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August 02, 2007

Many Sustainability Reports Upbeat, Ignoring Climate Change Risks
    by Anne Moore Odell

A new study from GRI and KPMG on sustainability reports notes that companies highlight new business opportunities created by climate change and shy away from risks associated with climate change. -- In most countries, companies have no legal responsibility to issue sustainability reports that focus on the social, environmental, and governance ramifications of their business activities. However, more and more companies are responding to internal and external demands to create these reports with, for example, almost half of the S&P 100 corporations writing sustainability reports in 2006.

The Global Reporting Initiative (GRI), started in 2000 as non-profit organization that has created a sustainability reporting framework for businesses, published the third version of its Sustainability Reporting Guidelines in 2006. Now GRI has partnered with KPMG's Global Sustainability Services to study the information found in a sampling of sustainability reports from 50 companies that follow GRI's guidelines.

The newly released research, entitled "Reporting the Business Implications of Climate Change in Sustainability Reports" notes companies, more often than not, point to the positive outcomes of climate change with the creation of new business opportunities and avoid discussion of business risks related to climate change.

"Since sustainability reporting is still relatively young and (for the most part) completely optional, we shouldn't expect to see a lot of serious reporting on risks and liabilities in sustainability reports," said Dr. Julie Gorte, Senior Vice President for Sustainable Investing at PAX World, a provider of SRI mutual funds. "Only when there is a requirement to report this information, and a protocol governing it, would we begin to see serious reporting on risks by a majority of companies."

GRI-KPMG's report broke the sustainability reports down by five global regions: US and Canada, Europe, Japan Asia Pacific, and South America and Africa. The report observes that sustainability reporting is most often found in the energy and financial sectors. Japan stood out from other areas of the world, as all of the Japanese reports covered in the GRI-KPMG report mentioned climate change and often included a statement from their CEO or chair discussing climate change.

The report finds that 90% of surveyed reports include climate change. However, only 20% of the studies reports mention any risks to their businesses from climate change. This lack of information on risks is in spite of evidence from a number of sources, including the UK government's Stern Report on the Economics of Climate Change, that say that climate change has serious ramifications for the world's economy,

Carbon emissions trading and credits, the report concludes, are the most focused on as new businesses opportunities created by climate change. Other opportunities from climate change vary widely from sector to sector, and include hybrid cars to energy efficient detergents.

The risk that was mentioned in the reports most often is the increase of energy costs, with about 20% of sustainability reports mentioning rising energy bills. Very few companies mentioned the risk of increased legal action, such as the risk of class-action lawsuits with regard to climate change.

"Possibly because climate change impacts cannot, for the most part, be pinpointed in time the added difficulty of mentioning climate risk in a financial context is just overwhelming," Gorte told

"But I suspect there could be a somewhat more concerning reason behind companies' unwillingness to link current or past events (like dreadful hurricane seasons or Wagnerian weather) to climate might have something to do with their wishing to report all catastrophes below the line that separates the everyday from the unusual and extraordinary. If one admits that climate change is behind the recent flood/fire/drought/hurricane/whatever, then one might have to put such things above the line, because climate change will be with us for awhile," Gorte continued.

Interestingly, 14 out of the 50 reports mentioned climate change as a stakeholder issue, highlighting the importance of external pressure on companies to deal with climate change. One reason for awareness of stakeholders concerning climate changes, the report suggests, is because of the European Union's Emission Trading Scheme with European companies in the energy sector leading the way.

As this new report notes, as more regulations and laws on climate change are signed into effect, disclosure will also probably increase as well. Disclosure will also increase with GRI's newest guidelines that include the indicator, "Financial implications and other risks organization's activities due to climate change."

However, following GRI's guidelines in order does not a useful report make, Gorte said. "There are a lot of reports done by the numbers, or by methodically ticking off each GRI protocol in order. That's the bean-counter's way to go about it, and while beans should at times be counted, that's no substitute for strategic judgment," Gorte concluded.

Climate change is happening now, but its implications are not easily apparent or understandable using pre-climate change risk analysis models. At the same time, sustainability reports written solely on the opportunities created by climate change do not provide all the information investors need to make informed decisions.

Investors need to know what are the short, medium and long-term risks for a company regarding climate change. At very least, investors have to know that companies are working to better understand these risks and report on what these risks might be.

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