due diligence – GHG Accounting

World’s Leading Investors Issue Guidelines for Company Action on Climate Change

At the Investor Summit on Climate Risk & Energy Solutions held at the United Nations in New York in January 2012, the world’s largest investors issued guidelines detailing their expectations of how companies should approach responding to climate change. The guidelines, entitled “Institutional Investors’ Expectations of Corporate Climate Risk Management”, provide a unified global investor voice on the issue for the first time in response to concerns about the impact of climate change on their investments.

Co-ordinated by three leading investor groups on climate change, the US-based Investor Network on Climate Risk (INCR), the European Institutional Investors Group on Climate Change (IIGCC) and the Investors Group on Climate Change (IGCC) in Australia and New Zealand, the document outlines seven steps investors expect companies to take to minimize the risks and maximize the opportunities presented by climate change and climate policy:

Governance. Clearly define board and senior management responsibilities and accountability processes for managing climate change risks and opportunities.
Strategy. Integrate the management of climate change risks and opportunities into the company’s business strategy.
Goals. Make commitments to mitigate climate change risks: define key performance metrics and set quantified and time-bound goals to improve energy efficiency and reduce greenhouse gas emissions in a cost-effective manner; and set goals to address vulnerabilities to climate change.
Implementation. Make a systematic review of cost-effective opportunities to improve energy efficiency, reduce emissions, utilize renewable energy and adapt to climate change impacts. Where relevant, integrate climate change considerations into research and development, product design, procurement and supply chains.
Emissions inventories. Prepare and report comprehensive inventories of greenhouse gas emissions; data should be presented to allow trends in performance to be assessed and it should include projections of likely changes in future emissions.
Disclosure. Disclose and integrate into annual reports and financial filings, the company’s view of and response to its material climate change risks and opportunities, including those arising from carbon regulations and physical climate change risks.
Public policy. Engage with public policy makers and other stakeholders in support of effective policy measures to mitigate climate change risks. Ensure there is board oversight and transparency about the company’s lobbying activity and political expenditures on this topic.

In addition, the guidelines set out steps that investors will take in the following areas: analysis, inquiry, monitoring, engagement, collaboration and public policy. By moving beyond disclosure and clearly outlining the areas in which investors expect to see companies take action, the guidelines provide a platform from which investors can monitor the performance of companies and engage with them to encourage positive steps on climate change. Investors are already taking action by monitoring alignment with their expectations through initiatives such as the Carbon Disclosure Project, and collaborating with companies through investor networks and the UN Principles for Responsible Investment. This group of investors considers the guidelines to be of particular importance to companies in carbon-intensive sectors, and those who have not have adopted carbon reduction targets or a systematic approach to managing climate change risks.

Study Finds that Lowering Levels of GHG Emissions can Increase a Company’s Stock Value

A recent study by researchers at the University of California (Davis and Berkeley) and the University of Otago in New Zealand entitled “The Relevance to Investors of Greenhouse Gas Emission Disclosure” has found that the amount of greenhouse gas (GHG) emissions a company produces and whether a company discloses their emission levels or not has a significant effect on the value of the company’s stock. In particular, the researchers found that the greater the GHG emissions, the lower the value of a company’s stock. Likewise, lower emission levels lead to higher stock values, all other factors being equal. Even if companies do not disclose this information, GHG emission levels are estimated by investors themselves, resulting in an even stronger risk discount to the stock value for high level emitters. This trend is particularly strong in energy intensive industry sectors. The study was led by Paul Griffin, a professor in the University of California, Davis Graduate School of Management.

Professor Griffin and his colleagues also discovered that markets respond almost immediately when a company releases information on their GHG emissions, with stock values responding the same day as the disclosure. “It really does appear to be a valuation factor,” Professor Griffin says. “Greenhouse gas emissions are important to investors in assessing companies.”

The findings bolster the arguments of investor groups, environmental advocates and watchdog organizations that have been seeking greater disclosure of company actions that affect climate change. The U.S. Securities and Exchange Commission (SEC) does not require all companies to report GHG emissions, but companies are required to disclose any information that is considered material to stock values. The findings of this study strongly suggest that GHG emissions data is relevant information to investors, therefore it could be argued that all public companies should disclose their GHG emissions to comply with SEC requirements. Approximately 50% of large U.S. firms report GHG emissions through the Carbon Disclosure Project.

The researchers analyzed four years of data (from 2006-2009) on firms listed in the Standard & Poor’s 500, and five years of data (2005-2009) for the top 200 publicly traded firms in Canada. While the researchers found the link between stock values and GHG emissions to hold true in most industries, the correlation was strongest for energy companies and utilities. According to Griffin, “after controlling for normal valuation factors like assets and earnings, we found the value of stocks to be a function of greenhouse gas emissions”.

Investors care about GHG emissions because markets are forward looking. Professor Griffin has indicated that in this case, investors are anticipating a time when companies will face increased costs for climate change mitigation, regulation and taxes.
The full study can be downloaded at Link.

