A new Merrill Lynch (NYSE: MER) Research report, "Combating Climate Change — Opportunities and Risks," has been published to examine the willingness of companies to tackle environmental issues. The report assesses the impact these issues have on their operational performance as climate change becomes increasingly important on political and corporate agendas globally, and looks at the business benefits of addressing this issue.
The report outlines how companies are identifying the wider benefits of taking a pro-environmental stance; how increased regulation may force companies to meet reduced emissions targets; how investors are demanding higher levels of carbon emissions disclosure; and how greater environmental awareness among consumers is influencing their buying behavior.
"Going forward, we believe companies will find it harder to hide behind bad environmental habits while governments impose legislative changes, investors become more engaged in these issues, and consumers demand more transparency on the supply chain," said Zoe Knight, head of socially responsible investment research at Merrill Lynch and author of the report. "In our view, investors should value these financial and reputational risks accordingly," added Ms. Knight.
Early Mover Advantages of Environmental Leadership
The report highlights the issue that corporates which take the lead in combating environment challenges can make operational savings, such as lower energy and transport costs, and can be innovators by identifying new market and product opportunities. Other benefits include a lower risk of supply chain and workforce disruption and a better risk management strategy. Additionally, as curbing carbon emissions rises up the political agenda globally, companies who lead on environmental issues could be well-positioned to shape regulations and policies.
Policy Makers and Investors Prompting Change
Legislation is likely to toughen and impact a wider variety of sectors. In Ms. Knight's view, the risk of severe financial penalties from carbon emissions is higher in the medium to long term. While power generation industries emit the greatest amount of CO2 (40 percent), it is an issue for companies in every sector.
Investors are already acting to obtain greater disclosure of companies' environmental risk profiles. As quantifying and publicizing emissions data becomes the standard, investors will be able to calculate new environmental valuation measures such as Revenues/CO2 or EBITDA/CO2 . Investors are campaigning, via the Carbon Disclosure Project, to efficiently gain access to information on corporate Greenhouse Gas emissions globally via questionnaires. Merrill Lynch & Co. is a sponsor of this project.
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