduction of GHG emissions, and serve a business imperative. To achieve these business and environmental objectives, setting GHG reduction targets as well as tracking and reporting on progress are critical.

Undisclosed Risk: Corporate Environmental and Social Reporting in Emerging Asia

Payson Schwin — Thu, 25 Jun 2009 09:13:16 -0400

In a world where the physical impacts of environmental degradation are already being felt, and most governments have embraced some form of regulation to mitigate further damage to the environment, environmental concerns are increasingly relevant to companies’ bottom lines. Companies will both impact and are dependent on the environment and current environmental trends will present companies with both risks and opportunities. In its report Emerging Risk, World Resources Institute (WRI) identified the critical trends that countries in emerging Asia face; trends that have a material financial impact on key sectors in the region (see Box).

At a Glance: Environmental Trends

Deforestation
Water Scarcity
Climate Change
Food Security
Energy Security
Air Pollution
Urbanization
Population Growth

Today, if and how companies manage trends such as climate change or water scarcity is of direct interest to investors. In fact, many investors and financial analysts regard a company’s performance on environmental and social aspects affecting their business as a proxy for good management.

In developed markets, company disclosure on environmental, social, and governance (ESG) performance on their website, in their annual report, or a separate corporate sustainability* report, is routine practice. In emerging markets, however, such reporting still lags behind.

Undisclosed Risk: Corporate Environmental and Social Reporting in Emerging Asia examines the current state of public corporate sustainability reporting in English by the ten largest companies in each of six Asian countries—India, Indonesia, Malaysia, Philippines, Thailand and Vietnam. This report does not cover corporate governance reporting and its drivers, although a national corporate governance code may have a positive influence on company transparency on environmental and social factors.

The companies examined include both multinational and national businesses, and cover sectors ranging from resource-based energy, mining, and oil and gas corporations to service sector banking, telecommunications, and transportation. The companies are ranked according to a four point criteria developed by WRI, which draw on guidelines from the Global Reporting Initiative1 and from the international consultancy SustainAbility’s Global Reporters work.2 To put the results in context, we also examine the regulatory and non-regulatory drivers in place in each country to encourage corporate disclosure on sustainability risks.

This study provides an investor perspective on corporate sustainability reporting in the six focus countries. It is intended for both foreign and local investors in key emerging Asian economies, as well as sector and equity analysts and researchers that cover the region.

Undisclosed Risk is part of a multi-report research project† between WRI and the International Finance Corporation (IFC) that studies the financial materiality of key environmental issues in India, Indonesia, Malaysia, Philippines, Thailand and Vietnam. The project seeks to help equity investors in emerging Asia to mitigate risks and take advantage of opportunities by directing capital toward environmentally sustainable listed companies.

Key Findings

Sustainability reporting in the six focus countries has improved in the past 5 years through the efforts of national governments, training and consulting organizations, national securities regulators, accounting professional associations and others.
Company disclosure in emerging Asia is typically focused on community giving and philanthropic activities. In general, such reporting is of more interest to stakeholder groups such as local communities and employees than to investors. We found most of the sustainability information disclosed to be of limited relevance to mainstream investors.
Indian companies examined in this study were ahead of the field, with the majority producing sustainability reports that we evaluated as average or above-average and somewhat relevant to investors. In contrast, the Vietnamese companies surveyed had the least progressive disclosure.
Companies with above average reporting are responding to external pressures, including pressure from stakeholders and parent companies, as well as reputation and supply chain concerns.
Each country, with the exception of Vietnam, has some form of regulations, codes, awards, support organizations, or market initiatives that encourage sustainability reporting. Malaysia is the most advanced in this respect.
Investors and equity analysts in emerging Asia often obtain pertinent information on sustainability risks through non-public informal channels. This practice likely gives some investors a competitive advantage. However, it does little to help tip the scale toward mainstreaming corporate sustainability reporting in the region.

