February 18, 2003
Carbon Disclosure Project Informs Investors of Climate Change Risks and Opportunities
by William Baue
A new report finds that companies stand to gain competitive advantage by addressing climate change.
Companies and investors alike stand to suffer financial losses due to climate change, according to
a report released yesterday in London by the Carbon Disclosure Project (CDP). On the other hand, companies
that take steps to address climate change can mitigate losses and even gain competitive advantage
that they can pass along to their shareowners.
The report, which was written by Innovest Strategic Value Advisors, was
based on a survey of chairs of the Financial Times's 500 largest global companies by market
capitalization. The survey found that 80 percent of the respondents acknowledged the financial
risks of climate change, but only 35-40 percent of companies are taking action to address the risks
and opportunities of climate change.
"This [report] is about the security of financial
returns as well as protecting the global environment," said CDP Chair Tessa Tennant.
Carbon Disclosure Project was launched in May 2002 to encourage corporate reporting of greenhouse
gas (GHG) emissions, which include carbon dioxide (CO2) as well as four other gases that scientists
believe contribute to global warming. CDP participants include 35 major institutional investors
representing more than $4 trillion in assets, such as Connecticut Retirement Plans and Trust Funds (CRPTF), Credit Suisse Group
(ticker: CSR), and the University Superannuation
"It is almost certain that, in the years ahead, a series of trends will
continue to amplify the financial impacts of climate change, and we want to help companies and
investors alike take control of the situation," said Ms. Tennant.
Climate change poses
both direct risks, such as abnormal weather events resulting from climate change, and indirect
risks, such as litigation that demands companies be held accountable for losses from climate
The report cites research conducted by German reinsurer Munich Re that found worldwide economic losses due
to natural disasters have reached almost $1 trillion over the past 15 years. It also found that
these losses appear to be doubling every decade.
The report notes the rise in shareowner
action on climate change; 19 climate change resolutions were filed in the 2002 proxy season. This
is about twice as many as in any previous year since the first shareowner resolution to address
climate change was filed eight years ago.
Based on the information gathered in the
survey, Innovest analyzed corporate "carbon beta" risk profiles, or the carbon risks of particular
companies relative to their sectors. It found wide variance of threat to shareowner value. For
example, the carbon beta risks for FT500 automobile manufacturers vary by a factor of 35 times in
terms of CO2 emissions per vehicle sold or produced.
Companies that manage climate change
risk well stand to preserve and even enhance shareowner value while same-sector competitors that
fail to manage climate change risk stand to erode shareowner value, according to the report.
The shift toward more prudent management of GHG emissions may not cost companies; indeed,
the companies may end up saving money. The report points out that BP (BP) has cut annual CO2
emissions at their plants by 10 million tons, generating savings of some $650 million. The report
lists many examples of companies with such foresight.
"These companies are ahead of the
curve," said Ms. Tennant. "They are better positioned to achieve cost-effective risk management
solutions and adapt to unforeseen future developments."
"What's more, they are able to
exploit any upside profit opportunities," Ms. Tennant added.
Individual and institutional
investors can take advantage of these potential profit opportunities by investing in companies with
proactive carbon management strategies. In fact, the report concludes by suggesting that the
definition of fiduciary responsibility may require institutional investors, as well as company
directors and executives, to take environmental risks such as climate change into consideration.