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February 05, 2007
S&P 500 Lags on Climate Disclosure, Electric Utilities Burning Economic Value Into Carbon
    by Bill Baue

Two recent reports use findings of the 2006 Carbon Disclosure Project to assess limits of transparency on climate risks and opportunities and drag on value creation at electric utilities.

Last week saw a flurry of activity on climate disclosure, or corporate reporting of greenhouse gas (GHG) emissions data--primarily carbon dioxide (CO2). Two key reports based on responses to the 2006 Carbon Disclosure Project (CDP), the fourth annual 10-point questionnaire sent to the biggest corporations in the world, were released.

One report, commissioned by Ceres, a coalition of investors and environmentalist groups, and Calvert, a socially responsible investing (SRI) firm, assesses how S&P 500 companies address the four points of the Global Framework for Climate Risk Disclosure in their CDP4 responses. The other report, commissioned by California's two huge pension funds (CalPERS for public employees and CalSTRS for teachers) and the World Wildlife Fund (WWF), examines if electric utility companies are adding or detracting economic value after factoring in carbon emissions.

The Global Framework upon which the Ceres-Calvert report is based was first introduced in October 2006 by a coalition including CalPERS, CalSTRS, CDP, and Ceres as well as the Global Reporting Initiative (GRI) and the Universities Superannuation Scheme (USS). The Framework covers four elements: total GHG emissions, physical risks, regulatory risks, and strategic analysis.

"The report's overwhelming conclusion is that disclosure practices among the nation's 500 largest companies are severely lacking," states the report. "Less than half [47 percent] of S&P 500 companies responded, and the responses received fell far short of the standards set by the Global Framework."

The US response rate compares poorly to the global rate--almost three-quarters (72 percent) of the FT500, a listing of the largest companies in the world, responded to CDP4. Likewise, S&P 500 companies provided only about a quarter of the information covered in the Global Framework in their CDP4 responses. Entergy (ticker: ETR), the company with the most complete disclosure, provided 64 percent of the information covered in the Global Framework.

"Companies provided more information about qualitative measures such as corporate governance than they did about quantitative measures such as emission reduction goals or the impact of regulations that would impose a cost of carbon," the report states.

Exacerbating these low levels of disclosure is the relatively high level of refusal to share this information publicly, as nearly a third of the respondents designated their responses "confidential," thus making it available only to CDP4 signatories.

"This report underscores the need for the SEC to take action to include climate risk as part of their 'materiality' standard for corporate reporting, and for the companies of the S&P 500 to take heed,” said Howard Rifkin, deputy treasurer of the state of Connecticut, a leading activist on climate risk.

The report makes ten recommendations to companies to improve climate disclosure, including creating a climate management team with board oversight and setting absolute GHG emission reduction goals and deadlines with an action plan for achieving results. For investors, it recommends incorporating climate risk and opportunity into investment analysis and selection, and addressing these issues through active share-ownership.

The electric utilities report reflects a similar response rate as the S&P 500 report, with 112 of 265 global power companies responding to CDP4. The electric utilities report focuses on quantitative data, with UK-based SRI research firm Trucost applying the TRUEVA methodology it devised with Yale University Professor Bob Repetto that integrates environmental externalities into "economic value added" (EVA) calculations.

Unfortunately, only 25 companies disclosed sufficient quantitative data for a TRUEVA analysis. Of these 25, only six added value, while the remaining companies detracted value from the economy once their carbon emissions were factored into the equation. Pacific Gas & Electric (PCG) scored highest with a TRUEVA measure of $395 million after the damages it produced were subtracted from surpluses generated. Coal-burner American Electric Power (AEP) had the lowest TRUEVA measure of a negative $3.3 billion based on a cost of $21 per ton for carbon emissions--the price set under the European Union Emission Trading Scheme.

"This study shows investors that the true value of utilities is considerably less once the utilities' environmental costs have been incorporated into the analysis," said Russell Read, chief investment officer of CalPERS. “As this analysis demonstrates, it is imperative for utilities to disclose the environmental data required by investors so they can more accurately assess a firm's true value and associated risk."

Bookending the release of these two reports were a couple of other significant developments on climate disclosure. The week before these publications saw the launch of the Climate Disclosure Standards Board (CDSB) at the World Economic Forum (WEF) in Davos, Switzerland. The CDSB gathers under one umbrella all the key players on climate disclosure--including the California Climate Action Registry, CDP, Ceres, the Climate Group, International Emissions Trading Association, WEF Global Greenhouse Gas Register and World Resources Institute (WRI.)

The CDSB seeks to harmonize carbon disclosure in company annual reports around the four key points of the Global Framework, raising the profile and relevance of this information to all investors and stakeholders (instead of just those who already understand the importance of climate risk.)

"It's time to raise the bar on corporate disclosure of carbon emissions reporting," said Jim Rogers, CEO and chair of Duke Energy (DUK). "Adopting this standard is key to addressing the climate issue."

Capping off the activity was the February 1st announcement by the CDP of its dissemination of the 2007 questionnaire to 2,400 of the largest quoted companies in the world to gather data for CDP5. The number of signatories is up from 225 for CDP4 to 284 in CDP5, with assets under management increasing from $31 trillion last year to $41 trillion backing CDP5.


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