"The normal business model is to expand into the developing world to keep your profit margin up. You can't do that if there's no water to operate," says Cary Krosinsky, a vice president at Trucost, which for ten years has offered environmental consulting and data services.
"Whether it's from KLD, Jantzi-Sustainalytics, Thomson or Bloomberg, you're looking for specific and more gritty data than you were expecting or getting ten years ago," says Timothy Smith, the director of the environmental, social and governance group at Walden Asset Management in Boston. "So I think this is a genie that is not going back into the bottle. If anything, the new challenge will be going to smaller companies and asking them to start disclosing. You know the old line, 'What's measured is managed.'"
The Data
The data itself, though, is extremely variegated and extensive, and the way analysts use it differs in much the same way financial analysts parse 10-K language, sorting through P/E ratios or free cash flow according to their tastes, and then making human judgments (and in the case of BP, maybe even unfortunate ones).
Trucost starts with financial information from sources such as Dun & Bradstreet to examine a company's operations, then looks at direct environmental impacts and those from the company's supply chain. After using up environmental data from public sources, the firm uses information such as fuel use or purchases to stand in for emissions and then tries to verify or tweak its findings after interviewing the companies.
One of the studies done by the firm looks at greenhouse gas emitted by companies in the S&P 500 index. According to the report, if each company in the most carbon-intensive industries, (utilities, oil and gas, food and beverage, chemicals and basic resources), had to pay $24.28 per metric ton of carbon dioxide it used under a cap-and-trade system proposed for the U.S., the EBITDA of these companies could fall anywhere from 1% to 117%, says Trucost in a recent report, "Carbon Risks & Opportunities in the S&P 500" (a study based on February 2009 data on 497 index participants). The 34 utility companies in the index could see their combined earnings halved.
"If a market price of $28.24 were applied to each ton of [carbon dioxide equivalent] emitted by companies in the S&P 500 and their first-tier suppliers, carbon costs would total over $92.8 billion," says Trucost. "This equates to over 1% of revenue from the companies in 2007 and over 5.5% of combined EBITDA."
"If you look at carbon intensity, one has to look at a company's direct impacts as well as indirect impacts," says Krosinsky. "There is Scope 1, Scope 2 and Scope 3 environmental impacts. Scope 1 would be the direct operations of a company-manufacturing, in effect. Scope 2 would be their purchase of electricity, and Scope 3 would be everything else-all the indirect impacts like commuting. But often it's supply chain: What are companies purchasing in order to create their products or to conduct their normal business?"
Many companies outside the utilities, oil and beverage sectors are at risk from "Scope 2" emissions. The insurance, banks, media, telecommunications and technology sectors have the lowest carbon intensity. More than 203 companies in the index would see carbon costs amounting to less than 1% of EBITDA.
What's likely more interesting for data junkies is that the range of all emissions is wide within each S&P 500 sector. Among utility companies in the S&P study, the carbon intensity ranged from 245 metric tons of carbon dioxide equivalent per million dollars (emitted by electric and gas distributor PG&E Corp.) to 15,145 metric tons (for Allegheny Energy). In oil and gas, Nabors Industries, a well drilling and rig servicing contractor, boasts the lowest carbon intensity, at 98% smaller than the largest intensity company in that arena (Dynegy, whose carbon costs could represent 31% of its revenue, according to the report). Within the food and beverage, travel and leisure, and construction sectors, there is also wide variation, with some companies two-thirds more intensive, says the report.
These variations can be meaningful because in many cases socially responsible investors want to be exposed to diverse sectors. "If you had a desire to maintain exposure to the traditional energy sector, it was hard to find appropriate replacements and I think that's why you saw the players sort of dragging their feet on changing [BP] earlier than they did," says Patsky. "The Gulf disaster was sort of a final straw. You saw a lot of us jump and jump early. But we didn't get out as early as I would have loved to."