September 19, 2006
Carbon Disclosure Project Finds Tipping Point in Awareness But Not Action on Climate Risks
by Bill Baue
CDP4 reveals almost three quarters of FT500 tracking their greenhouse gas emissions, but less than
half of those who think climate change poses risks are reducing GHG emissions.
By now, most everyone accepts that climate change is real, is anthropogenic (that is, caused in
large part by we humans), and is likely catastrophic unless we collectively take responsive action
immediately. This year brought a tipping point to this perception in the US not only amongst the
public, but also amongst corporations, according to the fourth Carbon Disclosure Project report
(dubbed CDP4) issued yesterday in
New York City. The numbers backing the CDP--225 signatories worldwide managing $31.5
trillion, up more than $10 trillion since last year and now representing almost a third of all
global institutional investor assets--show that investors have reached a tipping point on climate
change as well.
As with previous iterations, CDP4 asked for carbon emission-related
data, practices, and policies from the 500 largest companies in the world (FT500)--as well as from an additional 1,600
companies throughout the world this year. More than 940 of the 2,100 companies completed the
10-question CDP4 questionnaire. Innovest Strategic
Value Advisors, a socially responsible investing (SRI) research firm, prepared a report on the
results of the questionnaire responses by the FT500 companies.
The report reveals a degree of disconnect between corporate awareness of climate risks and
opportunities, and corporate action to address these risks and opportunities. Some 87 percent of
responding companies said climate change represents "commercial risks and/or opportunities."
However, less than half (48 percent) of these companies have implemented a program to reduce their
GHG emissions, even though three quarters (73 percent) of respondents are tracking their greenhouse
gas (GHG) emissions.
"The findings of CDP4 confirm that awareness of the risks and
opportunities posed by climate change has risen dramatically among investors and the companies they
own," said James Cameron, chair of the CDP. "But awareness alone will not drive the changes in
investment and corporate strategy needed if disastrous climate change is to be avoided, for that
investors will have to put the CDP data to work."
Innovest has started the process of
putting the CDP data to work. For example, Innovest compiled a Climate Leadership Index (CLI) based on
"best-in-class" responses to the CDP4 questionnaire on a 100-point scale for the 10 industries most
exposed to carbon risks and opportunities. Five companies scored 95 for their CDP4 disclosure:
HSBC (ticker: HBC--banks), Unilever (UN--food
companies), RWE (RWEG--international utilities), BP
oil and gas), and Rio Tinto (RTP--metals and mining).
Innovest also created a GHG regulatory model based on a hypothetical carbon regime modeled on
the Kyoto Protocol.
The model calls for a ten-percent reduction of global GHG emissions by 2012 from a 2005 baseline to
identify potential winners and losers in a carbon-constrained future.
"The best positioned
company in our GHG regulatory model could have windfall revenues yielding $298 million or 10.6% of
2005 Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)," the report states.
"The worst could lose 25% of its EBITDA due to regulatory compliance costs."
carbon regulation would punish some companies and reward others. For example, coal-based electric
utility Southern Company (SO) would incur $1.12 billion to
reach a ten-percent reduction in carbon emissions, assuming a reduction price tag of $25 per tonne.
In contrast Entergy (ETR), which owns nuclear,
hydroelectric, and wind as well as fossil fuel-based electric plants, would generate $298 million
in credits to reach a ten-percent reduction in carbon emissions by 2012.
companies represent the extremes--for most companies, GHG reduction would be less costly than
expected, according to the report.
"At a fixed marginal abatement cost of $25 per tonne,
many companies could reduce their 'business as usual' 2012 emissions to 10 percent below 2005
levels for less than 1 percent of their reported 2005 earnings," the report states.
course, while these actions may be achievable, they may not be enough to solve the climate change
dilemma. This may require even more radical action.
"For companies, this means better
risk management, new and re-examined business models, and being more attuned to climate-driven
opportunities on the upside," states the report. "For institutional investors--who are, after all,
the companies' owners to a considerable extent--it means moving beyond awareness and disclosure and
actually integrating climate risk research into their stock selection and portfolio construction
"Until and unless this occurs, awareness and disclosure alone will not be
sufficient to catalyze changes at a scale and a rate commensurate with the truly extraordinary
nature of the challenge," the report concludes.