However, in order to reduce the electricity bill, the company can use the energy saving elements like bulbs, using of central air conditions with the automatic power switched systems and others. Stockland has incorporated the cost curve methodology into its Climate Change Action Plan target-setting function. This will enable the organisation to set an emissions reduction target and have an accurate, reality-based estimate of the costs associated with achieving that target.
- Emission Trading Scheme (ETS)
3.1 Overview of ETS:
Due to the greenhouse effect organizations are more concerned about the carbon trading in the international market. Emissions Trading Scheme is a method of the Australian Government to challenge of climate change. Therefore a market-based scheme will be introduced to impose a cap or limit on carbon dioxide emissions and allows parties to buy and sell permits for reductions in emissions. The objective of ETS is to reduce the pollutions of environment from all corporations and industries operations
3.2 Effects on Corporations
As the introduction of ETS from government regarding climate change, undoubtedly, it will influence on Australia’s economy. Also, ETS will heavily and adversely affect on all of the industries particularly mining, building and utility industries. From Berg and Moran’s articles (2008), some possibility of outcomes from implanting ETS will be increase in taxation of petrol, devalue homes, factories and commercial premises, unpredictable price change and so on.
3.3 Effects on Stockland:
Relate to the case of Stockland, the use of land, building materials, and transportation will all produce carbon emissions. Therefore the introduction of ETS will directly impact on this corporation’s day to day activities. Stockland needs to take many considerations into their project, such as lowering the operating cost (as mentioned earlier in the effects of carbon taxes), design plan (green buildings) in order to control the exceeding of the cap limit. Otherwise, Stockland will need to purchase additional caps from the secondary market which will be monitored by the Australian Government. Moreover, as the introduction of National Greenhouse and Energy Reporting Act 2007 came in to effect, it increases regulatory requirements for Stockland to comply with this Act. In order to acheive the sustainability in the leading position in the Australian market, Stockland’s Corporate Responsibility and Sustainability Report sets out what they had done for Green House Gas emissions reduction plan including collecting company emission data with its own climate change action plan tool, analysis of datas in their own data system and taking legal advice for the organizatin in regards of NGERA application.
From the Energy Metrics data in Corporate Responsibility and sustainability Report, it shows that Stockland’s greenhouse gas emission in FY 2009 was 145,326,882 in Australia. And office GHG emissions intensity and retail GHG emissions intensity decreased by 8% and 3% during FY2008 and 2009. Electricity consumption has decreased to 7%. It reduced energy consumption by 5 % across their operating retail centre portfolio and it commit to reduce greenhouse gas emissions intensity and energy use intensity by 20% by FY 2014. In addition, the company adopted NABERS rating to assess their performance of buildings. It is a tool to measure the success of energy and water savings initiatives. From the report it shown there is an increasing of ratings from 2.5 in 2005 to 3.6 in 2009. (CRS report, 2009, P77) and it aims to achieve average of 4.5 by 2014 (CRS report,2009). Moreover, the company has been awarded Sustainable Company of the year award in 2009 and six Green Star accreditation in 2010.
Most importantly, the emissions trading scheme will bring a lot of uncertainty to Australia’s economy and corporations, such as price change, increase in costs and so on. However, on the other hand, it may bring the corporation the opportunity to trade cap with other corporations and make potential profit.
Income Statement Effects
According to Stockland annual report 2010, the total revenue was 2,060.1 million. As following pie chart shows the main revenue is from property development sales and rent from investment properties. The other revenue includes the revenue from shopping centres and retirement living. Considering the potential impact of ETS (Emission Trading Scheme) on the Stockland’s income statement, this part strongly focuses on its impact on the property development sales, rent from investment properties, and shopping centres.
Data source: Stockland financial report 2010
4.1 Risks:
4.1.1Increasing expense
The increasing expenses will diminish the corporations’ profit and weaken their financial performance. In the Stockland annual report 2010, it recorded that the revenue from property development sales increased from 1146.4 m to 1348.5m, which means by 17.6% more than the year of 2009. Comparing for the figure of the cost of property development sales, there was an increase rate of 23.5% which means from 802.0m to 990.2 m. Thus, it was considerably higher than the revenue growth rate in 2010. Based on the current figure, presumably, the continuing higher increasing rate of cost will worsen its profitability in the future.
