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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.

The 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 Scheme.

"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 change.

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.


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