Ahead of this weekend’s launch of the carbon pricing mechanism, investors and corporate advisors say that they are confident that liable companies are aware of their exposures and have plans to manage costs for the first stage of the carbon pricing period. However, there is great interest in analysing how companies disclose and manage their carbon risks going forward, particularly once the carbon pricing regime moves to an open trading market in three years’ time.
Duncan Paterson, CAER
For the first three years from July, the carbon price mechanism will be a fixed price of AU$23/tonne of carbon emissions. From July 2015, the system will transfer to a cap and trade market based system with a “collar” – a floor price for permits at AU$15, a highly contentious figure given that Europe’s emission trading scheme, which is also a market based vehicle, is currently trading at around AU$8.
Liability under the carbon pricing scheme is attached at the facility level, and if a facility falls under one of the covered sector and emits 25,000 tonnes of carbon or more per year directly, it will fall under the scheme and the liable entity will be required to offset the carbon emissions. The National Greenhouse and Energy Reporting (NGERS) Act, is the basis for reporting greenhouse gas (GHG) emissions under the carbon pricing regime.
Because of the fixed price of the initial three years of the regime, there seems to be consensus that liable entities understand their obligations for the near future and are prepared for the carbon price’s launch.
“On preparedness, we believe the preparation of liable listed companies is adequate to good,” said Nathan Fabian, chief executive of the Investor Group on Climate Change (IGCC). “We suspect that in the last couple of months, there have been some companies getting up to speed or catching up, but we have no reason to believe that companies haven’t done the preparation necessary.”
Corporates have assimilated the legal requirements of the legislation and have also reviewed contracts to establish issues like carbon cost pass-throughs.
“From my perspective by and large the clients we deal with are fairly well prepared for the carbon pricing scheme,” said Grant Anderson, a partner in the energy and resources group at law firm Allens. “They have spent a lot of effort in terms of determining which entity within a corporate group is a liable entity, whether that liability should be transferred to another entity and reviewing their existing contracts to ascertain whether the carbon cost can be passed through and the amount to pass through.”
Not all liable entities have necessarily disclosed their precise obligations, or their strategies going forward, but the expectation is that reporting will become better and more transparent post-July. Most experts that spoke with The Sustainability Report believe that liable entities’ annual reports for the 2011-2012 financial year, which will come out from September, will contain more disclosures, and disclosure will strengthen as time passes.
“I think it’s fair to say that companies were cautious about disclosure of their data in the market,” Fabian said. “Not all companies of course. For example, BHP, AGL and a number of leading companies have been publishing their emissions data in their annual reports for some time. Other companies probably are more cautious because they didn’t feel they had cause to publish before. There was an effort by companies to build in some delay in the release of data of NGERS data to the market. I suspect that companies have been careful to try and get their data right and so it’s understandable that they would want a year or two to work on their internal processes, their data gathering and their internal auditing processes are right before publishing it in a regular cycle in the market, but we’re going to move on from that situation very quickly. I think you can make a case that after the first couple of quarters of the carbon pricing period, companies should have data collection and company processes in order.”
Since the Clean Energy Future legislation passed through Parliament last year, there has also been intense research into possible costs and implications for investors, as well as in some cases years of emissions data via the voluntary disclosures to the Carbon Disclosure Project (CDP). However, the quality of reporting is not always perfect, given that companies often report emissions to differing levels of aggregation, which prevents comparability and limits the scope of knowledge on offer heretofore.
“We run into issues where we have a difficulty analysing specific impacts,” said Doug Holmes, head of sustainability research at Regnan. “For example, there are times when emissions are aggregated at a level where we can’t set out individual activities and work out what the liabilities are and see what might be covered under concessions. The way in which companies report is quite opaque and it’s quite a difficult task to work out specific liability. That’s one of the problems with NGERS because they’re aggregated up at overall Scope I and Scope II emissions. Depending on the company, some will disaggregate that more than others. In other cases, NGERS reporting is the only thing you have … With the CDP there’s often discrepancies between the information that’s disclosed there versus other avenues. We spend quite a lot of time trying to sort out the actual picture. A number of companies have changed methodologies as well and often don’t explain that.”
Investors aren’t the only ones that find problems with NGERS – liable entities have also grappled with the reporting requirements, said Anderson of Allens.
“I think where NGERS has created some issues is that there are ambiguities and uncertainties in the measurement determination,” Anderson said. “Companies have been struggling a bit when you get to some of the nitty-gritty issues, but these are problems that have been around since 2007. Most of our clients have worked through those issues or are working through those issues. It hasn’t suddenly reared its head because 1 July has suddenly arrived.”
Despite the inconsistencies and lack of comparability over greenhouse gas emissions, there is still enough data and analysis present for institutional investors to make assumptions over their portfolios where they are invested in liable companies.
“We’re not having clients banging on the door raising questions,” said Duncan Paterson, CEO of CAER – Corporate Analysis. Enhanced Responsibility. “Clients who are sufficiently engaged with the whole ESG space to use a providers like ourselves have been thinking about this issue for a while. The other thing to note is that there has been good research on the sell side, and I think a lot of our clients are getting information from us and the sell side service providers. Investors are reasonably empowered about their immediate information needs. The longer term strategic implications to the business will be what they’re scratching their heads about.”
However, even as investors are sanguine about the immediate launch of the pricing period, there are a range of questions about what will happen over the longer term and questions over how companies manage both risk and opportunity.
“There is a reasonable amount of disclosure of greenhouse gas emissions,” Paterson said. “Large emitters are required to disclosure anyway, and there is information available because of the Carbon Disclosure Project.” What we’re not really seeing is clear communication from companies as to how they’re going to manage the implications of the carbon price going forward. What evolutions will it bring going forward, in terms of detailed scenario planning? Some of those sorts of things are coming through from one or two companies, but not across the market as you’d expect, given the amount of noise the carbon price has generated.”
Holmes of Regnan expects that as companies disclose their emission going forward, there will also be information about strategy that has been missing.
“We would expect to see more information on actual abatement,” said Holmes. “At this point, we would expect that companies would have worked through what their opportunities would be to abate or buy credits, and what the strategy is. The information we see flowing through is quite patchy. We get bits and pieces on abatement strategies and it’s not really sufficient at this stage. We would expect to see more on that.”
There some outstanding grey areas at the margins of the regulations, Anderson said.
“One area of uncertainty in the carbon pricing scheme relates to gas supply liabilities,” Anderson said. “The legislation is unclear as to who might be liable in some circumstances for the supply of natural gas, and in particular, do pipeline operators have liability for the gas they transport? Also, not all of the regulations that are required to underpin the scheme are in place – one example of this is the regulations that are required to provide for the supplementary allocation of free carbon units for liquefied natural gas.”
Looking broadly into the future, if the carbon pricing regime is not rolled back should the federal government change, cap and trade will become a normal part of risk and return considerations, said Phil Spathis, manager, strategy and engagement at the Australian Council of Superannuation Investors (ACSI).
“I think there will be an impact on behaviour, an incentive as a result of the system itself, and once all the politics moves on, and things becomes free of the political guff, this will then become part of the usual risk/return consideration that anyone will take into account when pursuing any arrangements in respect to the company,” Spathis said. “It’s not out of left field. Look, I don’t think that the changes or the impacts will occur overnight. They will occur over time.”
Ed note: updates throughout with comment from Grant Anderson, Allens
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Carbon price to bring reporting and compliance complexities