PAPER

Climate Risk Management 10 (2015) 95–105

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Climate Risk Management

journal homepage: www.elsevier.com/locate/crm

A benchmarking framework to evaluate business climate change risks: A practical tool suitable for investors decision-making process

http://dx.doi.org/10.1016/j.crm.2015.09.002 2212-0963/� 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

⇑ Corresponding author at: Vas Sofias 12, University Campus, 67100 Xanthi, Greece. Tel.: +30 2541079392. E-mail address: [email protected] (I.E. Nikolaou).

Nikolaos Demertzidis, Thomas A. Tsalis, Glykeria Loupa, Ioannis E. Nikolaou ⇑ Department of Environmental Engineering, Democritus University of Thrace, Greece

a r t i c l e i n f o a b s t r a c t

Article history: Available online 9 October 2015

Keywords: Climate change finance Financial risks Climate change risks Environmental finance Corporate sustainability Sustainable development

A fundamental concern for the investor community is to identify techniques which would allow them to evaluate and highlight the most probable financial risks that could affect the value of their asset portfolio. Traditional techniques primarily focus on estimating certain conventional social-economic factors and many fail to cover an array of climate change risks. A limited number of institutional documents present, to a somewhat limited extent, some general-defined types of business climate change risks, which are deemed most likely to influence the value of an investors’ portfolio. However, it is crucial that stakeholders of businesses and scholars consider a wider range of information so as to assist investors in their decision making. This paper aims at establishing a new framework to operationalize and quantify an array of business climate change risks to provide more comprehensive and tangible information on non-traditional risks. This framework relies on the benchmarking – scoring systems and Global Reporting Initiative (GRI) guidelines, and is applied to various Greek businesses that are certified by Environmental Management and Audit Scheme (EMAS). � 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC

BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Introduction

Today, the results of climate change are associated either positively or negatively with a business’s operation. On the one hand, a number of scholars have supported that climate change will create promising financial conditions suitable for many entrepreneurs and prospective investors to exploit a number of new opportunities such as climate bonds and environmental bonds (Dunn, 2003; Pfeifer and Sullivan, 2008; Brouhle and Harrington, 2009). Okereke (2007) identified that the UK FTSE 100 companies have placed topics associated with climate change at the forefront mainly as a tool to maximize profit and as a result of institutional pressures. On the other hand, climate change is considered responsible for many financial losses that might effect the investors’ portfolio value. The extent to which a company is effected by various climate risks depends on the sector a business operates in, such as mining companies, water utilities and sport firms (Scott et al., 2003; Pearse et al., 2011).

A number of international organizations, that operate either as business initiatives or investor financed projects, have lately divided climate change risks of businesses in four fundamental categories, physical risks, reputational risks, regulatory risks and litigations risks (CDP, 2011; Coburn et al., 2011). The physical risks are essentially associated with the effects of extreme weather events (e.g. hurricanes, droughts) on businesses’ operation and production or on the different stages of

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the supply chain. The reputational risks are related to the harmful actions of consumers and local communities against busi- nesses (e.g. boycotts, protests) due to the improper day-to-day operation of businesses with regards to various climate change aspects (e.g. Green House Gas emissions). The regulatory risks are associated with the additional costs that might burden the financial structure of businesses when they try to adhere to the requirements of climate change regulations (e.g. CO2 emissions act, clean air act, energy taxes). Finally, litigation risks are associated with offences committed by busi- nesses concerning the climate change aspects of legislation (Coburn et al., 2011).

The prospect of these types of risks having an effect on the cash-flow structure of businesses and their viability is sub- stantially very obscure (CDP, 2011). One indicative example could be the threats posed to businesses which are located around costal zones. These businesses constantly put at risk their operations as a rise in sea level could require them to relo- cate their facilities. Another example of businesses which are exposed to climate change risks are those which operate with a vulnerable supply chain as the production process is dependent on regions in which extreme weather events have already happened or frequently occur. The escalation of such risks has recently been strongly associated with the security of inves- tors (CERES, 2011). Considering the portfolio theory, Wellington and Sauer, (2005) supported that climate change risks could be classified in two distinctive groups, systematic risk when the effect of climate change on a specific business is transferred to the overall sector and unsystematic when these types of risks affect only the interior environment of the business, that is to say only within the borders of a business.