Emerging Risks: Impacts of Key Environmental Trends in Emerging Asia

Payson Schwin — Thu, 25 Jun 2009 08:57:13 -0400

The health of the planet is becoming a significant issue for the financial and corporate world. Powerful global trends around the environment, sustainability, business, and investment have converged to a point that certain environmental issues have become material financial matters for publicly traded companies and their investors. Financial markets that are attuned to these trends are likely to create strong incentives for companies to improve their environmental performance.

The relevance of environmental sustainability to investment is not limited to London, New York, and Tokyo. Emerging markets have grown at an unprecedented rate in the last two decades as large institutional investors have increasingly looked to these markets as investment destinations.

Emerging Risk is an introduction to a series of sector reports on the financial materiality of key environmental trends in India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam. It forms part of a research collaboration between the World Resources Institute (WRI) and the International Finance Corporation (IFC) to give investors in emerging Asian countries the information and tools they need to link the materiality of issues such as climate change, air pollution, water scarcity, and deforestation to traditional financial analysis.

Emerging Risk sets the scene with an overview of the principal players, main stock exchanges, selective environmental trends affecting emerging Asian nations, and the impacts of the trends on critical sectors in the six focus countries. This report is intended for international and local investors as well as analysts, policymakers, and researchers who cover this region. It should be useful to any investor-related audience seeking to understand the business impact of environmental trends on publicly listed companies in emerging South and Southeast Asian countries.

Because this report addresses an investment-oriented audience with varying degrees of knowledge about environmental issues, we have framed the issues in terms of broad environmental themes or trends, reflecting those typically identified in reports by the World Bank, Asian Development Bank, and the like.

The six Asian economies on which we focus—India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam—all have rapidly growing industrial, commercial, and financial sectors, and all are susceptible to environmental risk. For example, all six are particularly vulnerable to the physical risks associated with climate change. The region’s rapid economic growth has fueled the world’s highest increases in the commercial and domestic demand for energy. In 2008, the six countries together contain approximately 1.6 billion people, or about 25 percent of the world population.

At a Glance: Environmental Trends and Risk Categories for Investors

Trends:

Deforestation
Water Scarcity
Climate Change
Food Security
Energy Security
Air Pollution
Urbanization
Population Growth

Risks:

Operational or physical
Regulatory and legal
Reputational
Market and product
Financing

The box to the right summarizes the main environmental trends we explore and the main types of risk they engender. Physical impacts are likely to be the most pronounced and can directly affect a company’s daily operations, for example disruption in production due to a lack of water or severe weather-related damage to company assets.

Our research shows that resource-dependent sectors—like forestry products, food and beverage, and oil and gas—which are important to these emerging Asian economies, are precisely those that will be affected by the physical impacts of environmental trends. The construction and real estate sectors also have become significant economic players and are highly dependent on the availability and cost of raw materials. The manufacturing sectors range from low value–added goods, such as textiles, to high value–added goods, such as software, and they often are highly resource (labor, energy, and water) intensive. India, Malaysia, and the Philippines have a thriving service sector, such as business process outsourcing, which is highly dependent on a skilled workforce.

To illustrate the environmental challenges facing companies operating in this region, we use three case studies: supply chain pressures on Staples, the office supplies giant; the effects of water scarcity in India on Coca-Cola’s manufacturing process; and the physical effects of flooding in Indonesia on sectors ranging from automobiles to telecommunications.

In the years ahead, investors and asset owners, particularly large institutional investors, will have a role to play in redirecting capital toward more environmentally sustainable economic activities, which can reduce investment risk and support the region’s long-term prosperity. This report is intended to help them take the first steps in that direction.

Watering Scarcity: Private Investment Opportunities in Agricultural Water Use Efficiency

Kelly McCarthy — Tue, 11 Nov 2008 17:37:41 -0500

In many regions around the world, demand for fresh water now outstrips renewable supplies. Water scarcity is projected to worsen considerably due to a combination of factors such as population increase, higher incomes and changing lifestyles, pollution, and climate change.

Agriculture is by far the biggest water user, accounting for more than 70% of global withdrawals. With booming industrial and domestic demands for water, especially in fast-growing emerging economies, the competition for finite water resources is intensifying.

