Focus: Finance and Governance - Outlook - Three rules of environmental impact

The Department of Trade and Industry's Operating and Financial Review (OFR), in effect since April, requires firms to comment on the impact they have on the environment or say why they should not do so.

Investec's 2005 Climate Change Survey found most companies do consider the environment and have employed environmental consultants. But the OFR allows companies to be vague about their activities. To help shareholders, particularly charities, to judge companies' activities in this area and to form views on how this might have an impact on their future returns, companies should comment on three areas.

First, monitoring - companies should show they have thought about the environment and how it might have an impact on them.

Second, measuring - firms can calculate their energy and transport bills to estimate what their emissions are. Some, such as Diageo, already do this. Others can be helped by consultants, such as Trucost.

Last, mitigating - what they are doing to limit their emissions.

By commenting on these areas, companies can help shareholders form a better view of their activities. The steps are framed in a financial manner and seek out measurable facts, enabling comparisons to be made between companies.

Under the OFR it is now mandatory for companies to mention the environment in their reports and accounts. Many companies, particularly utilities, can face fines or lose licences if they fail to meet the environmental standards set for them. For example, the EU Emissions Trading Scheme, which came into effect this year, requires companies whose carbon emissions exceed their permitted levels to buy carbon permits or face fines.

A company's record on the environment is vital to its brand. Stakeholders, including staff, shareholders and customers, may prefer firms that treat issues such as climate change seriously. Last December, HSBC said it intended to become the first major "carbon-neutral" company, showing that climate change is becoming a major issue for business.

In our 2005 Climate Change Survey, 79 per cent of UK quoted companies said they thought it was an issue they needed to take into account, but only 9 per cent felt investors would accept a lower return in exchange for a better environment.

To allow shareholders, including charity investors, to vote with their money, companies must be as transparent as possible. The three steps above should ensure that shareholders form their views based on facts rather than corporate soundbites.

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