Companies and investors need to do more to deal with the risks arising from global warming

Around a third of the largest FTSE companies have not taken action to mitigate the risks associated with climate change, according to a new report.

EIRIS, a UK provider of research into corporate social, environmental and ethical performance, compared the responses to climate change of 300 of the largest FTSE companies. Although the general trend indicated that the majority of companies in the group had some kind of climate change policy, many of which contain emissions reduction targets, the report stated that much more needs to be done.

Through its impact on water scarcity, food production, energy supply and migration climate change could have a range of negative consequences for business.

Conflict arising from access to resources is one scenario outlined by Lloyd’s of London in another recent investigation. There is a possibility of water-induced conflict in some parts of the world, said Lloyd’s, possibly between Pakistan and India over access to diminishing water supplies in the Indus river basin. China, a country with a large population and declining water resources, could also come to blows with Russia, which has an excess of water and fertile land and a declining population.

Further, as the world overheats southern based populations could be forced to emigrate northwards. This could lead to increased competition and heightened tensions particularly in Europe, as people from Africa move north, and North America, as populations in Mexico migrate northwards.

“One area in which investors can encourage companies to take a more long term view of climate change risks is in relation to remuneration.

One of the best guesses at the potential economic costs of climate change came from the Stern Review, commissioned by the UK government. Lord Stern found that climate change could end up costing between 5% and 20% of global GDP per year. But Stern said it would only cost about 2% of global GDP to avoid.

The industries particularly in line to be affected by changes in global temperatures and the corresponding impacts are chemicals, construction, electricity, food, industrial metals, mining, and oil and gas.

That is why some companies are beginning to take action to try and limit their contribution to global warming and prepare to mitigate against its results. ‘The private sector needs to support research on climate change, and develop and promote new technologies both to mitigate and adapt to climate change,’ said Lloyd’s chief executive, Richard Ward.

Encouragingly, according to the EIRIS report, over 90% of the high impact sectors (those mentioned above) disclose their CO2 or greenhouse gas emissions data. While over half (55%) of the 300 companies surveyed have short terms targets on climate change. Overall only 12% of the companies analysed in the report had no commitment to climate change mitigation, and only one of the high impact companies had no such commitment.

However, most of the companies were not taking a long term approach and over a third had unmitigated climate related risks. ‘The lack of long-term strategies could be because companies are waiting to see how governments adopt regulations for emissions reductions,’ said Carlota Garcia-Manas, assistant head of research at EIRIS and the author of the report.

“Only 12% of the companies analysed in the report had no commitment to climate change mitigation.

One of the biggest problems is a lack of clarity and comparability of quantitative emissions data which decreases transparency and makes it hard for investors to make decisions over which companies are performing best, i.e. doing the most to mitigate against the impact of climate change. The Aldersgate Group and the Carbon Disclosure Project are two initiatives designed to provide guidance and improve companies’ greenhouse gas disclosure.

It is very important that investors have accurate and comparable information which they can use to make informed decisions about which companies are handling climate change risks and incurring the least negative impact, this will in turn drive improvements from the corporate sector and encourage them to address climate change.

One area in which investors can encourage companies to take a more long term view of climate change risks is in relation to remuneration. Only about 20% of companies incentivize management based on their attention to climate change risks, said the EIRIS report. Activist investors could encourage more companies to do this.

Given the importance of climate change and its likely impact on future long term financial performance, it is increasingly seen as investors duty to integrate consideration of climate change into their investment strategies, concluded the report.

See also: Negotiating emissions cuts