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June 08, 2009
S&P 500 Companies Face Financial Risks Under Cap-and-Trade Legislation
    by Robert Kropp

Report by the Investor Responsibility Research Center Institute and Trucost finds the utilities sector to be especially vulnerable, and advises investors to incorporate climate change risks into their investment strategies.

Direct emissions in carbon dioxide equivalents (CO2e) by companies in the S&P 500 were greater than the emissions caused by all cars, buses, trucks, and aircraft in the US in 2007. If emissions from companies that are direct suppliers to S&P 500 companies are included, the total doubles, to 4,307 million tons of CO2e. 59% of greenhouse gases (GHG) from companies in the S&P 500 were emitted by the utilities sector.

A recent report, commissioned by the Investor Responsibility Research Center Institute (IRRCi) and prepared by Trucost, analyzes the effects of a cap-and trade program requiring the purchase of carbon emission credits on the earnings of companies in the S&P 500.

The report, entitled Carbon Risks and Opportunities in the S&P 500, finds that carbon costs for companies in the S&P 500 will total over $92.8 billion in 2012, if Trucost's estimate of a carbon market price of $28.24 is accurate. If the 34 companies in the utilities sector had to pay a market price of $28.24 for their GHG emissions, their earnings would be almost halved.

According to the report, a market price of $28.24 would lead to average costs to companies of between 1% and 117% of earnings, and over 5.5% of combined earnings before interest, taxes, depreciation, and amortization (EBITDA). The combined earnings of companies in the utilities sector could fall by an average of 45%. The report finds that five companies in the utilities sector—Exxon Mobil, American Electric Power, Southern Company, Duke Energy, and AES—account for more than 30% of direct GHG emissions from operations of the S&P 500.

For three companies—Allegheny Energy, American Electric Power and Ameren—the report finds that carbon costs could wipe out all earnings.

Because there is currently no charge to companies for GHG emissions, carbon costs are not reflected in their financial statements. However, cap-and-trade legislation would require that companies make carbon costs explicit. Incorporating the costs of emissions would increase the urgency for investors to assess the material risks of climate change in their investments, incorporate carbon disclosure and performance into active ownership practices, and evaluate carbon exposure in their investment strategies.

Jon Lukomnik, program director of IRRCi, said, "Two-thirds of S&P 500 companies have inadequate greenhouse gas emissions disclosures. Investors would be wise to watch closely as the Congress continues its consideration of the American Clean Energy and Security Act of 2009. The legislation is considered highly complex, and could have profound, long-lasting impacts on company balance sheets."


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