With the gradual implement of ETS, there are many sources play a role for the increasing expenses. Such as, fuel cost, material cost, transportation cost etc, among all of them, electricity cost is the remarkable one. According to the market value of carbon credits at $20/tonne(Federal Treasury, 2008), it is predictable that the electricity price will surge significantly as a result of introduction of Carbon Pollution Reduction Scheme(CPRS) which means the cost of electricity will raise from17% to 24%.
Wholesale price of electricity under different scenarios of CPRS
Source: Report to Federal Treasury, Impacts of the Carbon Pollution Reduction Scheme on Australia’s Electricity Markets, 11 December 2008
The continuous increasing electricity price will burden the corporation in various areas. Most specifically, with respect of property develop sales and rent from investment property, construction sectors and operating offices will be under the burden of higher electricity price. For the rental properties, the tenants will pay the electricity bill, rather than owners, where it is not necessary for Stockland to concern increasing electricity expense in this respect. However, similarly, the suppliers of Stockland will be under same pressure, including the manufacturers of various building materials including cement, lime, concrete and aggregates, and sorts of construction machines. It is easy to understand that manufacturers will eventually distribute the additional increasing cost to their clients including Stockland.
More money will be allocated to the replacement of present facilities which are assessed as less energy-efficiency, as the Building Code of Australia stipulated stricter requirement in energy efficiency, simultaneously leading to a surge in building costs.
4.1.2 Regulatory risk: non-compliance penalties & reporting risk
In respect of ETS, Stockland needs to face the potential regulatory change in its financial reporting and operating activities. The main regulatory sources are from CPRS(Carbon Pollution Reduction Scheme) and NGER, where NGER will provide concrete support for CPRS and require companies to comply with specific accounting reporting standard to report their annual carbon emissions, electricity consumption and production.
With achieving the threshold of NGER, Stockland is also subjugated to NGER. If Stockland does not comply with NGER, it will suffer maximum civil penalties of $220,000 and daily penalty provisions for continuing offences.
Under NGER, Stockland has responsibilities to collect and analyse data about their gas emissions and energy consumption, which will need extra skilled accountants and sector managers engaged, increasing their reporting cost. Referred to its Corporate Responsibility & Sustainability 2010 (p5), mentioned earlier in the ETS effects on Stockland (3.3) we understand that Stockland has begun to integrate its environmental data collection systems within its organization. However, more significantly, Stockland’s report will draw attentions from public concerning whether they hold CSR to implement on more environmental-friendly business activities. Otherwise, it will have a negative impact on their reputation, and undermine its competency and vice versa.
4.2 Opportunities: Potential revenue from ETS
More specifically, the emission trading is the market-based method to reduce the pollution through providing economic incentives, where the lower emission companies can trade its emission permits with the higher emission companies. Stockland is considered as a lower emissions-intensive entity. Stockland will probably get extra credits to trade its emission permits due to its ongoing energy emission program covering its major business.
- Effects on Financial Statement Position:
According to Stockland’s Annual Report 2010, its Balance Sheet is still strong with 1.9 billion cash and undrawn facilities to fund its business strategy and plan. Its total asset is over 14 billion and its weighted average debt maturity is 6.2 years.
source: stockland financial report 2010
However, this Australian leading property group believes that the present and intended regulatory requirements and standards including NGERA 2007, The Energy Efficiency Opportunities (EEO) Act 2006, CPRS, ETS would significantly affect the Company. Based on our research we believe the following impacts are the main factors which will affect the balance sheet items:
5.1 Inventory
In the Stockland annual report 2010, it defined the inventory in diverse way, including land and property held for resale, development work in progress. Although the majority of the Stockland’s emissions are Scope 2 under CPRS, namely, “Indirect emissions that result from the generation of the electricity, heat or steam a company purchases.” , in which Stockland does not directly participate, Stockland will still be influenced because of the increasing downstream cost including electricity cost and intensive building materials costs which will lead to the increase of the cost of inventory.
