The national headlines and global business reports were anything but quiet last month. Hurricane Katrina. Oil prices at $70 a barrel. Refineries off-line. Gas prices above $3 a gallon. Hurricane Rita.

It was a month of uncertainty, sorrow, angst and grief.

And while the eyes of the nation focused intently on developments in Louisiana, Texas, and the fuel lines at the corner gas station, a quieter event was taking place at JP Morgan Chase's global headquarters in New York City.

There, more than 200 investors, corporate executives, academics, and environmentalists unveiled the results of the Carbon Disclosure Project 2005.

Don't roll your eyes just yet.

On the contrary, pay heed: This was not a fringe event, despite the relative lack of publicity. Jim Rogers, the CEO of $4.7 billion Cinergy—who is designated to lead the combined merger with Duke Energy, which will create one of the top five electricity generating companies in the country—delivered the keynote address in New York. A similar event in London was addressed by Sir Christopher Bland, CEO of $35.2 billion BT Group.

Perhaps more importantly, the organizers claim that investors with more than $21 trillion in assets participated. Even discounting that number for the inevitable double counting, it's clear that a broad swathe of the institutional investment community has come around to seeing climate change and environmental issues as bottom-line concerns. Signatories to the CDP's information request included the planet's largest mainstream financial stalwarts: $70 billion HSBC in London, Zurich's $59.9 billion UBS, Italy's banking giant UniCredit S.p.A., the global asset management subsidiary of Tokyo's Nikko Cordial, Paris-based Caisse des Dépôts, the asset management arm of $60.6 billion Deutsche Bank in Frankfurt, Germany, and others, including several in the U.S. such as State Street Global Advisors. And that's in addition to the "usual suspects": CalPERS, the New York State Common Retirement Fund, Dutch pension fund giants ABP and PGGM, Canada's Ontario Teachers Pension Plan, and others.

Those investors joined together to ask companies for increased disclosure about their exposure to various climate and carbon-emission financial variables. By creating a clearinghouse for that information, the investors seem to have built critical mass for the CDP: More than 350 of the world's largest 500 companies by market capitalization responded to CDP's 2005 questionnaire. The level of response is testimony, in part, to the weight of the investors behind the CDP. Corporate executives also appreciate the single information platform, rather than a myriad of surveys increasing the already present questionnaire fatigue.

Cameron

Primarily, however, the serious and thoughtful corporate responses to the CDP questionnaire indicate that climate change issues are increasingly the focus of C-level management in routine business planning. In fact, in the latest CDP survey, the number of corporate responses increased to 71 percent, up from 59 percent last year. And more than 90 percent flagged climate change "as

posing commercial risks and/or opportunities" to their business. "Considerably more of the world’s largest corporations are getting a handle on what climate change means for their business and what they need to do to capture opportunities and mitigate risks," said CDP Chair James Cameron.

And that corporate concern cuts across a wide band of industries. Insurance companies didn't need hurricanes Katrina and Rita to suggest that climate change is affecting their underwriting risks: The Association of British Insurers estimates a tripling of storm and flooding claims by 2050, and French financial services giant AXA believes that climate change issues now affect about 20 percent of global GDP. Indeed, AXA considers climate risk the single largest risk in some of its reinsurance lines—more important than interest rates or foreign exchange.

But where AXA sees risk, others see opportunity.

ABN AMRO Holding, the $45.1 billion Netherland-based financial services firm, has created carbon financing products. Manufacturers such as General Electric, with its "ecomagination" campaign, and Japan's $81.3 billion Matsushita have used the focus on reducing carbon emissions to help reduce overall energy costs. And, of course, Honda and Toyota have stolen automobile mind- and market-share by introducing hybrid cars that reduce emissions and get better mileage.

However, even non-heavy users of energy are participating. Pharmaceutical giant Novartis has publicly announced it expects to spend up to $100 million through 2012 to become a leader in energy efficiency and greenhouse gas emissions. Retailers, hardly the first sector that comes to mind with respect to carbon emissions, are enthusiastic participants in CDP. Starbucks and Paris-based Carrefour—which at $99.1 billion is Europe's largest retailer—both use their sustainability and carbon reduction programs to burnish their corporate images, reduce emissions, and cut energy costs.

But heavy energy users have the greatest incentives to participate in the CDP. That's because the increasing acceptance of carbon emissions as a major business issue has led to a co-operative effort by a number of leading global corporations to request a robust emissions trading system—complete with limits on greenhouse gas emissions. Signatories such as $24.9 billion aluminum producer Alcan, Cinergy, Toyota, and Australian mining giant Rio Tinto

apparently believe that such a plan—with the rules clear and known to all—will be the best way to insure fair competition over the long run, rather than allowing a rogue competitor to lead a destructive short-term race for market share by ignoring its emissions and under-investing in its physical plant.

Emissions exchanges are already in place to facilitate such trading, led by the Chicago Climate Exchange and its subsidiary, the European Climate Exchange.

So, what should corporate executives do to ensure they are not left behind?

First, get a copy of the CDP report, available from the box at right.

Second, sample some of the 354 responses to the most recent questionnaire (also at right). Most of the individual company responses are available for download; take advantage of that and check out what your competition is doing. Perhaps they see opportunities or risks that you have not yet considered. In addition, you can learn what quantitative and qualitative indicators they're using. At a minimum, you'll be able to benchmark your energy costs and emissions compared to your competitors; at most, you'll learn about new techniques to manage risks and reduce costs, and will generate some ideas for increasing revenues and burnishing reputation.

If your company already has a program, what you find on the CDP Web site may help it evolve and improve; if you don’t have a program, what’s on the site might help you decide whether or not you need one, and—if you do—how to begin.

And finally, if your company does develop a program to reduce carbon emissions, or is already doing so, publicize it to your investors. While we believe the $21 trillion figure of institutional investors may be overstated, what is clear is that this issue is rapidly filtering into the mainstream.

Your investors are paying attention.

This column solely reflects the views of its authors, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

What did you think of this column? If you'd like to react or respond, we urge you to write a letter to the editor.

Topics