Wednesday, 3 June 2009

Carbon risks and opportunities

In what looks like a fascinating report (I've only skimmed through it so far), environmental data company Trucost has assessed the global carbon exposure of companies listed in the S&P 500 Index. The report was commissioned by the Investor Responsibility Research Center Institute (IRRCi), a not-for-profit organisation focusing on where corporate responsibility and the informational needs of investors meet.

The full report is here, but there were some aspects that jumped out from the management summary:

Exposure to carbon costs:

- If a market price of $28.241 (which TruCost estimates to be the likely cost in 2012) were applied to each ton of CO2-e emitted by companies in the S&P 500 and their first-tier suppliers, carbon costs would total over $92.8 billion. This equates to over 1% of revenue from the companies in 2007, and over 5.5% of combined EBITDA.

- At that price, average carbon costs would amount to between 1% and 12% of revenue in the Utilities, Basic Resources, Food & Beverage, Chemicals and Oil & Gas sectors.

- Financial risk from carbon costs is greatest in t
he Utilities
sector, where EBITDA at a company level could fall by 2% to 117%.

- Exposure to carbon costs varies significantly across companies in the Index. Carbon costs would amount to less than 1% of EBITDA for 203 companies, while 71 companies could see earnings fall by 10% or more.

Corporate disclosure on greenhouse gas emissions:

- 66% of companies analysed do not publish adequate data on direct emissions from operations, and could therefore be unprepared for mandatory reporting requirements.

- 34% of S&P 500 companies disclose direct greenhouse gas emissions in line with the GHG Protocol, or provide data on resource use that can be used to derive emissions. These companies account for 92% of the total direct emissions from the S&P 500 as calculated by Trucost.

- The majority of companies in the carbon-intensive Utilities, Chemicals and Basic Resources sectors disclose direct operational emissions.

It does highlight the significant impact that carbon pricing is going to have, particularly on energy-intensive sectors. Pressure is building rapidly on companies to better manage emissions, which is where IT can help. IT companies in this sector will have plenty of opportunities to help their clients.

But it also highlights the lack of preparedness amongst major companies for the inevitable demands for them to count and report their carbon emissions. Even if legislation doesn't force them too, investors will. It's no surprise that the Carbon Emissions Management Software (CEMS) market is starting to take off. We'll be reporting on the market, players and products in much more detail in the near future.

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