Water scarcity and increasing competition present the agricultural sector with a huge challenge. Farmers are expected to meet the rapidly increasing demand for food, feed, fuel and fibre crops even though most land and water resources have already been committed. Consequently, crop water productivity must increase (‘more crop per drop’), partly through raising irrigation water-use efficiencies, either at the system or at the farm level. This is also an investment opportunity which, we believe, will attract the necessary private capital for at least three reasons.

Technologies to improve water use efficiencies are mature and are ready for large-scale adoption. These technologies include automated ‘on-demand’ irrigation, remote-sensing technology to manage soil moisture, low-pressure drip irrigation, as well as drought-resistant crop varieties.
Policies are starting to provide farmers and investors with the right incentives to invest in water-use efficiency. Water prices are rising to better reflect the value and delivery cost of irrigation water. Rights to water are formalised and can in some countries be traded from low to high-value uses. The private sector is engaging in providing expertise and capital as investment risks are shared. Farmers’ access to product markets and financial services is expanding. Consequently, water-use efficiency in irrigated agriculture is emerging as an opportunity for private investments.
Market signals seem to be favourable. Food and commodity prices reversed their long decline and farmers’ incomes have increased accordingly. Higher water, energy and fertiliser costs may encourage efficient irrigation technologies and practices. Some irrigation technology markets and specialised companies are reporting strong growth. Investors are increasingly aware of the opportunities in the water sector.

However, the current turbulence in the global financial markets (October 2008) may impact private investors’ decision making and their investment options which we cannot oversee at the time of writing. In practise this means that some of the conclusions drawn in this report may be affected although the general picture still holds.

Rattling Supply Chains: The Effect of Environmental Trends on Input Costs for the Fast-Moving Consumer Goods Industry

Kelly McCarthy — Mon, 10 Nov 2008 10:33:45 -0500

In recent years, the world has experienced a remarkable rise in the prices of vital commodities, including energy and agricultural products. For example, between 2006 and 2008, the average world price for oil rose by 110 percent, rice by 217 percent, wheat by 136 percent, maize by 125 percent, and soybeans by 107 percent. The resulting economic impact on firms, households, and entire economies has renewed attention to the scarcity of natural resources and the best way of managing them in the twenty-first century.

The world’s natural resources are under pressure, as approximately 60 percent of the benefits provided by natural ecosystems are being degraded or used unsustainably. As much as 20 percent of freshwater use exceeds the long-term sustainable supply, and between 15 and 35 percent of the withdrawal of water for irrigation is unsustainable, raising concerns about agricultural yields and costs. The current patterns of resource consumption are exemplified by the case of oil. North America and Europe consume more than 50 percent of this resource yet account for only 20 percent of the global population. At the same time, the growing populations of developing countries are realizing their desire for a better quality of life, which has led to increased consumption and thus greater demands on finite resources.

As global forces like changing demographics, growing environmental pressures, environmental regulation, and climate change interact to alter the future landscape of markets and industries, business leaders have recognized the need to understand their nature and magnitude. For large companies with global dimensions, this need for understanding is not limited to their direct operations but instead may rest primarily in their supply chains.

To illustrate the financial relevance of environmental issues, WRI and A.T. Kearney, Inc., collaborated to develop a future scenario of major environmental trends, including the physical impacts on the environment and the public policy response. We then determined the potential implications for a basket of commodity prices for energy and agricultural commodities, as well as the effects of those prices on the earnings of a representative set of companies in the fast-moving consumer goods (FMCG) sector.

Our scenario, which we named Ecoflation, shows a future in which policies and constraints on natural resources force firms to add to the cost of doing business the environmental costs previously borne by society. While this concept will inevitably increase costs in the near term, technological advances, efficiency gains, and reallocation of resources should ultimately lower costs to firms while reducing natural resource–related risks over the longer term.

