More companies factoring carbon price into business risk
Companies are increasingly taking into account the cost of carbon in their business plans, according to new research. CDP says that in just five years there has been an 80 percent increase in the number of companies using – or planning to use – an internal carbon price.
Of the nearly 6,000 companies surveyed on carbon pricing in 2020, more than 2,000 – representing more than $27 tn in market capitalization – disclose that they use an internal carbon price or plan to implement one within the next two years, says CDP, a non-profit that runs the world’s environmental disclosure system.
The research looks not just at how many companies factor carbon prices into their risk assessments, but also what price they put on carbon internally – and CDP says ‘it is clear that corporations need to up the carbon prices they are currently accounting for internally.’
It highlights the fact that prices have ‘soared’ to all-time highs in the EU emissions trading scheme this year, rising to more than €40 ($48) per metric ton of CO2e (CO2 equivalents), adding that there has also been an increased focus on carbon-pricing regulation: 64 carbon-pricing initiatives are in place or scheduled by governments and regulators, up from 61 in 2019. CDP notes that many companies use evolutionary prices that evolve over time.
Despite 1,830 companies telling CDP they face or expect regulation on the price of carbon, 60 percent of these (more than 1,100) do not identify it as a substantive risk to their business. CDP says this is concerning ‘as it shows a potential gap in climate risk data being provided to investors.’
Nicolette Bartlett, global director of climate change at CDP, tells Corporate Sister publication IR Magazine that although the increase in the number of companies using internal carbon pricing – or planning to do so in the near future – is encouraging, ‘it’s not enough.’
Bartlett also points to the finding that so many companies say they are facing, or already face, carbon-pricing regulation, yet they ‘do not highlight that as a potential risk in their risk disclosure. You would have thought that even if you’re managing that risk, it would still be a substantial enough one that you would tell your investors about it.’
Something else Bartlett says she finds ‘very surprising’ is that ‘in their risk analysis each year, between a quarter and a half of all the companies that disclose to us don’t see climate risk as substantive enough to report on.’
AN INDICATOR OF ESG SOPHISTICATION
CDP says its data demonstrates a correlation between companies setting an internal carbon price and taking other actions to reduce emissions, with a higher percentage of the companies that currently implement an internal carbon price also setting comprehensive emissions-reduction targets or using more renewable energy.
‘Carbon price is certainly an indicator of an increasing sophistication within a company’s ability to internalize the risk,’ comments Bartlett, adding that it appears to align with other climate-related focuses from the investor side. ‘Do you have a target to reduce emissions? Is it aligned with the Paris agreement? Is it science-based? Things like that are indicators of something more substantial.
‘The other [area of focus] is compensation plans. Do you have a plan you’re willing to put in front of your investors that shows how you’re going to achieve these targets and how you’re going to transition to a zero-carbon world? And also, how are you going to flourish in the zero-carbon world?’
In terms of why companies use internal carbon pricing, CDP says 60 percent of all respondents flag ‘driving low-carbon investment’ as a key reason, while ‘improving energy efficiency and changing internal behavior’ are also highlighted as objectives.
The companies that make up the research come from 84 countries, and CDP says all regions – bar Africa – have seen an increase in the number of companies already using or planning to use an internal carbon price since 2018.
The biggest absolute increase is seen in Asia, with China – which CDP notes launched the world’s largest emissions-trading scheme this year – seeing a significant yearly increase: in 2020 the number of companies saying they use or plan to use an internal carbon price is up 27 percent from 2019.
For companies looking to add an internal carbon price to their internal risk and accounting, Bartlett says they need to first decide what their ultimate objective is. ‘They should design their strategy linked to that objective,’ she advises. ‘Companies should ask themselves: what decisions is this covering? How much of an influence is this going to have on those decisions? What price are we going to use? They then need to evaluate whether it works over time.’