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November 03, 2006
As Climate Debate Matures, Companies Strategize Solutions and Investors Push for Disclosure
    by Bill Baue

Companies are taking tangible actions to minimize risks and seize opportunities related to climate change, while investors promote more robust climate-related disclosure.

The release last month of the Stern Review on the Economics of Climate Change by former World Bank Chief Economist Sir Nicholas Stern and Climate Change--the Costs of Inaction by Tufts University researchers catalyzes a major shift in the climate debate. Gone are questions of whether climate change is real or caused by humans (the answer if "yes" to both). Now, skeptics and believers argue over the Review's estimates that inaction on climate change will cost 20 percent of gross domestic product (GDP) annually, while the report from Tufts' Global Development and Environment Institute pegs it at six to eight percent by century's end. Both contend that action to reduce greenhouse gas (GHG) emissions to safer levels would cost much less--as little as one percent of global GDP per year according to the Review.

Many in the business and investment communities are well ahead of the curve on this debate, judging by the spate of recent activity of companies committing to climate change strategies and investors pushing for further action and disclosure to protect and enhance shareowner value.

"Companies and investors are moving quickly from the theoretical implications of climate change to the real nuts-and-bolts," Ceres President and Investor Network on Climate Risk (INCR) Director Mindy Lubber told "In increasing numbers, they're analyzing the risks and seizing the opportunities from climate change--DuPont, GE, and Goldman Sachs being the most obvious examples."

Last month, DuPont announced its 2015 Sustainability Goals, outlining both market expansions and environmental footprint reductions over the next decade. The company seeks to grow by $2 billion its annual revenue from products that create energy efficiency or reduce GHG emissions, while at the same time reduce its own GHG emissions at least 15 percent. These are among the strategies outlined in a recent report from Business for Social Responsibility (BSR) entitled A Three-Pronged Approach to Corporate Climate Strategy. Later in the month, Morgan Stanley announced another strategy discussed in the report: it will invest $3 billion in global carbon markets and low-emissions energy projects over the next five years.

"Wall Street is also paying closer attention, especially in regard to the electric power sector which faces financial exposure from emerging greenhouse gas limits," Ms. Lubber added.

Much of the recent climate-related activity focuses on enhancing disclosure of climate risks so that investors and analysts can accurately assess the financial implications of companies' climate strategies. Just this week Ceres released a report highlighting best practices in climate risk disclosure by electric power companies, which face almost certain regulation of GHG emissions in the future.

This report piggybacks INCR's release earlier in the month of a Global Framework for Climate Risk Disclosure. The framework urges four elements of disclosure: total historical, current, and projected GHG emissions; strategic analysis of climate risk and emissions management; assessment of physical risks of climate change; and analysis of risk related to the regulation of GHG emissions. Recommended avenues of disclosure include the Carbon Disclosure Project (CDP), sustainability reporting according to Global Reporting Initiative (GRI) guidelines, and of course through mandatory financial reporting such as disclosures required by the US Securities and Exchange Commission (SEC).

In its fifth annual survey of climate-related disclosure in SEC filings by companies in five sectors most impacted by climate change, Friends of the Earth (FoE) found nearly twice the rate of disclosure in 2005 than it did in 2000. However, only about half (49 percent) of the 100 companies surveyed are disclosing climate-related risks to their investors. All of the 26 electric utilities surveyed are reporting now, which is up from 50 percent five years ago. Over three-quarters of oil and gas companies are reporting as well, up from 44 percent. However, about a quarter of petrochemical and automakers are reporting, up from seven and 22 percent respectively, and only 15 percent of insurers are reporting, compared to seven percent in 2000.

"A growing number of companies are complying with SEC disclosure rules and are reporting climate risks to shareholders," said Michelle Chan-Fishel, coordinator of FoE's Green Investments Program. "But many corporations are still taking an all-too familiar approach of painting a rosy picture of themselves while hiding their true risks--and in some cases, while pursuing dubious business strategies."

Ms. Chan-Fishel points to some encouraging action in Canada that promotes more robust disclosure on climate-related issues. The Performance Reporting Board of the Canadian Institute of Chartered Accountants (CICA) is currently soliciting public comments on a draft paper entitled MD&A Disclosure About the Financial Impacts of Climate Change and other Environmental Issues.

"Although this draft does not have the authority of a legally-binding accounting standard, it is important in that it offers best-practice guidance to accountants and reporters," Ms. Chan-Fishel said. "The draft is also important because it is the first climate risk disclosure guidance issued by an accounting body."

The paper recommends providing important guidance to companies on their climate-related disclosures, but it also falls short in a number of areas, according to Ms. Chan-Fishel. For example, it does not ask companies to report their GHG emissions, disclose their energy use or sources, discuss carbon trading, or declare their public position on climate science or mandatory GHG emissions caps. CICA has not placed a deadline for public comment submissions.


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