Climate change still not key for capital markets

Climate change still not key for capital markets

Mumbai/New Delhi: When iGate Corp. filed to raise money from the US equity markets last week, it joined a minority of companies that included climate change among the standard risk factors in the offer document.

The information-technology company talked about environmental liabilities and risk, cited statistics such as greenhouse gas emissions per employee and carbon footprint studies in the document, which is aimed at educating investors on potential risks.

While, internationally, scientists agree that emissions of carbon dioxide, methane and such gases increase the earth’s temperature, there’s controversy over the effects and the consequences this will have on the planet.

Apart from regulations aimed at countering the effects of climate change, global conventions such as the Kyoto Protocol stipulate norms that need to be followed by the countries that sign up to them.

The second commitment period for emission reductions is currently under negotiation in Cancun, Mexico. The first commitment period began in 2008 and will end in 2012.

While nations have been debating this at the international level, companies and even regulators have not paid much attention to the issue until earlier this year.

In February, the US Securities and Exchange Commission (SEC) issued guidance specifying climate change-related disclosures that companies have to make in their financial filings in response to petitions by some institutional investors in the previous three years.

In a 29-page document, the US securities regulator outlined the necessity for such disclosures. It spoke about the impact of the changing regulatory landscape, the indirect effects of scientific and technological progress (change in demand due to greener alternatives) and the physical impact (such as water costs).

Still, it stopped short of making these mandatory and left them to the discretion of reporting firms.

Only about two in 10 of the companies that filed to raise money in the US over the past month talked about climate change in their offer documents. Mostly, they made generic statements and didn’t quantify the risk it poses to earnings.

Locally, too, such disclosures are not mandatory. They barely find a mention even in the prospectuses of companies such as Coal India Ltd, a firm that has direct links to climate change because it produces a fossil fuel.

Very few Indian firms publish carbon-related emissions data and emission management plans, environmental activists said. For many companies, climate change is still an alien concept and relegated to corporate social responsibility divisions, said Ashutosh Pandey, chief executive officer, carbon advisory business, Emergent Ventures International, a Delhi-based firm specializing in climate change and carbon advisory services.

“In the last one year, companies have started thinking about climate change but the issue has not reached the CXOs level. Many are doing carbon footprinting but not integrating sustainability into business strategy. Until that is done, we will not see change," said Pandey.

Anushree Sinha, environmental economist with the National Council of Applied Economic Research (NCAER), says that the biggest reason why businesses have little interest in doing anything is the long-term nature of climate change.

“The corporate sector is not looking beyond direct consequences in the short term but if they don’t address this, they are hampering their own prospects vis-à-vis productivity and consumers," she said.

To be sure, measuring climate risk and quantifying its impact on a business is difficult and inexact, with little by way of standard tools or language, besides the lack of precedent.

Three fund managers interviewed by Mint said they considered climate change too much of a long-term phenomenon to affect investment decisions. It applied mostly to the monsoon and the impact it has on demand for agriculture-related products.

“In the long run, disturbances due to climate change can be averaged over a period of time, because of which not much attention is paid to this," said Gopal Agrawal, who heads equity assets at Mirae Assets Global Investments (India) Pvt. Ltd.

“We are more bothered about this quarter’s monsoon and its impact on demand," said a fund manager with one of the larger Indian asset-management companies who wanted to remain unidentified. “We also don’t have any scientific tool to assess its impact."

Indian companies, as of now, are sellers of carbon credits but this accounts for a minuscule portion of revenue.

The future of the carbon market (for countries such as India and China) is also contingent on what kind of commitment the developed world will make to reduce emissions and how much of that they will source from developing countries, the quality and quantity of such credits etc.

The European Union, for instance, has restricted the number of such carbon credits they will buy from developing nations. Countries are negotiating the larger question of future reductions and more detailed issues of carbon credits at the ongoing Cancun climate meeting.