These themes have lately gained great momentum from the investor community. Except for the international organiza- tions that request relative information, a number of international investor groups have emerged which require climate change information with regards to a businesses’ operation such as the Investor Network on Climate Risk (INCR), Institu- tional Investors Group on Climate Change (IIGCC), and Asia Investor Group on Climate Change (AIGCC). Similarly, a series of ethical investor groups have been established which seek to identify explicit information published by businesses about the level of their environmental performance (Newell, 2008). This trend is also placed under the so-called term of Social Responsible Investment (SRI) that has indicated a growing consciousness for climate change issues either as a threat to their financial returns or as a chance to maximize their income. Anguilera et al. (2006) highlighted that this trend is adopted by institutional investors in order to avoid ‘‘a) the long-term financial implications in a wide range of industries from the physical changes that climate change is bringing about, and (b) the short-term costs of greenhouse gas emissions under the EU’s Emissions Trading Scheme to some particularly vulnerable industries such as insurance, re-insurance and energy” (p. 154).

Investors require sufficient information about climate change effects on a businesses’ operation in order to make safer decisions. Thus, many scholars have proposed various carbon accounting systems to record these types of information (Lohmann, 2009; Burritt et al., 2011). Nevertheless, Kolk et al. (2008) stated that despite the positive impact of current inter- national private initiatives which are designed to urge businesses to disclose appropriate information for climate change, ‘‘neither the level of carbon disclosure that CDP [Carbon Disclosure Projects] promotes nor the more detailed carbon accounting provide information that is particularly valuable for investors, NGOs or policy makers at this Stage” (p. 719).

However, many existing corporate social responsibility, environmental and sustainability reports include, inter alia, infor- mation regarding business practices to mitigate climate change problems. The common practice to evaluate these reports is based on scoring/ benchmarking systems. The proposed methodological framework makes the voluntary disclosed informa- tion of reports comprehensible and comparable.

In this sense, this paper provides a scoring/ benchmarking system so as to draw relative useful information from a busi- ness’s environmental reports. The proposed system relies on current scoring/ benchmarking systems logic to draw compar- ative and quantifiable information to create an overall ranking system to examine businesses in order to assist investors and each interested party in selecting the businesses with less exposure to climate change risk (Nikolaou and Tsalis, 2013). This system was applied to a range of EMAS statements from a sample of Greek businesses that operate in various sectors.

The rest of the paper includes four sections. The first section includes theoretical background regarding climate change risks, carbon accounting systems and social responsible investments. The second section describes the methodology fol- lowed by ranking of the firms examined according to their climate change disclosures. The third section analyzes the findings of this research alongside findings and similarities in the relative literature. Finally, the fourth section includes the conclu- sions of this paper and focuses on describing the most important contributions the paper makes to the current literature.

Theoretical underpinnings

Considerable effort has been made lately by various official actors within an international context to encourage modern communities to actively participate in reducing CO2 emissions (Arrow et al., 1996; Stern, 2007). Similarly, a number of inter- national treaties and agreements have been signed (not necessarily by the majority of countries) such as the Kyoto protocol (Weinhofer and Hoffmann, 2010). Additionally, international scientific movements focus on identifying solutions for climate change (Intergovernmental Panel for Climate Change, IPCC). These efforts have encouraged several governments to enact specific instruments to convince responsible actors (households and businesses) to tackle the challenges of climate change. Some categories that these instruments fall into are as follows: command and control (e.g. air emission acts), economic (e.g. energy taxes) and self-regulated (e.g. carbon footprint, ISO 14064) (Goulder and Schneider, 1999; Martin and Rice, 2010).

In this context, the business community has adopted various management and technological strategies to mitigate their CO2 emissions or shift to a less energy-intensive behavior. Apart from the aforementioned categorization of government

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policies, the reasons that explain why businesses have adopted climate change strategies are classified in the current liter- ature either as a proactive or reactive reaction (Boiral, 2006). The reactive character of climate change strategies can be exclusively associated with the ‘‘command and control” or economic instruments, while the reactive character will be the self-regulated efforts of businesses in an attempt to exploit business challenges or avoid business risks.