Manitoba begins Consultation on Proposed GHG Legislation

The Manitoba government has launched a public consultation period to gather input on proposed cap-and-trade laws aimed at reducing greenhouse gas (GHG) emissions. The consultation is part of Manitoba’s commitment, announced in December 2009, to move forward on enabling legislation to create a cap-and-trade system.

In June 2007, Manitoba joined the Western Climate Initiative (WCI). It is expected that Manitoba’s system would integrate with the WCI, meaning that Manitoba will be able to participate in the WCI trading system with BC, Ontario, Québec, California as well as other several U.S. states. The WCI’s goal is to reduce GHG emissions in the region by 15% below 2005 levels by 2020.

In 2008, Manitboa’s GHG emissions was 21.9 megatonnes of carbon dioxide equivalent (CO2e) or approximately 3% of Canada’s total GHG emissions. Manitoba’s GHG emissions profile is unique among Canadian jurisdictions. Unlike other Canadian provinces whose GHG emissions come from a small number of large emitters, the majority of Manitoba’s GHG emissions come from many smaller emitters across a wide range of sectors.

Manitoba’s proposed cap-and-trade program would affect approximately 18 emitters that release more than 25,000 kilotonnes each of GHGs per year. Another group of about 36 emitters that each release 10,000 kilotonnes of CO2e per year or more (but less than 25,000 kiltonnes) would only be required to report their emissions.

According to data from Environment Canada, in 2008 the Koch Fertilizer plant in Brandon was the largest emitter in Manitoba, followed by Manitoba Hydro, Winnipeg’s Brady Road Landfill, TransCanada Pipelines and HudBay Minerals.

Comments on the proposed cap-and-trade program can be made online through the Manitoba Conservation Department website until March 15, 2011.

WCI Proposes Harmonised Reporting Requirements for Canadian WCI Members

On September 8, 2010, the Western Climate Initiative (WCI) released its proposal for revising and harmonising the existing Final Essential Requirements for Mandatory Reporting (the Essential Requirements) for use in Canadian jurisdictions. The proposal is entitled Harmonisation of Essential Requirements for Mandatory Reporting in Canadian Jurisdictions with the WCI Essential Requirements for Mandatory Reporting and the EPA Greenhouse Gas Reporting Program (the Harmonisation Document).

By way of background, on July 16, 2009, the WCI published the Essential Requirements for implementation by WCI Partner jurisdictions. On September 22, 2009, the U.S. Environmental Protection Agency (EPA) adopted its final Mandatory Reporting Rule (the EPA Rule) for greenhouse gas emissions. On May 28, 2010, the WCI invited stakeholder comment on its proposal to harmonise the Essential Requirements with the EPA Rule for use in a cap-and-trade program. In order to maintain consistency across all WCI jurisdictions, WCI members acknowledged that the WCI proposal to harmonise with the EPA Rule necessitated the development of revised Essential Requirements for use in Canadian provinces to ensure harmonised quantification methods throughout the U.S. and Canadian WCI jurisdictions. As a result, WCI members directed the WCI Reporting Committee to develop amended Canadian Essential Requirements that are themselves harmonised with the proposed WCI Essential Requirements for use in U.S. jurisdictions.

The following principles were applied in the harmonisation process:

1. A Canadian facility should apply the same functions, equations, sampling protocols and measurement criteria as U.S. facilities subject to the U.S. version of the harmonised Essential Requirements. This means that the harmonised Essential Requirements will achieve the same level of reporting accuracy for Canadian and U.S. facilities, but the U.S. version may require more data elements to be reported to harmonize with the EPA Rule.

2. The quantification methods included in the harmonised Essential Requirements must remain sufficiently reliable and accurate to be employed in a greenhouse gas (GHG) cap-and-trade program.

3.The WCI reporting system must remain suitable for use in Canadian jurisdictions. For example, it must allow reporting in metric as well as English units and must, where necessary, include Canada-specific emission factors.

4. The harmonised Essential Requirements should facilitate harmonisation with Canadian federal reporting. Some Canadian jurisdictions are working with Environment Canada to develop a one-window reporting tool for provincial and national GHG reporting requirements.

The WCI anticipates that Canadian WCI members will implement the harmonised Essential Requirements by adopting them into or through their reporting regulations. The WCI is also working on minor revisions to the general provisions of the Essential Requirements and the development of quantification methods for upstream oil and gas, natural gas transmission, distribution and storage, underground coal mine and magnesium production that are appropriate for use in Canadian member jurisdictions.

A stakeholder call to discuss the proposal will be hosted by the WCI during the week of September 20th. The Harmonisation Document is available through the WCI web site.

GHG Audit

Beyond the requirements of current and pending GHG reporting regulations, due diligence and financial evaluations of your business will increasingly need to consider the costs and risks associated with GHG emissions. As part of the process for preparing your risk management strategy or carbon neutrality strategy, GHG Accounting Services offers a comprehensive and cost effective GHG audit service that will help you develop and manage these strategies. The audit report prepared by our team of experts will identify the GHG emission characteristics of different branches or products and services of your business, evaluate potential costs and regulatory risks as well as identify cost and emissions reduction opportunities.