Climate Disclosure and Climate Risk for Asian Companies

Abstract

Climate risk is now recognised to be significant to the businesses and society overall. A fast-changing environment with the new regulation, policy changes, technological shifts and consumer behaviour is expected to put significant pressure on companies. Companies are starting to realise that business-as-usual scenario is no longer valid. Nonetheless, few company leaders seem to grasp the idea of what climate risk means, let alone internalise these risk and carry stress test scenarios. The card of downplaying these risks as too uncertain or distant in future is no longer credible. Company executives need to take measure to create a resilient and financially sustainable business. This paper discussed the relevance of climate risk for companies. While the topic is increasingly catching attention, little work is done documenting and analysing the economic and financial impact of climate change on a country, sector and firm level. This chapter tackles that issue on two levels. First, it analyse the climate disclosure and climate risk for Asian-based companies. Second, we look at country-specific climate risk and its relationship with financial performance. It shows that climate risk disclosure is still in very infant stage in Asia despite the need for much more. The author observes an overall negative relationship between climate risk (and physical risk) and company valuations captured by P/E and P/B ratios. This is an essential result for asset managers, and asset owns for valuations and portfolio allocations. Once considered a hidden and extreme risk, and climate risk, it should be considered a systematic risk and therefore demand a risk premium.

Appendices

Appendix 1

CDP provides a scoring decision chart (see Fig. 1), allowing us to make this translation possible by referring to this scoring criteria. Firstly, we divided the full score (100) into five successive hierarchical groups. F-range is equivalent to a numeric range of 0–20, D-range is equivalent to 20–40, C-range is equivalent to 40–60, B-range is equivalent to 60-80, and A-range is equivalent to 80–100. According to CDP explanation, a company must reach the threshold of the fundamental level to be evaluated on the next level. For example, a company must score more than 80% regarding “disclosure” in order to be evaluated regarding “awareness”. If the company is given a nominal grade of C, then its numeric score is estimated to be approximately 40 + (60–40) * (0 + 44%)/2 = 44.4. For another example, if the company is given a nominal grade of A, then its numeric score is estimated to be approximately 80 + (100 − 80) * (80% + 100%)/2 = 98 [6].

Appendix 2

See Table 4.

Table 4 Asian companies that report to CDP and have Bloomberg data on physical risk as of June 2018