The strategies and practices adopted are dependent on the size of the firm. Larger firms are better able to identify financial resources and knowhow in order to respond to climate change policies and risks compared to Small and Medium sized Enter- prises (SMEs). Bradfor and Fraser (2008) suggest a policy matrix to identify the different ways by which SMEs in different sectors might interact in Different climate policy measures. Williams and Schaefer (2013) identify that public policy policies are a very important factor to encourage SMEs to adopt climate change strategies. Such policies could include financial aids for those SMEs that adopt new technologies and climate change management. Hall (2006) indicates that managers of SMEs despite considering climate change risks as very important for their future viability, underestimate the short-term impacts of climate change. The effects of these strategies are especially practical for various stakeholders in order to improve their judg- ments when engaging in (direct or indirect) businesses. There are controversial opinions on what the financial sector’s requirement are with regards to information on corporate performance in climate change (Mills, 2005).The lack of relevant information could also be associated with the banking sector, for instance, land is often used as collateral against loans and the land may be devalued due to the polluting activities of businesses (Thompson and Cowton, 2004). Similarly, a banking sector that focuses exclusively on lending to the agriculture sector might have greater exposure to climate change risks because weather extreme events (e.g. droughts and hurricanes) might weaken the borrowers’ ability to pay back the loan. Furrer et al. (2009) classified climate change risks in the banking sector into the following categories; commercial/wholesale banking (e.g. carbon loans, mortgages at lower price when using renewable energy sources), investment banking (e.g. carbon-related products, climate change-related investment products) and asset management (e.g. fiduciary duty invest- ment policies covering carbon).

Moreover, considerable attention has been paid to climate change responsibilities by the investor community regarding business. In particular, some specific categories of institutional investors focus on obtaining information about climate change that could influence the ongoing or efficient operation of businesses and thereby their portfolio returns encompass- ing these businesses. Some private initiatives have been made and many institutional documents have been published including certain guidelines to improve an investor’s understanding of business climate change risks (CERES, 2011; Sullivan et al., 2011; CDP, 2011). CDP (2011) examined three types of climate change risks; supply chain risks, reputational and change in consumer behavior, and physical risks. CERES (2011) has classified climate change risks in distinct categories: physical risks, financing and underwriting risks and opportunities, regulatory risks and opportunities, litigation risks, indi- rect risks and opportunities, and reputational risks emissions.

The physical risks vary between different sectors such as agriculture, food and beverage and apparel. For the agricultural sector, for instance, some significant impacts of physical risks could be the effects of water scarcity and droughts, rising aver- age temperatures and shifts in seasons on the amount of crop yield, and the exposure to pests and diseases (David Gardiner and Associates, 2011). Scott and McBoyle (2007) highlight the implications of physical risks on the international ski industry and the steps taken by the industry to mitigate such risks. Regulatory risks are mainly associated with the impacts of leg- islation and government policy on climate change on a business’s operation. For instance, Blyth et al. (2007) indicated that the regulatory risks associated with climate change could be a very significant external aspect which could have an influence on investment decision. Kolk and Pinkse (2007) considered that public pressure on businesses to address the issues of cli- mate change is a significant request mainly due to the negative impact it would have on the business’s reputation if they chose to ignore requests. Such reputational risks are considered vital, investors must be informed in order to ensure safe investment in companies, and to minimize risks.

A number of risks might also be associated with lawsuits from local authorities, NGOs and governments against busi- nesses to punish them for illegal operation regarding Green House Gas (GHG) emissions and other climate change aspects. This is known as litigation risks and is expected to have negative effects on business cash flow through penalties. Lash and Wellington (2007) pointed out that current production and technological weaknesses are not only considered barriers for firms, but also might provide incentives for some industry sectors to exploit new innovation by designing novel products and services with low carbon footprint. The lack of such strategies would force many of the businesses to be confronted by a ‘‘competitive risk” as prices and the range and efficiency of low-emission technologies will change over time (Jones and Levy, 2007).

It has been suggested that crucial information about climate change risks for businesses, which are of interest to investors or other financial stakeholders should be recorded and published through accounting techniques. Tyler and Chivaka (2011) maintained that valuable climate change information either for businesses or investors must be recorded properly ‘‘financial valuation techniques for particular dimensions and challenges that climate change presents to the valuation of assets and compa- nies” (p. 57). In their case study research, Pfeifer and Sullivan (2008) have shown that despite the high interest of institu- tional investors in business climate change, there is a lack of adequate information for such types of business risks. However, it is important to note that even though Keele and DeHart (2011) did not identify a positive relationship between stock exchange and climate change announcements, they supported that such information is a promising characteristic for long-term returns for investors.

Freedman and Jaggi (2005) identified that more climate change disclosures have been made by businesses that are located in countries that have ratified the Protocol of Kyoto. Stanny and Ely (2008) pointed out that the level of climate

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change disclosures of businesses could be related to their size (SMEs or MNCs), to the previous level of general environmen- tal disclosures and to the level of exporting orientation of businesses. Ihlen (2012) identified a differentiation between dis- closures among businesses of different sectors. The different level of climate change disclosures creates a greater need for a ‘‘stricter carbon disclosure which follows clear guidelines that do not vary per year and require external verification, also to ensure comparability and the provision of all relevant data” (Kolk et al., 2008: p. 742). Similarly, Mizuguchi (2009) proposed also the need for standardized disclosure on climate-risk in financial statements of firms, while Hoffmann and Bush (2008) suggested certain indicators to measure climate change risks.

