Company heads need to be aware of both the direct and indirect liabilities on their businesses as the international community pushes towards a low carbon future writes Martha Grossman.

Climate change is a global problem that carries to the boardroom a number of environmental, regulatory and financial implications. As world leaders move toward the development of policies to reduce carbon emissions, global markets are in parallel moving to seize the early opportunity and understand the degree to which carbon pricing will impact companies worldwide.

Companies not only face direct liabilities resulting from emissions, but also, many indirect carbon price impacts on cost structures through increased supply chain and energy costs. Even companies not directly exposed to a cap and trade or carbon tax scheme are likely to face higher costs of operating, as carbon costs flow through the global economies of supply chains and transactions. It is vital that company CEOs or CFOs are aware of the inevitability of a low carbon economy and adapt their businesses to both address risks and capitalise on growth opportunities.

In order to meet its long-term emission reduction target of 60 percent by 2050, Australia has proposed the introduction of a price on carbon. The change in political landscape following Australia’s 2010 federal election has forced the new government to press ahead with economy-shaping initiatives on climate policy, due largely to the insistence of the Greens and rural- based independents.

So what does this mean for Australian companies? Undoubtedly there will be a change in the business landscape and company cost structures as emissions intensive and liable parties look to pass on the cost impost. As a result, carbon cost implications are likely to propagate along supply chains throughout the Australian and global economy. As well as increases in the price of energy, particularly electricity, many

businesses will face higher supply chain costs. Not least this will impact how Australian companies will do business in Asia, especially given Asia’s pivotal relevance to the Australian economy. Equally relevant is the way that overseas investors, many of whom are Asian, will view the changed Australian setting.

Findings from a recent survey conducted by Standard & Poor’s and RepuTex reveal that companies in the Asia Pacific region continue to be concerned about the potential impact of regional carbon risk on their businesses, yet are beginning to take steps to mitigate potential exposure, notably via investment in new technology and participation in Asia’s burgeoning Clean Development Mechanism, largely through carbon credit markets in China or India.

In Asia, unlike many developed economies, corporate eyes are firmly focused on how local companies can benefit from new regulatory regimes as a means to tap new revenue or investment flows. However as global supply chains continue to bring international markets closer, companies in all regions can expect increased operating costs, even if not directly exposed to a carbon cap and trade scheme in their own back yard.

How each CEO confronts these risks will soon be closely monitored by capital markets globally.

When the world contemplates carbon it envisages smoke stacks, and the direct emissions resulting from production, manufacturing and industrial processes. However, as the interpretation above suggests, the hidden element of the carbon agenda is the upstream cost exposures that will impact companies, for example the increasing costs of raw materials, transportation and logistics. The financial impacts of these liabilities are potentially significant for corporates across all industries, and increasingly, these costs are likely to have a significant impact on credit and equities positions of companies, and their capital markets counterparties.

*According to the analysis carried out by RepuTex, value-chain costs by sector indicate that despite having the lowest exposure to a direct carbon price, consumer discretionary and telecommunications companies could potentially have the highest overall annual carbon liability due to high supply-chain cost exposure. The level of indirect exposure for each company is assessed by reference to pricing power and market positioning. (Source: RepuTex)

Research undertaken by RepuTex on the carbon exposure of S&P ASX 200 industries indicates that the financial impacts of a carbon price will vary from sector to sector, with heavy industries such as aluminium facing a high direct permit liability, as well as electricity cost increases. However unsuspecting sectors are also likely to be highly exposed, for example, it is anticipated that revenue loss will be significant for traditionally low impact sectors such as Consumer Staples. Companies within this sector often have a highly carbon intensive supply chain, often in Asia, which entails packaging and transport and as a result companies may face serious carbon liabilities due to carbon costs being passed through the value chain from their upstream vendors.

The onus is thus on company CEOs to put in place strategic measures to ensure that the operating and competitive environments of companies are not negatively affected by carbon pricing.

Strategy can entail the implementation of emissions abatement policies as well as carbon trading and hedging strategies. In addition to addressing carbon business risks, prudent company operators should be aware of the ample opportunities that a carbon price can present such as via competitive product pricing, investments in clean technology and international or domestic offset projects as well as development of carbon efficient products and services. Ironically, many CEOs don’t have the knowledge they need to build effective strategies and construct opportunities around the carbon agenda.

The recent two-week United Nations climate conference in Cancun, Mexico has again brought to the fore the comprehensive range of economic and social climate change issues that government policy makers and business leaders face. Each country, indeed, each company too, faces a unique situation that requires very careful consideration, a formidable task for business and policy leaders. From an Asian ‘developing economy’ perspective, not surprisingly, all eyes continue to be on China, many argue that China is rapidly building a range of carbon initiatives to show direction at national level, particularly through its network of municipal governments.

Ultimately conferences like Cancun, and others to follow, contribute to building definitions. Ironically we are now seeing many companies actively seeking greater definition on carbon, they are clearly able to recognise the importance of definitions which will in turn provide the important foundations from which strategies can be built. ■

*Martha Grossman is the Director, Asia, for RepuTex. Over the past five years, Martha has been based in both Shanghai and Hong Kong where she has led research into developing risk models for global companies, government organisations and financial markets, focusing on the pricing of environmental and sustainability related factors relevant to Asian markets.