To be more specific, the significant increase of electricity price will naturally enhance the cost and the explanation could be referred to the company’s Income Statement (Part for the cost the wholesale price of electricity under different scenarios of CPRS: 4.1). It easily can be seen from the following picture (mentioned below), that the building material cost/sqm is usually going up in all 4 states and this is even prior to the ETS time. Therefore, it will be easier to understand why the cost of inventory will go up after the ETS comes into effect. However, Stockland has to analyze whether an increase of its rent price, property price, management fee is appropriate and if so; when and how much could Stockland charge in order not to lose its market share and still have enough profit margin to meet the board’s and shareholder’s requirements. Otherwise, Stock will lose its sales and lease contract if it only wishes to keep the same profit as before.
Most importantly, as a major Company in its industry Stockland has actively participated in many schemes to obtain an idea of the current position of the Company including Citi Group Assessment of Risks and Opportunities for Climate Change and the ASX 100. The Assessment result concludes that “Stockland has the opportunity to earn credits in building efficiency programs and has sustainable buildings initiatives underway.” If Stockland can continue to devote itself in such a way it may even have better sales result as other Companies in the same industry cannot correctly or promptly respond to the ETS.
Data source: BICI, , viewed on 22nd may 2011
5.2 Assets/Liability
After the introduction of CPRS, Permit Asset and Carbon Emission Liability will be shown in the Stockland’s Balance Sheet when applicable. However, so far the Australian Accounting Standard did not specifically cover or explain how to deal with the above 2 items. Based on our research, CPRS White Paper is in favor of adopting the IASB Emission Trading Scheme and the relevant accounting treatment diagram is enclosed. In addition to the tax point of view, the cost of permit can be deducted.
5.3 Disclosures on Financial Statement
For Carbon accounting, it is necessary to follow the financial reporting framework and disclose sufficient information to assure on emissions and energy. Also the accounting format should comply with the current Accounting, Auditing Standards and Corporation Act etc. However as a listing Company Stockland needs to meet its disclosure obligations which will promote investors’ confidence and that will also help them to get financial funds easily. Under Section 674 of the Corporation Act 2001 it states that listing rule will provide legislative support and impose statutory liability for the breaches in different circumstances.
References:
Berg, C & Moran, A. 2008, 'Emissions trading: Towards the biggest economic change in Australian history' Institute of Public Affairs Review, vol. 60, no. 4, pp. 34-37
Stockland, 2010, Stockland financial report 2010, view at 20 May 2011, http://media.wotnews.com.au/asxann/01097953.pdf
Stockland, 2010, Carbon disclosure project 2010, view at 20 May 2011, http://www.stockland.com.au/assets/about-stockland/carbon-disclosure-project-2010.pdf
Stockland, 2009, Corporate Responsibility and sustainability Report, view at 20 May 2011, http://stockland.2009.crs report.com.au/pdfs/FY09%20Corporate%20Responsibility%20and%20Sustainability%20Report.pdf
Australian Government ComLaw, 2007, National Greenhouse and Energy Reporting Act 2007,
(National Greenhouse and Energy Reporting Act 2007)
(office of Environment and heritage)
( Climate and our environment)
( Corporate Responsibility and Sustainability)
( NABERS)
http://www.co2australia.com.au/index.php?action=help&helpcatID=621&helpID=3568#3568
Citi Group Assessment of Risks and Opportunities for Climate Change and the ASX 100
Corporations Act 2001 (Cth)
Stockland financial report, june 2010, p1
, viewed on 21st May, 2011
Overview of emission trading scheme from Australian department of finance and deregulation, 2010
Carbon disclosure project,2010, p-17
Carbon disclosure project,2010, p-17
Berg, C & Moran, A. 2008, 'Emissions trading: Towards the biggest economic change in Australian history' Institute of Public Affairs Review, vol. 60, no. 4, pp. 34-37
Stockland Carbon Disclosure Project 2010
http://www.co2australia.com.au/index.php?action=help&helpcatID=621&helpID=3568#3568
Citi Group Assessment of Risks and Opportunities for Climate Change and the ASX 100
Corporations Act 2001 (Cth)