Methodology

The lack of a standardized accounting system for climate change risks has made it difficult for investors to handle invest- ment portfolios. Essentially, investors ignore an array of risks that might have a strong impact on their future returns. Today, a common practice to draw non-standardized information from environmental reports or other relative databases is the scoring/benchmarking techniques which assist in quantifying and classifying a variety of arbitrary information in certain cat- egories of comparable information. Fig. 1 illustrates the methodological framework which consists of five sections. The first section clarifies the basic concepts in relation to business climate change risks on which various explicit quantitative indi- cators are developed in the second section. The third section describes the method of data collection. The fourth section anal- yses an application of the methodology in a sample selection and the final section provides a ranking of the firms sampled.

Definition of business climate change risks

As aforementioned, a range of academics, scholars and international organizations proffer various types of significant business climate change risks such as physical risks, competitive risks, supply chain risks, regulatory risks, litigation risks and reputational risks (Stanny and Ely, 2008; Furrer et al., 2009; Coburn et al., 2011). The proposed methodological frame- work focuses on examining four wide and visibly quantifiable categories of business climate change risks; physical risks, rep- utational risks, regulatory risks and litigation risks. Table 1 illustrates some specific indicators for each category of business climate change risks. There are a number of proposed indicators within the current literature on climate change risks and business carbon footprints for each category of risks (Hoffmann and Bush, 2008; CERES, 2011). The first category includes three general indicators to measure the potential impacts of physical risks on business behavior to tackle physical risks such as the cost of new equipment, the potential relocation costs and the costs of reclamation after extreme weather events. Sim- ilarly, reputational risks include three main indicators which are used to assess the willingness of a business to participate in NGOs that adopt strategies to reduce climate change impact as well as their willingness to disclose information on climate change damage which has already occurred. Six indicators were used to measure any changes made in a business as a result of regulation requirements. The main purpose of such indicators is essentially to measure the change in cash flow of busi- nesses so as to comply with legislation requirements. Finally, the litigation risks are associated with lawsuits and judicial decisions against businesses with regards to climate change.

Fig. 1. The structure of the proposed methodological framework.

Table 1 Business indicators for climate change risks.

Climate change risk categories

Indicators description

A. Physical risks PHR1: The investments for new equipments to mitigate risks arising from potential physical risks (e.g. drought, hurricanes and high level of sea) PHR2: The relocation costs for a business’ facilities to avoid continual and repeated physical risks PHR3: The costs for damage reclamation to respond to extreme weather events

B. Reputation risks RER1: The participation and involvement of businesses in company associations and Environmental NGOs that sought to tackle climate change RER2: The number of complaints by local communities against businesses for their negative contributions to climate change RER3: The number of accidents and their air emissions releases

C. Regulation risks RGR1: The direct and indirect mitigation of a business’ air emissions as a result of regulation RGR2: The height of businesses’ investment in new clean technologies for reducing air emissions RGR3: The costs for businesses to produce low climate change intensive products RGR4: The costs for a business to adapt to climate change as an outcome of relative legislation RGR5: The costs of employees’ education in topics on climate change RGR6: The provision of information in relation to climate change performance of a business’s suppliers

D. Litigation risks LTR1: The information for the lawsuits against businesses for their illicit activities as regards to climate change acts LTR2: The information for penalties and judicial decisions against businesses in relation to the legal requirements of climate change acts

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Benchmarking/scoring techniques

A range of scholars have established benchmarking/scoring methodologies to quantify, in a comparative way, the non- systematic provision of environmental information through a business’s environmental report. Some indicative and impor- tant methods to analyze the content of environmental reports have been published either by scholars such as Mordhardt et al. (2002), Mangless (2006), and de Villiers and van Staden (2006) or by international (transnational) organizations and projects such as SustainAbility/UNEP (SustainAbility/UNEP, 1997, 2002) and Deloitte et al., 1997). Skouloudis et al. (2010) supported that these benchmarking techniques offer a range of benefits to stakeholders one being that it provides a trans- parent way to disclose business information with regards to environmental matters more easily and systematically.

The common idea behind these techniques is the evaluation of environmental reports by means of a numerical scale in order to identify the completeness of information disclosures according to a standard set of indicators. Current techniques utilize some slightly divergence numerical scales (mainly from 0 to 3 or to 6) that assist in measuring the extent to which various types of environmental information is covered in environmental reports. For instance, 0 is proposed by the majority of current methods when information for a specific environmental indicator has not been mentioned, while they propose a higher number (in some methods up to 6) when the specific indicators are widely covered in environmental reports. Con- sidering such methods, this paper proposes a benchmarking method to evaluate climate change risks. This technique pro- vides a more comprehensive and simpler way to analyse data from environmental reports in order to assist investors and financial stakeholders in decision making.

