May 26, 2016
Understanding corporate climate risk
Mellony Spark – Analyst Associate
The World Economic Forum’s Global Risks Report 2016 lists climate change mitigation failure as the top risk facing companies today. So how do investors assess and compare individual company climate risk exposure and strategic resilience?
Leading global corporate environmental disclosure initiative, the Carbon Disclosure Project (CDP), recently expanded and evolved its rating metrics. Previously, only greenhouse gas emissions were scored. The CDP now assesses and rates a company’s full climate change risk exposure and strategic response. As a signatory to the CDP, Kagiso Asset Management attended a workshop for insights on the new methodology.
Risk now in focus
The new scorecard is tailored to incentivise action based on a company’s assessment of the risks, impacts and opportunities posed to a business by climate change. The extensive scorecard questionnaire awards merit for demonstrating commitment to quality disclosure (the first and essential step), awareness of how climate change affects the company’s operations, its risk management in response and leadership in addressing climate change. Scoring ranges from ‘A’ to ‘E’.
The leadership in addressing climate change issues category is a new introduction to the questionnaire. A company cannot be rated a leader in its sector without a clear process for identifying and managing company-specific climate change risks and opportunities as part of its stated risk management strategy. Companies rated as leaders get to join the CDP’s “A-List”; in 2015, only one South African company made it to the A-List (Investec Limited).
Science Based Targets
The new methodology introduces Science Based Targets in evaluating performance; a joint initiative by CDP, the UN Global Compact (UNGC), the World Resources Institute (WRI) and WWF. Targets are based on the total volume of carbon that can be emitted globally while providing a degree of certainty that global mean temperature increase can be limited to 2 ºC. This is known as the carbon budget and requires ambitious reductions from current emissions levels: the most recent IPCC Assessment Report predicts a 3.7ºC to 4.8ºC increase by the end of this century if we maintain the current global emissions trajectory. Science Based Targets limit a company’s greenhouse gas emissions to an allocation considered their fair share of the budget.
For South African companies, this may be well timed. With South Africa a signatory to the November 2015 COP21 agreement, and the Carbon Tax Bill tabled, companies can expect increasing pressure to set ambitious emission reduction targets. Science Based Targets provide clear guidance to companies in setting these targets while aligning with a fast-approaching national agenda.
The CDP initiative provides critical guidance to companies in navigating this changing terrain. As for investors, keeping track of who are the Leaders in a de-carbonising world could provide opportunities for identifying value. Pick ‘n Pay Holdings, Tiger Brands, Tongaat Hullett and Woolworths are the four South African listed companies to make the Science Based Target commitment, positioning them well for the regulatory changes on the horizon. The first three companies’ shares are all held within Kagiso Asset Management’s portfolios.