Last Updated: 11:28pm GMT 04/11/2006
Robert Watts assesses which big companies would face the highest taxes over CO2 emissions
The message from the Government could not be clearer. Last week’s seismic report on the economics of climate change by Sir Nicholas Stern has paved the way for a range of new taxes on the businesses that pour millions of tonnes of carbon dioxide into the atmosphere.
No longer will the amount of CO2 big companies produce come at a cost just to the environment. It is becoming increasingly clear that there will be a heavy cost to profits and share prices. The burning question is which companies will be hit the hardest.
Investors want answers. So The Sunday Telegraph this week commissioned Trucost, the market leading environmental research house, to find out which of Britain’s biggest publicly quoted companies would have the greatest exposure to new taxes on carbon.
The findings, published in the above table, lay bare for the first time the enormous cost facing many of Britain’s biggest companies.
As one would expect, oil, energy and utility companies feature prominently in Trucost’s top 20. International Power, British Energy, Shell, Scottish & Southern, Drax, BP and Scottish Power make the top 10.
And it is also not surprising to see the high placing of the steel giant Corus Group or British Airways, also located in sectors where one would expect to see high production of CO2 emissions. However, more surprising is the prominence of the building company Hanson, which generates high levels of emissions as one of the world’s biggest manufacturers of bricks and cement.
The high placing of the food groups, Tate & Lyle and Associated British Foods may also raise eyebrows — particularly as they have a good case to make that fields planted with sugar beet or sugar cane help offset carbon emissions from the energy-intensive refining process. The travel and leisure giants Carnival and Compass Group also make the top 20.
Trucost’s data does not claim to be empirical. Where the company concerned has not disclosed its CO2 emissions, Trucost has calculated the emissions based on the average emissions in the sector and the company’s turnover.
But the figures are the fairest reflection possible of the enormous carbon liabilities Britain’s biggest companies are facing.
“A company’s CO2 emissions are now a serious liability on its books, and can be compared with its other liabilities, such as its pension black hole” says Dr Richard Mattison, managing director of Trucost.
“Companies are coming under increasing investor demands to provide clear transparent emissions data — and the Stern Report only increases pressure on them to do so.”
More than 220 of the world’s most powerful shareholders, who together manage assets worth $31 trillion (£16.2 trillion), have signed up to Trucost’s Carbon Disclosure Project. This initiative, whose backers include Aberdeen Asset Management, Close Brothers, Gartmore, Henderson, HSBC, Jupiter, Merrill Lynch, Schroders and Standard Life, aims to make big companies come clean about their emissions.
So seriously is F&C Investment taking the Stern Report that it has hired one of the economist’s team. Victoria Bakshi, a former Treasury official, is soon to start as an associate director in F&C’s Socially Responsible Investment team.
However, the big problem for the investment community is that most companies simply do not want to disclose their carbon emissions.
Companies that did not respond to the latest report include Alliance Unichem, Carphone Warehouse, Dana Petroleum, John Laing, Kesa Electrical, Kier Group, Matalan, Mytravel, Pilkington, Rentokil Initial and Woolworths. Some companies claim that emissions data is “market sensitive” information that would be valuable to their competitors.
The benchmark reporting which investors would like to see disclosed is the so-called GHG figure. Simply put, this measures the total greenhouse emissions produced by a company in a year.
In the 2006 edition of the Carbon Disclosure Project, just 24 of the FTSE100 produced a GHG figure. The quality of reporting is even worse in smaller listed companies. Just 10 per cent of the FTSE350 revealed the all-important GHG figure in this year’s CDP report.
More sneakily, Trucost believes that some companies deliberately report their CO2 emissions in a way which ensures that the investment community cannot compare its carbon liability with that of other companies.
“One practice is to report the amount of CO2 generated per employee, but then not list how many employees the company has,” says Mattison.
Such horseplay does not go down well with the investment community, especially now the chancellor, Gordon Brown, seems unlikely to face any political opposition to increasing green taxes after the next general election — or perhaps before.
“Investors need much greater transparency,” says Karina Litvack, head of governance and socially responsible investment at F&C Investments. “And that is only going to become more important now it appears that we are moving to a world of higher tax and higher regulation over carbon emissions.”
Many companies are already paying a heavy price for their carbon emissions through the European Commission’s Emissions Trading Scheme, which was created to help Europe comply with its obligations under the 1997 Kyoto Treaty.
Under the scheme each factory, generator or other such installation over a certain size has a cap on how much CO2 it can produce in a year. If an installation produces more than its quota of CO2, the company which owns the installation must buy more CO2 credits from another company that has not exceeded its quota.
The implementation of the scheme has come in for strong criticism. The biggest problem has been that the quotas are set by the member state’s government. In many cases, the quotas were too large and some companies have been able to profit from the scheme by selling off their credits.
Some companies, however, have suffered under the scheme. Trucost has estimated that Scottish & Southern, the energy company, had to spend around 9 per cent of its pre-tax profits on buying carbon credits from its rivals last year.
“There is a huge awareness of climate change by fund managers, but it has not really manifested itself in asset prices yet – and one of the reasons for that is the level of disclosure,” says Nick Robins, head of social responsible investments at Henderson Global Investors.
But it’s not just the publication of one number that leading fund managers want to see. “We want to see the climate change issue moved into the main body of the report and accounts, not just bundled in with corporate and social responsibility. We want more information on strategy: how the company’s management is looking to lower its CO2 emissions in the future.”
Litvack for instance is particularly impressed by the way BP has pledged to lower its total CO2 emissions in the years ahead – even though its production is expected to rise.
But there is an even greater dimension to all this. The figures in Trucost’s research only take account of the operations of the companies and their suppliers. The research does not include emissions generated by products and services sold by these companies. For example, it does not include CO2 created by cars burning petrol sold by BP and Shell.
There are good reasons for omitting a business’s produce from the research. After all, if such fuel were to be used by another company – an airline or a logistics company for instance – this would lead to double counting.
Second, there is no way of knowing whether the fuel would be used in an energy-efficient engine or one that generated a disproportionate amount of CO2.
However, despite these limitations Robins calculates that companies listed on the London Stock Exchange and the goods and services they sell are together responsible for 15 per cent of the world’s CO2 emissions.
“That 15 per cent includes all the CO2 generated by burning everything produced by British Coal and all the fuel created by FTSE oil companies,” says Robins. “So it’s essential not just for these companies and their investors that they address their CO2 liability. It’s crucial for the world.”