Table 2 illustrates the proposed indicators for measuring climate change risks of businesses. An Aggregate Climate Change Risk Index (ACCRI) is proposed that consists of two sub-indexes an accountability index and a performance index. The former index aims at presenting to what extent a business has covered the indicators referred to in Table 1 in its environmental reports. This indicator shows financial stakeholders the level of accountability of a business with regards to climate change risks. It is measured in a three-point scale as follows 0 when information is not published, 1 when qualitative information is given and 2 when quantitative information is given (Table 2). The latter index measures the performance score that is achieved by a business for each type of indicator in Table 1. This indicator indicates the valid outcomes of a business regard- ing each type of climate change risk indicator. The measurement units is a three-point scale as follows: 1 when the perfor- mance is worse than the previous year, 1.5 when the performance score is equal to the previous year and 2 when the performance score is better than the previous year (Table 2). The rationality behind the scale selected for the performance indicator is to reward the business even if its environmental performance is worse than the previous year. As such compa- nies should be rewarded as they are better than those which have done nothing about certain indicators.

Data collection

The proposed indicators were applied in a sample of EMAS certified Greek businesses in different sectors. The acronym EMAS means Environmental Management and Auditing Scheme it was launched by the European Commission to facilitate organizations to contribute to sustainable development. EMAS is deemed as a good tool for estimating eco-efficiency (Erkko et al., 2005), environmental performance (Honkasalo, 1998) and competitiveness of businesses (Iraldo et al., 2009). This

Table 2 Measurements scoring and mathematical formulas.

Indexes Measurement scale Description

Accountability indicator 0 When information is not mentioned 1 When qualitative information is mentioned 2 When quantitative information is mentioned

Performance Indicator 1 When quantitative information is worsen from previous year 1,5 When quantitative information is equal to previous year 2 When quantitative information is better from previous year

ACCRI (Aggregate Climate Change Risk index) =ACCRI + PCCRI, where 0 6 CCRAI 6 56

ACCRI (Accountability Climate Change Risk index) = P3

i¼1PHRi þ P3

j¼1RER4 þ P6

k¼1RGRk þ P2

l¼1LTR2, where 0 6 ACCRI 6 28

PCCRI (Performance Water Risk index) = P3

i¼1PHRi þ P3

j¼1RER4 þ P6

k¼1RGRk þ P2

l¼1LTR2, where 0 6 PCCRI 6 28

Table 3 Environmental statements per sector.

a.a Sector Number of businesses Environmental statements/year

2004 2005 2006 2007 2008

1 Food and beverage 5 2 3 5 3 2 Tobacco 1 1 1 3 Cloths 1 1 1 1 1 1 4 Wood and paper 5 3 4 2 4 5 Mining and oil 6 4 3 3 2 6 Chemical 8 3 1 2 4 7 Plastic and equipment 2 1 1 1 8 Non metallic 3 3 1 1 2 9 Metallic 9 2 3 3 3 3

10 Environmental services 6 1 2 3 3 3 11 Services 3 1 2 1 12 State-run organizations 3 1 1 2

Total 52 8 25 20 25 21

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essentially constitutes a suitable database for scholars due to the fact that any certified-business with EMAS is obliged to publish an environmental statement including environmental policy and environmental performance information.

For the scope of this paper, the basic criteria for data selection are: a) EMAS-certified firms and b) Published EMAS state- ments for at least two years. Data was gathered from the Library of EMAS of Hellenic Minister of Environment and Climate Change (http://www.minenv.gr/emas/emasreports: available at 01/01/2012). The Aforementioned criteria were met by 52 EMAS-certified Greek businesses which were selected from 12 sectors (Table 3). Table 3 also illustrates the number of Environmental Statements per year.

Data analysis

Some simple and suitable statistical techniques for the scope of this analysis were employed to scrutinize the data. In particular, some descriptive statistic techniques were utilized due to their suitability to provide comparable data for climate change risks among different sectors and the range of information published about climate change risks.

