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Ignoring Climate Change Poses Big Financial Risk

Ignoring Climate Change Poses Big Financial Risk

Published 02-17-03

Submitted by CDP

LONDON - Investors failing to take account of climate change in their asset allocations and equity valuations face serious investment repercussions over time, according to a new survey of the chairmen of the 500 largest global companies by market capitalization.

The survey is the largest ever to assess and provide hard data on acompany's exposure to climate change through impacts of both extreme weatherevents and regulation of Greenhouse Gas Emissions, presenting these factors interms of the value of shareholdings in corporations worldwide.

The Carbon Disclosure Project (CDP), which conducted the survey, is a unique collaboration by more than 30 major institutional investors, who on 31May 2002 collectively represented more than $4 trillion in assets. (See listbelow.)

The CDP study found that while 80 percent of respondents acknowledge the importance of climate change as a financial risk, only 35-40 percent were actually taking action to address the risks and opportunities. The full report, Executive Summary and responses are available at http://www.cdproject.net

To ensure complete objectivity, all funding for the CDP was raised from independent philanthropic sources and coordinated by Rockefeller Philanthropy Advisors (http://www.rockpa.org). Funders included The Nathan CummingsFoundation (USA); Esmee Fairbairn Foundation (UK); Turner Foundation (USA); W.Alton Jones Foundation (USA); Climate Initiatives Fund (UK); Home Foundation(Netherlands); Network for Social Change (UK); Rufus Leonard (UK); and WWF(UK).

Innovest Strategic Value Advisors (http://www.innovestgroup.com), a NewYork-based specialist advisory firm that analyzes and rates companies'environmental and social practices, prepared the final report.

Risk Exposure Varies Widely

The Carbon Disclosure Project report reveals that the financial impact of climate change extends well beyond the obvious, emissions-intensive sectors such as oil and gas and electric utilities. Companies in the financial services, transportation, semiconductor, telecommunications and electronic equipment sectors, among others, will also be significantly affected.

Further,industry sectors vary widely in their degree of risk exposure and the levels to which companies, in response, develop their risk management capabilities. Those at greatest risk were not necessarily those with the strongest risk management architecture. For example:

* Auto: FT500 manufacturers vary by a factor of 35 in terms of Carbon Dioxide (CO2) emissions per vehicle sold/produced.

* Electric Utilities: In the US, estimated total costs of reducing Greenhouse Gas emissions intensity by 10%, range from over $1.70 to below $0.20 per MWh.

* Oil and Gas: Total costs of reducing 2001 CO2 emissions by 10%,assuming a uniform 20 Euros/ton marginal abatement cost, range between 0.7% and 5.1% of 2001 net income.

* Banks: Share price valuations could fall as much as 29 percent for banks without adequate carbon risk management strategies.

Inadequate preparation will also have a profound impact on supply chains.The survey showed that the additional costs associated with climate change would alter the economics of supply chains, especially in the commodity and manufacturing businesses. As a result, emerging market producers will become more cost-competitive short-term, but the EU and the U.S. may have a powerful case to restrict imports or impose a carbon levy under GATT rules.

Monumental Educational Challenge

"We face a monumental educational challenge because most institutional investors have a 'knowledge deficit' when it comes to obtaining systematic, portfolio-wide information about the risks companies face when it comes to climate change," said Tessa Tennant, CDP chairperson. "The financial consequences of climate change are almost certain to grow, and the information deficit for investors will prove costly."

Managing the financial risks of climate change does not necessarily impose a net cost on companies. The report noted that those companies surveyed that were quick to reduce gas emissions stand to gain competitive advantage, in terms of both cost and market risk management. For example BP has cut annual CO2 emissions at their plants by 10 million tons, saving some $650 million.

According to Ms. Tennant, these companies are ahead of the curve, better positioned to achieve cost-effective risk management solutions, adapt to unforeseen future developments and exploit any upside profit opportunities.

Corporate Response Bodes Well for Future

"This survey confirms the importance of taking early action to reduce greenhouse gases, one of the most pressing environmental issues of our time," said Doug Bauer, Vice President of Rockefeller Philanthropy Advisors. "We are pleased that we could play a role in helping institutional investors understand the direct connection between climate change, fiduciary responsibility and shareholder value."

The CDP team was enormously gratified by the response it received. According to Ms. Tennant, it is almost certain that in the years ahead a series of trends will continue to amplify the financial impacts of climate change, and the CDP's goal is to help companies and investors alike take control of the situation.

"This is about the security of financial returns as well as protecting the global environment," said Ms. Tennant. "The report should be required reading for directors, executives, and investors everywhere -- and companies failing to take its messages seriously are likely to hear from their shareholders."

A U.S. briefing for financial analysts on the Carbon Disclosure Project will be held in New York on March 4th. Swiss Re will host the event; Madeleine Albright will address the gathering and media will be invited to attend.

Carbon Disclosure Project Signatories included:
Abbey National
Alecta, (Ramsay Brufer +46 8 441 9262) Allianz Dresdner Asset Management (Bozena Jankowska +44 20 7475 1733)
AP2 (Lennart Jonsson +46 31 704 29 29)
AP3 (Pernilla Klein +46 8 555 17 142)
Baillie Gifford & Co
Calvert (Elizabeth Laurienzo +1 301 657 7047) Central Finance Board of the Methodist Church (Bill Seddon +44 20 7251 1199)
Coalition for Environmentally Responsible Economies (CERES)(Ariane van Buren +1 212 222 0700)
Connecticut Retirement Plans and Trust Funds (Bernard Kavaler +1 860 702 3277)
Cooperative Insurance Society (CIS) (Helen Beckett +44 161 837 4100)
Credit Suisse Group (Dr. Bernd Schanzenbaecher +41 1 333 8033)
Domini Social Investments LLC (Kimberly Gladman +1 212 217 1023)
Gartmore Investment Management plc
Henderson Global Investors (Nick Robins +44 20 7410 4356)
ING Sustainability Funds (Herman Kleeven +31 70 378 1798)
Insight Investment (Helen Barnes +44 20 7321 1580)
Jupiter Asset Management (Emma Howard Boyd +44 20 7314 4769)
Local Authority Pension Funds Forum(Stuart Bell at PIRC Limited +44 20 7247 2323)
Rabobank (Daniel Dijk +31 622 934 186)
Legal & General (John Morgan +44 20 7528 6213)
Merrill Lynch Investment Managers (Nigel Webb +44 20 7743 5938)
Morley Fund Management (Toby Belsom +44 20 7809 6198)
Munich Re
Societe Generale Asset Management UK(Carole Arumainayagam +44 20 7815 8909)
Storebrand (Stephen Williams +44 20 7960 7915)
Swiss Re Asset Management (Pascal Dudle +41 43 285 5740)
Threadneedle Investments (Richard Eats +44 20 7521 9100)
UBS Global Asset Management (UK)(Sandie Deane +44 20 7901 5155)
University Superannuation Scheme
Walden Asset Management (Timothy Smith +1 617 726 7250)

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