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August 11, 2009

Largest Companies in FTSE All World Index Show Improvement in Addressing Climate Change, but Room for Further Improvement Remains
    by Robert Kropp

Report by EIRIS compares 2009 performance of the 300 largest companies in the Index to that of 2008, and finds that while corporate commitment to mitigation has improved, unmitigated risk is still unacceptably high. -- Asking what investors should be doing about the unprecedented "projected impacts of climate change on the environment and society," a new report by EIRIS, a UK-based provider of research into the social, environmental and ethical performance of companies, compared the corporate responses to climate change of the 300 largest companies in the FTSE All World Index to its 2008 analysis.

The report, entitled Climate Change Compass: The road to Copenhagen, looks forward to what it describes as "the most important climate change-related meeting since 1997," to be held in December, 2009, in Copenhagen. If combined with stimulus packages and clear regulatory frameworks from governments, the meeting in Copenhagen offers opportunities for companies to develop low-carbon activities. spoke with Carlota Garcia-Manas, Assistant Head of Research at EIRIS and the author of the report, about its findings.

"In general, there's been a positive trend," said Garcia-Manas. "The majority of companies in the group now have some kind of climate change policies, many of which contain emissions reduction targets."

The report found that of the 300 companies analyzed, 55% have short-term targets on climate change, up from 48% in 2008. In addition, 91% of high and very high impact companies disclose absolute CO2 or greenhouse gas (GHG) emissions data. High impact sectors are defined by the report as chemicals, construction, electricity, food, industrial metals, mining, and oil and gas.

Other positive findings of the report include a significant decrease in the proportion of companies in high-impact sectors with no or limited responses to climate change, from 34% in 2008 to 19%. The number of companies in high-impact sectors with a corporate-wide commitment to climate change mitigation increased, from 84% in 2008 to 99%. Only one high-impact company of those analyzed in the report had no such commitment in 2009.

Overall, the proportion of companies with no or limited disclosure on climate change decreased to less than 12% in 2009, from 29.4% in 2008.

However, utilizing such key indicators as governance, strategy, disclosure, and performance, the report found that over a third of the 300 companies analyzed continue to carry unmitigated climate-related risks. Some high-impact sectors, such as industrial metals, food producers, and oil and gas producers, were found to have a greater proportion of companies with unmitigated risk when compared with 2008.

Garcia-Manas said, "While most company policies now contain some reference to short-term emissions reduction targets, when we look out five or ten years we don't see as much information. The lack of long-term strategies could be because companies are waiting to see how governments adopt regulations for emissions reductions."

While the report found that a "lack of clarity and comparability of quantitative data persists and can compromise investment decisions," it is not because of inadequate reporting initiatives that this is so, according to Garcia-Manas.

"The Carbon Disclosure Project (CDP) is an established initiative that provides guidance to companies for greenhouse gas emissions disclosure," she said.

Another of the key findings of the report is the necessity for investor engagement. According to the report, "Investors must understand the impact these issues will have on their portfolios and integrate climate change into their engagement strategies or when exercising voting rights."

Underscoring the importance of investors in encouraging companies to address climate change risks effectively, Garcia-Manas said, "The more companies are doing, the less risk investors are incurring. We suspect that investor activism has had an impact on companies addressing more of risk."

One important area in which investors and Boards of Directors can encourage companies in their portfolios to address climate change more effectively is in the area of remuneration. Only about 20% of companies incentivize management attention to climate risks, according to the report.

"Remuneration is one of the main issues," said Garcia-Manas. "Activist investors can engage with companies to ensure that management structures incentivize attention to climate risks."

Asked by if the report focused on regional differences among companies, Garcia-Manas said, "At the moment the only country assessment we have is a study of Asian companies, but we plan on issuing a report on North American companies this year."

Entitled Climate Change Tracker: Asia, that study, which was released in May, 2009, found that while initiatives on the part of Japanese companies was having a positive influence, opportunities for Asian companies to improve performance through increased levels of disclosure and engagement remain.

The new report concludes, "Given the importance of Climate Change and the likely impact of it on future long-term corporate financial performance it is increasingly seen as an investor’s fiduciary responsibility to integrate consideration of climate change into their investment strategy."

Garcia-Manas concluded, "The three pillars in improving reporting are the companies themselves, governments, and investors."

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