Business sectors climate change ranking

Finally, a ranking of examined sectors was made in order to create a clear picture and a helpful platform for facilitating investors to select the least risky investment with regards to climate change. However, it is important to highlight that before making a decision an investor would require information about the financial structure of the businesses as well as the climate change risks. This is out of the scope of this paper and the assumption is made that the businesses are financially viable. Given that financial information of a business is not the most salient criterion when some types of investors (e.g. eth- ical funds, climate change investors, institutional investors) make their long-term decisions, this methodology was not con- cerned with a business’ financial performance. For example, a business could be profitable at the present time, but it might face a future financial threat due to the gradually increasing requirements of stricter environmental legislation or anticipated extreme weather events.

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Results and discussion

Table 4 illustrates the average scores for the physical risks for each sector sampled. Findings show a limited amount of published information by businesses on physical climate change. All sectors and all sampled businesses did not achieve scores that exceed the total average (�x ¼ 28). In particular, the mining and oil sector and state-run organizations have dis- closed a higher amount of information about climate change risks (�x ¼ 1:16; �x ¼ 1:33) than the other sectors. The predom- inance of the public sector initially causes surprise, nevertheless it could be explained by the size of these organizations. This finding is not confirmed by Guthrie and Farneti (2008), who have indicated that a group of Australian public organizations disclosed a limited amount of non-quantitative environmental information. This differentiation is the result of a different institutional regime in the countries where businesses sampled operate as well as the different types of organizations exam- ined. The classification of the mining industry at the top could easily be explained due to the fact that this sector is consid- ered quite exposed to physical risks and therefore action will be taken in order to protect its operation (David Gardiner and Associates, 2011). This is confirmed by the current literature that indicates the high awareness of mining companies of their sensitivity to climate change risks (Ford et al., 2010).

Table 5 illustrates business climate change risks that are associated with business reputation. Considering the statistical means of the sectors sampled it seems that services, state run organizations and environmental services are classified at the top of the list of businesses examined (�x ¼ 3:16;�x ¼ 2:16;�x ¼ 1:73). Even though the explanation for the classification of the service and environmental service sectors being placed at the top seems reasonable, the primacy of state-run organization needs a more comprehensive explanation. In particular, the service sector includes businesses that operate mainly in the financial, telecommunication and tourist sectors whose primary motive for undertaking formal environmental practices such as ISO 14001 and EMAS (Coulson and Dixon, 1995; Hu and Wall, 2005), is to improve their reputation and image. The state-run organizations seem to disclosure a high amount of climate change information associated with reputation, nevertheless this could not be explained by the present structural features of the economy in which businesses operate (monopolistic characteristics, low environmental awareness of citizens). A possible explanation, relying on detailed research via a telephone interview, is that many European policies and supportive financial programs have forced public organiza- tions into adopting such types of strategies. It is also worth noting that although the mining industry is expected to be near the top of the classification, this sector is placed in the middle of the classification (�x ¼ 1:54).

Table 6 shows the risks of businesses that are associated with the regulations of governments. It is clear that more infor- mation was disclosed concerning regulation risks than any other risk. This could be explained as a result of the reactive char- acter of the environmental policy of firms which might be explained as an effect of ‘command-and-control’ (e.g. air emission acts) and ‘economic’ instruments (e.g. energy tax). Relative literature supports that the legal requirement of businesses with reference to climate change issues is actually a reactive response and might cause significant financial risks and additional costs on business operations (Kolk and Pinkse, 2004). However, the findings of the research indicate a regular and expected classification of the sectors sampled. It is rational that the mining and the oil sector and the food and beverage sector achieved higher average scores in relation to other sectors (�x ¼ 8:62; �x ¼ 8:54) due to the tougher environmental legislation that they face. It also seems that there is a higher proportion of information disclosures s2 ¼ 2:28; s2 ¼ 2:39 as a consequence of the growing environmental legislation during the period examined.

Table 7 indicates the scores of the sectors sampled for lawsuits regarding climate change risks. The food and beverage and mining and oil sectors achieved higher scores for litigation risks in relation to other sectors (�x ¼ 1:91; �x ¼ 1:62). These find- ings are not confirmed by international literature that indicates that disclosures in relation environmental litigation are very limited (Cho and Patten, 2007). In particular, Wiseman (1982) showed that the oil industries had not disclosed information about environmental litigation. Similar findings were obtained by the study of Cuganesan et al. (2010) which focused on the food and beverage industry.

