Initiatives such as the Carbon Disclosure Project highlight the growing concern about greenhouse gas emissions. Companies and pension fund investors should keep a close eye on this issue in preparation for future regulatory changes.

The Carbon Disclosure Project (CDP), an independent non-profit organization with a worldwide membership representing $41 trillion in assets under management, has launched its sixth annual questionnaire about greenhouse gas (GHG) emissions and remedial measures. On Feb. 1, 2008, the questionnaire was delivered to 2,800 companies around the world, with responses expected by May 31, 2008.

The CDP questionnaire supplements existing corporate disclosures concerning GHG emissions, looking at both direct and indirect carbon emissions. It also solicits increased disclosure on strategic responses to GHG emissions, including proposed technology innovations and associated costs.

In 2007, the annual questionnaire was directed at 2,400 of the largest publicly traded companies in the world by market capitalization, 200 of which are traded on the Toronto Stock Exchange. The Conference Board of Canada prepared a report on the 2007 Canadian results.

Overall, the quality of disclosure was mixed and generally weak. Since measurement of carbon emissions is largely voluntary, many companies either don’t measure emissions or reductions at all, or measure them according to alternative standards (i.e., standards other than those governed by the Corporate Accounting and Reporting Standard, published by the World Business Council for Sustainable Development and the World Resources Institute).

Some respondents indicated that they were unable to determine the potential impact of GHG emissions on their businesses because of the “…continued lack of certainty in federal and provincial GHG policies and regulations.” However, there are many reasons to compile and report a GHG inventory, such as managing GHG risks, identifying reduction opportunities, participating in voluntary GHG programs and publicizing positive results, complying with mandatory reporting programs and participating in GHG trading markets.

A number of pension funds have expressed interest in the responsible investment area in general and the GHG issue in particular. In the words of the British Columbia Investment Management Corporation, “if companies are aware of and responsive to the environmental and social impacts of their operations (i.e., manage these issues to at least industry/global business standards), they can reduce risk to long-term profitability. On the other hand, poor environmental and social policies can damage a company’s reputation and long-term financial performance.”

In adopting this view, pension funds are acting as long-term equity holders, increasingly aware of the need for—and inevitability of—constraints on GHG emissions. Companies that are prepared for the future regulation of GHG emissions will be better able to anticipate costs and plan for the implementation of emissions reductions. Conversely, companies that can’t measure their carbon emissions according to international standards may be hard-pressed to implement controls and reductions when they’re ultimately required to do so.

Evidence of the increased legal profile of the GHG emissions issue includes the U.S. Supreme Court decision to recognize carbon dioxide as a pollutant under the Clean Air Act, the appearance of GHG emissions as a factor in environmental approval applications (in favour of low-emission wind farms or against high-emission power plants) and lawsuits claiming damages for harms caused by GHG emissions. In Canada, there has also been a lawsuit seeking a court order to require the federal government to comply with the Kyoto Protocol—further proof that the GHG emissions issue is beginning to have a strong influence.

But since the current environment isn’t regulated, it’s unclear which direction future GHG emissions regulations in North America will take. As Finance Minister Jim Flaherty recently noted, the danger is that lack of a disclosure and regulatory structure at the national level will encourage a hodgepodge of local or provincial responses to the regulation of emissions. Not only will this approach be less effective, it also threatens to multiply regulatory requirements and increase compliance costs. A move toward effective national standards is critical to avoid inconsistent measurement and evaluation standards, and to minimize the inevitable impact of GHG constraints.

Murray Gold is a partner with Koskie Minsky LLP in Toronto.

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the February 2008 edition of BENEFITS CANADA magazine.