Based on our scenario of more stringent climate change regulations, enhanced and enforceable forest policies, growing water scarcity in key agricultural regions, informed biofuel policies, and a greater consumer demand for green products, we estimated a reduction of 13 to 31 percent in earnings before interest and taxes (EBIT) by 2013 and 19 to 47 percent in 2018 for FMCG companies that do not develop strategies to mitigate the risks posed by environmental pressures. While we do not claim to be able to predict the future, and indeed our methodology has inherent limitations, our scenario is based on scientific knowledge and a sound understanding of policymaking. We believe that the magnitude of our estimated impact on earnings is not unrealistic for companies that do not act. Please see the accompanying technical document for further information about data sources and underlying assumptions of our methodology.

Even though the earnings at risk for our selected sample are significant, we believe that companies have the ability to independently and collaboratively find solutions and transform their operations to mitigate this risk and also to take advantage of growth opportunities. We suggest the following actions for companies in the FMCG and other industries to address the emerging environmental risks to their supply chains:

First, understand environmental impacts and dependencies by examining how cost drivers are exposed to emerging environmental trends and, when possible, seek substitutes with lower environmental impacts.
Take inventory of current environmental initiatives through the value chain to see what the company, its suppliers, and its partners already are doing.
Rank environmental issues and opportunities according to their current and future potential impact on costs, revenues, and reputation.
Chart a new course by embedding sustainability principles into an action plan, by including externalities in the decision-making process and establishing the principal performance indicators.

Winners will generally be those companies that anticipate the implications of a changing landscape, collaborate with suppliers and other stakeholders, and make environmental sustainability one of their business principles. Hedging strategies or shifting suppliers will not be enough. We believe that in order to adapt to these challenges, companies will need to implement real structural changes, such as product innovation and restructured value chains, which will affect both the companies and millions of existing and new consumers.

Carbon Value Analysis Tool (CVAT)

admin — Sun, 01 Jun 2008 00:00:00 -0400

The Carbon Value Analysis Tool (CVAT) is a screening tool to help companies integrate the value of carbon dioxide emissions reductions into energy-related investment decisions. The tool has two main purposes:

To test the sensitivity of a project’s internal rate of return (IRR) to “carbon value” (the value of GHG emissions reductions). CVAT integrates this value into traditional financial analysis by ascribing a market price, either actual or projected, to carbon emissions reductions.
To facilitate the development of emissions reduction strategies by developing a Marginal Abatement Cost Curve (MACC) across a portfolio of projects. CVAT ranks projects so managers can prioritize them according to their implicit cost per tonne of carbon emission reduction.

CVAT estimates direct and indirect emissions reductions using standards developed by the GHG Protocol Initiative. CVAT can also run a Monte Carlo analysis for key project variables such as carbon value, providing insights into the possible range of a project’s IRR.

To analyze a project, CVAT asks for four types of information:

basic project information,
some details about the project’s design and operation,
assumptions about future energy prices, and
foreign exchange rates (for projects denominated in currencies other than US dollars).

CVAT is designed for use by many types of professionals, including project managers, engineers and energy managers in large companies.

Capturing King Coal: Deploying Carbon Capture and Storage Systems in the U.S. at Scale

Hiranya Fernando — Tue, 20 May 2008 19:44:32 -0400

Coal is a key fuel source for current and future electric power generation. Coal becomes even more critical when cost of electricity and security of supply issues are viewed in light of other fuel sources such as gas or uranium. Yet coal combustion produces about 1.9 billion tons of CO2 per year in the U.S., roughly equivalent to all CO2 emissions from U.S. transport per year. The burning of coal, with more CO2 emissions per unit of energy produced than any other fossil fuel, has signiﬁcant adverse climate change impacts.

One way to reduce carbon emissions from coal-ﬁred power is to capture and store it permanently underground, a process called carbon capture and storage (CCS), also called carbon sequestration. CCS has captured the attention of policymakers, power generators, and environmentalists because of its potential as a bridging technology that will permit the continued use of coal as a fuel source while not contributing to a further destabilization of the climate. A great deal of work is underway to develop and improve the technologies, legal frameworks, and policies required for wide-scale deployment of CCS systems.

The main reason for this interest is that several major world economies, including the U.S., China, and India depend heavily on coal as an energy source. Alternative means of moving to a zero-carbon power mix, including wind or solar (which are dispersed and have variable output) and nuclear power (which raises difficult questions of security and waste disposal) require wrenching changes to our energy systems. CCS apparently offers the prospect of staving off climate disaster while maintaining something near the status quo. Coal can remain central to the energy mix, and CCS makes this possible.