Table 4 Physical climate change risks.

a.a Sectors Average scores/years Statistics

2004 2005 2006 2007 2008 Mean s.d

1 Food and beverage 1 1.5 0.66 1 1.04 0.34 2 Tobacco 0 0 3 Cloths 1 1 1 1 1 0 4 Wood and paper 1 1 0.5 0.33 0.61 0.34 5 Mining and oil 2 1 1 0.66 1.16 0.57 6 Chemical 1 1 1 0.75 0.91 0.14 7 Plastic and equipment 1 1 1 1 0 8 Non metallic 1 1 1 1 1 0 9 Metallic 1 0.8 1 1.33 1 1.02 0.19

10 Environmental services 1 1 1 1 1 1 0 11 Services 1 1 1 1 0 12 State-run organizations 1 1 2 1.33 0.57

Table 5 Reputational climate change risks.

a.a Sectors Average scores/years Statistics

2004 2005 2006 2007 2008 Mean s.d

1 Food and beverage 1.5 1.5 1.33 1 1.33 0.23 2 Tobacco 2 2 3 Cloths 2 2 2 2 0.5 1.7 0.67 4 Wood and paper 1 2 1 1 1.25 0.5 5 Mining and oil 2 2 1.5 0.66 1.54 0.62 6 Chemical 1 1 2 1.25 1.41 0.47 7 Plastic and equipment 1 1 1 1 0 8 Non metallic 1 1 1 1.5 1.12 0.25 9 Metallic 1 1 1 1 1 1 0

10 Environmental Services 2 2 1.33 1.66 1.66 1.73 0.27 11 Services 3 5 1.5 3.16 1.75 12 State-run organizations 2 2 2.5 2.16 0.28

Table 6 Regulation climate change risks.

a.a Sectors Average scores/years Mean s.d Years

2004 2005 2006 2007 2008

1 Food and beverage 5.5 9.75 7.91 11 8.54 2.39 2 Tobacco 1 1 3 Cloths 5 9.5 10.5 12 12 9.8 2.88 4 Wood and paper 6 7 7.25 8.83 7.27 1.17 5 Mining and oil 11 9 9 5.5 8.62 2.28 6 Chemical 5.66 8 7.5 8.12 7.32 1.13 7 Plastic and equipment 6 4 6 5.33 1.15 8 Non metallic 5 7 8 4.5 6.12 1.65 9 Metallic 6.66 6.7 7.75 6.5 9.87 7.49 1.26

10 Environmental services 8 5 8.66 7.66 10.16 7.9 1.88 11 Services 9 5 5 6.33 2.30 12 State-run organizations 7 6 9 2,5 6.12 2.71

Table 7 Litigation climate change risks.

a.a Sectors Averages scores/year Years Statistics

2004 2005 2006 2007 2008 Mean s.d

1 Food and Beverage 1.5 2.75 1.58 1.83 1.91 0.57 2 Tobacco 1 1 0 3 Cloths 1 1 1 1 1 1 0 4 Wood and Paper 1 1 1 1 1 0.47 5 Mining and Oil 2 2 1.5 1 1.62 0.47 6 Chemical 1 2 1 1.62 1.40 0.49 7 Plastic and equipment 1 1 1 1 0 8 Non metallic 1 1 1 1 1 0 9 Metallic 1 0.8 1 1.33 1 1.02 0.19 10 Environmental Services 1 1 1 1 1 1 0 11 Services 9 5 5 1.33 2.30 12 State-run organizations 1 1 1 1 0

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Table 8 illustrates the total scores and the final ranking of the sampled sectors. The total scores are given in Table 6 to Table 7. The sector with the highest score shows that it disclosed a higher amount of information concerning climate change and might have less exposure to climate change risks. Thus, the sector with the highest score will be considered a better investment in relation to other sectors by potential investors according to the climate change status of sectors. According to this hypothesis, the Food and beverage sector was classified in the first position in 2006 and 2008, while in 2005 and 2007 the best scores were achieved by the cloths and services industries. Finally, environmental services achieved the best score in 2004.

Fig. 2 illustrates comparatively the final scores of the total sample of sector examined from 2004 to 2006.

Table 8 Average total scores per sector.

Sector Average Total Scores Ranking per Year

2004 2005 2006 2007 2008 2004 2005 2006 2007 2008

1 Food and beverage 0 10 15.5 11.5 14.83 6 1 4 1 2 Tobacco 2 0 0 4 0 5 11 10 10 9 3 Cloths 9 13.5 14.5 16 13.5 3 3 2 1 3 4 Wood and Paper 9 11 9.75 11.16 0 3 5 8 6 9 5 Mining and oil 0 17 14 13 7.83 2 3 2 7 6 Chemical 7.66 12 11.5 12 0.75 4 4 5 3 8 7 Plastic and equipment 9 7 9 0 0 3 10 9 11 9 8 Non metallic 0 8 10 11 8 9 7 7 6 9 Metallic 9.66 9.3 10.75 10.16 12.87 2 7 6 8 4

10 Environmental services 12 9 12 11.33 13.83 1 8 4 5 2 11 Services 0 22 0 16 12.5 1 10 1 5 12 State-run organizations 0 11 10 9 8 5 7 9 6

The bold values highlights the sector with the best score in relation to other sectors for same year.

