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January 12, 2011
Smaller Companies Lagging in Climate Change Reporting
    by Robert Kropp

A report by Pax World and Clean Air-Cool Planet finds that only four of the Russell 2000 small- to mid-cap companies studied report their greenhouse gas emissions.


According to the Carbon Disclosure Project's (CDP) 2010 S&P 500 Report, disclosure of greenhouse gas (GHG) emissions by S&P 500 companies increased to 59% in 2010, and 54% of companies now include emissions data in their annual corporate reports.

However, a new report, entitled
Risk and Opportunity in a Low-carbon Business Climate: Small & Mid-Caps & Climate Change, demonstrates just how far small- and mid-cap companies have yet to go in preparing for the transition to a low-carbon economy.

The report, authored by Helen Mou, a Sustainability Intern at
Pax World Management and a Climate Fellow at Clean Air-Cool Planet (CA-CP), examines the disclosure of climate-related risks and opportunities by 364 companies representing the top 50% of market capitalization among the Russell 2000 index of small- to mid-cap companies.

The findings of the report are sobering. Although 56 of the 364 companies studied published sustainability or corporate social responsibility (CSR) reports, "Only 39 recognized climate change (10.7 percent) at all, while only four of 364 companies reported their greenhouse gas emissions," the report found.

The four companies that reported their GHG emissions are Jet Blue, Otter Tail, Green Mountain Coffee Roasters, and Timberland.

Since late 2009, the US Environmental Protection Agency (EPA) has finalized a rule mandating the reporting of GHG emissions by approximately 10,000 facilities that account for 85% of total US emissions, and the Securities and Exchange Commission (SEC) issued guidance on disclosure of climate change risks and opportunities at publicly traded companies.

Julie Gorte, Senior Vice President for Sustainable Investing at Pax World, told SocialFunds.com, "Every small-cap company wants to become big. You'll want to be ready for the requirements, in the happy event that you're successful."

Furthermore, "If the US ever gets out of the feeling of being economically precarious and gets serious about regulating greenhouse gas emissions, as most of the rest of the developed world already is, the results of the report will be even more sobering," Gorte continued.

Asked about the reasons for such a lag in emissions reporting by small- and mid-cap companies, Gorte said, "It's always been the case that small and mid-cap companies tend to report less on sustainability programs and initiatives. They should be doing better, especially since many of them are going to have to start reporting on emissions anyway. More and more large-cap companies are requiring their suppliers to do more on sustainability."

"Investors have tended not to ask them to report," she continued. "Most of the big disclosure initiatives—the CDP, the
Global Reporting Initiative (GRI)—have done a lot of outreach to large companies, but smaller companies have not heard as much from their investors and the financial analysts who follow them."

Not surprisingly, "The four sectors that generally have the greatest impact on the environment and climate change – utilities, materials, energy, and industrials – ranked highest for overall disclosure," the report found. "The financials, information technology, and healthcare sectors rank in the bottom three, with healthcare consistently at the bottom."

Given the likelihood that Congress will ignore climate science and once again fail to consider meaningful climate change legislation, "Domestic possibilities for binding regulation of greenhouse gas emissions in the United States is currently difficult to predict," according to the report. However, as the report details, regulation is far from the only risk faced by companies that fail to prepare for a low-carbon economy.

"Physical risks will occur whether the United States ever passes legislation regulating emissions," the report warns. Competitive and reputational risks exist as well. Furthermore, opportunities will present for those companies that distinguish themselves as leaders on climate change issues.

One recommendation of the report advises industry trade groups to develop reporting guidelines for smaller companies.

"Industry associations can be very helpful," Gorte said. "The
Extractive Industries Transparency Initiative (EITI) and the Sustainable Forestry Initiative (SFI) are examples of initiatives that industry associations have come up with to help their members come up to speed on sustainability issues."

"Even though the national Chamber of Commerce has been vocally opposed to any regulations," Gorte continued, "The local chambers of commerce can often be quite helpful."

Gorte also noted that nonprofits such as
Ceres and CA-CP have been helpful in providing guidance for companies planning on taking their first steps toward sustainability reporting.

"Another thing that anyone can do is look at the CDP questionnaire, to see what kinds of things investors have asked companies for," Gorte said. "It gives you an idea of the risk factors involved, as well as the opportunities."

Asset managers and investment counselors should call attention to the absence of reporting by companies on climate risks, the report advised, in order to point out to them the investment advantages of reporting.

"On the analytical side, there is not as much vigilance about small-cap companies," Gorte observed. "But everybody, including the investment community, needs to wake up to the fact that regulatory isn't the only risk category."

Asked about the role of investors themselves, Gorte said, "We could do better in asking any company about sustainability."

 

 
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