Querying asset managers about their approach to climate change risk is definitely a reasonable action on behalf of clients, given the link to investment risk, says Nick Robins, head of SRI funds at Henderson Global Investors.
The question has been highlighted in a new research document published by Henderson, titled ‘The Carbon 100’.
Looking at FTSE 100 constituents the report has compared their carbon emissions against turnover, EBITDA (earnings before interest, tax, depreciation and amortisation) and market capitalisation. Henderson concludes not only that the UK’s biggest listed companies will definitely be affected, but that investors are still not able to get a full picture of the impact.
Finding common metrics in the first place is a key part of the research, Robins says, because without baseline measurements, it is not really possible to begin comparing the relative risk of different investments in context of climate change and emissions. Baseline measurements also provide a foundation for further research.
The Carbon 100 report states: “Just five sectors accounting for 29% of market capitalization generated 85% of direct carbon emissions: Oil & Gas, Electricity, Mining, Steel and Leisure. In addition, two-thirds of emissions are accounted for by five companies: Shell, BP, Scottish Power, Corus and BHP Billiton. The concentrated nature of emissions provides a focus for further investment analysis and shareholder engagement..”
Robins says it is too early yet to determine how this translates into, for example, specific impacts on yields or returns, which may be affected by the need to introduce new climate change-combating measures.
”We can’t say it will affect company X by so much,” Robins says.
However, also by way of example, Henderson’s report states by using the government’s own estimate of the marginal damage of a tonne of carbon, up to 12% of FTSE 100 EBITDA could be at risk. Some 26 companies have a ‘carbon exposure’ more than 10% of EBITDA, the report adds.
”The extent of this risk depends on the pace of Regulatory measures, the dynamics of market competition and reputational pressures to improve carbon management,” the report states.
Robins says IFAs should be taking climate change on board as a factor in their investment advice work.
”If there is one thing an IFA may want to think about it is asking the question ‘how do you as a fund manager manage climate risk in my portfolio?’”
Besides being a “reasonable” question to ask, any answers will also provide a good measure to any fund manager’s performance in light of general focus on corporate governance – of which the response to climate change is one part.
Investors should also be aware that companies will be forced to reply to climate change issues specifically through accounting and financial reporting requirements, Robinson says.
For example, companies engaged in the EU’s carbon trading scheme will be affected under FRS 10 rules on accounting for goodwill and intangible assets.
Climate change is predicted to affect fixed assets – such as factories hit by storms – something that will require reporting under FRS 11 ‘impairment of fixed assets’.
Robins says reviews of company law affecting the way financial reviews are presented have picked up on climate change, which is likely to result in adoption of measures to ensure there is some reference to this in future.
“The next year or so could see a lot of movement on this,” Robins says.
Investors, both private and institutional, are also taking steps to safeguard their interests, particularly in terms of the transparency issue. Organisations such as the US-based Investor Network on Climate Risk, and the global Carbon Disclosure Project are pushing companies to do more to give investors information about emissions and responses to climate change. These groups are pushing for such information in order to make better investment decisions.
The Carbon 100 research has found less than half the FTSE 100 constituents report their annual carbon emissions.
Henderson quotes Treasury estimates that 26,000 people were killed across Europe in the summer heatwave of 2003, costing “$13.5bn”, and notes the ABI has reported a doubling in flood and storm-related damaged in the 1998-2003 period against the previous five-year period.
Estimates of a 2.5 degrees centigrade increase in global temperatures this century could wipe 1.5% to 2% off future global GDP, according to Intergovernmental Panel on Climate Change statements quoted by Henderson.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
Data quality is key
Granted leave to appeal the judgement