0

2

4

6

8

10

12 Food and Beverage

Tobacco

Cloths

Wood and Paper

Mining and Oil

Chemical Plas�c and equipment

Non metallic

Metallic

Environmental Services

Services

2004

2005

2006

Fig. 2. The final score of the sampled firms.

N. Demertzidis et al. / Climate Risk Management 10 (2015) 95–105 103

Conclusions

This paper offers a framework for estimating the climate change risks of different business sectors using information drawn from their mandatory EMAS statements. The findings clearly show that disclosures about regulatory climate change risks exceed those of other types of risks such as physical risks, reputation risks and litigation risks. This is a result of the current climate change policy (mainly in Greece in particular and the European Union and USA in general) that focuses only on strengthening the regulatory regime (e.g. air emission acts) in order to entrench the operation of businesses in an envi- ronmentally friendly context. An encouraging and promising finding is the increasing level of climate change litigation risks that have been published by the sampled sectors in relation to the findings of previous studies such as Wiseman (1982). This type of information is considered very significant both in the environmental accounting literature (Cong and Freedman, 2011) and in the conventional accounting literature (Laux and Stocken, 2012) in order for investors to be able to optimize and secure their investment decisions as well as to avoid potential risks (Nikolaou and Tsalis, 2014).

Additionally, the proposed framework hopes to contribute to the present literature of business climate change and cli- mate change finance in the following ways. The first way is the attempt to operationalization various recent theoretical pro- posals from a range of international organizations such as the Coalition of Environmental Responsible Economies (CERES, 2011) and the Carbon Disclosure Project (CDP, 2011). As aforementioned, climate change risks could be classified in four cat- egories physical risks, reputation risks, regulatory and litigation risks. The lack of quantitative and precise information regarding these climate change risks by the majority of relative organizations and scholars will impede the ability of inves- tors and other stakeholders to make exact decisions to assure their investment and the stability of the general financial sys- tem. The contribution of the proposed framework is the quantitative estimation of climate change risks by some specific and clearly defined indicators that could be explicitly measured.

The second contribution of this framework is associated with the application of this framework in a sample of 13 sectors. This is an additional and an up-to-date empirical survey regarding business climate change risks, which contributes to the

104 N. Demertzidis et al. / Climate Risk Management 10 (2015) 95–105

limited number of relative empirical research. Inevitably, the initial description of theoretical background indicated that the current literature of climate change risks of businesses encompasses a limited number of technical reports and academic papers. Additionally, these works are based on questionnaire surveys and case study research. The growing skepticism about these methodologies has mainly been based on the subjectivity of the respondents’ answers and dependence on their busi- ness’s operation. The proposed framework provides an independent character based on the logic of benchmarking-scoring techniques and third party certification context.

Thirdly, it hopes to meet the most recent call for a standardized carbon accounting method. The need for mandatory busi- ness carbon and climate change risk accounting techniques in order to protect investors and capital markets from changes in climate has recently been recognized by a number of scholars and organizations in order to improve the security for inves- tors and capital markets from changes of climate (Smith et al., 2008; CERES, 2011). The substantial weakness of current car- bon and climate change accounting techniques is the absence of specific guidelines to record climate change information in financial and non-financial terms. The usefulness of such standardized information will assist investors in selecting the least risky investment with regards to climate change. This framework contributes to current standardized published information regarding climate change risks of businesses.

It is worth mentioning some limitations of the research. Even though the EMAS statements offer certain information about climate change risks suitable for the business community, their focus is not solely on climate change risks but they also cover a range of other environmental information which could be a clear explanation for the low level of total disclo- sures by businesses on climate change information (below the total average – 28 points). EMAS statements undisputedly provide useful insights into business climate change risks at this preliminary stage, however a novel accounting system for recording climate change risks under certain procedures, General Acceptance Accounting Principles (GAAP) and a third-party certification system would need to be examined in the future academic and professional agenda.

Moreover, EMAS statements provide information that is mainly restricted to business borders, even though some further information outside of a business’s operation is deemed necessary in order to estimate climate change risks on business operation such as the frequency of droughts, hurricanes, the sea level and the supply chain risks. At this preliminary stage of the business climate change and investor academic field, the proposed methodological framework would assist in exam- ining data from a range of different sectors and across sectors by utilizing information from Corporate Social Responsibility, sustainability and environmental reports.

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