But does it? There is in fact considerable complexity involved in deploying a national CCS system at the scale necessary to achieve significant emissions reductions. Indeed, it amounts to no less fundamental a transformation of the country’s energy infrastructure than would a huge-scale adoption of wind energy, for instance. This report examines the challenges of this transformation under the four broad categories of technology, policy, legal and regulatory framework, and investment, and their implications for CCS as part of the solution to mitigate adverse climate change impacts.

Watching Water: A Guide to Evaluating Corporate Risks in a Thirsty World

Piet Klop — Mon, 31 Mar 2008 00:00:00 -0400

A scarcity of clean, fresh water presents increasing risks to companies in many countries and many economic sectors. These risks are difficult for investors to assess, due both to poor information about the underlying supply conditions and to fragmentary or inadequate reporting by individual companies. As a result, market prices of securities are unlikely to accurately reflect the potential costs of water-related problems.

In this report, JPMorgan Global Environmental, Social, and Governance Research offers investors a framework for evaluating the impact of water scarcity and water pollution on individual sectors and companies. This is the first of a series of reports on transformational issues that we expect to offer investor clients and corporate managements over the course of 2008.

This report draws on the expertise of the World Resources Institute, which has helped us provide an overview of the issues from a global perspective. Then, with both our corporate and investor clients in mind, JPMorgan equity analysts from around the world lay out the water-related risks and opportunities they see facing companies in specific sectors. We provide criteria for examining these issues, which we hope will be of use to companies seeking to improve communication with investors about environmental issues as well as to investors themselves.

Here are the main points:

Exposure to water scarcity and pollution is not limited to onsite production processes, and may actually be greater in companies’ supply chains than in their own operations.
The power-generation, mining, semiconductor manufacturing, and food and beverage sectors are particularly exposed to waterrelated risks, in our view.
In our opinion, corporate disclosure of water-related risks is seriously inadequate and is typically included in environmental statements prepared for public relations purposes rather than in the regulatory filings on which most investors rely.
We recommend that investors assess the reliance of their portfolios on water resources and their vulnerability to problems of water availability and pollution.

We look forward to your comments on this report. We also welcome your ideas about other ways in which we may assist you in addressing environmental risks and opportunities affecting the securities markets.

Scaling Up: Global Technology Deployment to Stabilize Emissions

admin — Sun, 01 Apr 2007 00:00:00 -0400

Summary points

Climate change is not just an environmental challenge. It is becoming a defining fact of economic development.

A major obstacle to addressing the climate challenge is the daunting scale of potential solutions. In essence, reducing emissions to safe levels means transforming the way we produce and use energy, whether in power, transport, or heating and cooling, as well as many important industrial processes.

A number of options exist for reducing emissions by managing energy demand and employing low-carbon energy supplies that can make major contributions to clean economic growth. Yet three areas need to coalesce into a coherent vision in order to achieve adequate levels of emissions reductions:

The technologies involved, including the physical and capacity-related constraints to deploying them.
The investment required: who will provide it, the mechanisms they will use, and its cost.
The policies that will offer the most effective incentives to providers of both technology and capital to implement lower-emission solutions.

A paper by two Princeton researchers provided a mental framework to discuss these solutions by breaking the required emission reductions down into manageable (though still large) “wedges,” each provided by a different technology or set of technologies. Owing to its solution-oriented framework, the wedges approach has captured the imagination of those eager to tackle climate change.

This paper presents an overview, using the wedges framework, on how technology, investment and policy interact. It is intended to engage actors in the policy and investment communities as the key enablers of clean technology deployment worldwide.

Competitive Advantage on a Warming Planet

admin — Thu, 01 Mar 2007 00:00:00 -0500

How does climate change affect the corporate competitive landscape?

This article by WRI’s Jonathan Lash and Fred Wellington in the Harvard Business Review discusses the risks and opportunities.

View full article