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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 (BP--integrated 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."

Clearly, 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.

However, these 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.

Of 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 processes."

"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.


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