Companies: a new world of risk and opportunity

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Mindy Lubber Mindy S Lubber, President of Ceres and Director of INCR

Climate change will have far-reaching consequences on companies across all sectors of the economy. Already, billions are being invested in energy efficiency, renewable energy and development of low carbon technologies. Company disclosure on climate-related risks is increasing, carbon costs are being factored into company capital planning and corporate leaders are calling for mandatory caps on greenhouse gases (GHGs). Nevertheless, while many leading companies are taking important steps to manage climate change, bolder actions to maximise energy efficiency, develop climate-friendly products and curb greenhouse gas emissions throughout company supply chains will be needed.

INTRODUCTION

The potential consequences of climate change are generally understood, but how fast and dramatic those changes will be and how society will respond is still uncertain. Given projected physical impacts and the rapid spread of carbon-reducing regulations in the US and abroad, the risks, opportunities and challenges of climate change for business are profound. How companies respond will have important consequences for their competitiveness, profitability and even their very survival. Some companies and industries, by virtue of their own energy use or the goods or services they provide, face more pronounced challenges than others.

ELECTRIC POWER

Anticipated regulation of GHGs poses significant financial risks for the electricity sector, which accounts for 40 per cent of US CO2 emissions. The recent proliferation of state-level renewable portfolio standards (RPSs), which require a certain percentage of electricity needs to be met by renewable energy sources, is another challenge for US utilities. Fuel mix is an important variable affecting electric power companies’ climate risk profiles. Companies that burn large amounts of coal, the most carbon-intensive fuel, have higher emissions and greater climate risk exposure than companies that don’t. Southern Co, a heavily coal-dependent utility that ranks among the nation’s highest CO2 emitters, recently estimated that a moderate scenario for controlling GHG emissions could cost the company nearly US$800 million annually.

Pacific Gas & Electric (PG&E), a California-based utility that generates more than half of its power from carbon-free energy sources, has avoided building dozens of new fossil-fuel power plants by aggressively pursuing energy efficiency to an extent not seen elsewhere in the industry. (California, unlike nearly every other state, rewards utilities financially for energy efficiency expenditures.) By 2008, PG&E will invest an additional US$1 billion to install 10 million ‘smart meters’ to allow its customers to monitor and conserve their energy use, especially during peak demand hours.

With renewable portfolio standards in place in 25 US states, electric power companies are moving to diversify their generation portfolio to include larger amounts of renewable energy. Florida Power and Light (FPL), the fifth largest US electric power producer, is now the country’s leading wind power generator and developer of wind projects. FPL is also planning to spend US$2.4 billion on major solar energy projects, including a new 300 megawatt solar thermal generating operation in Florida.

Even heavy coal burning utilities are addressing GHG emissions. American Electric Power, the largest CO2 emitter in the Western Hemisphere, is making major investments to retrofit existing coal-fired plants and to build new plants with cutting edge carbon capture and storage technology. Proposals to build new coal-fired power plants, especially those with no CO2 controls, are facing tougher scrutiny. As noted in a July 25, 2007 article in the Wall Street Journal, coal plant proposals in Texas, Florida, North Carolina, Oregon and Minnesota have all been cancelled after “states [concluded] that conventional coal plants are too dirty to build”.

OIL AND GAS

Because oil and gas production and consumption accounts for more than half of carbon dioxide emissions in the US and because the industry makes large infrastructure investments that last for decades, oil and gas companies face substantial financial risks from regulatory developments, including carbon limits. These limits will drive the US and global economy towards low carbon energy sources such as wind, solar and other renewables.

The physical changes from climate change carry particular risks for the oil and gas industry – for example, damage to critical infrastructure from the 2005 hurricanes helped trigger nationwide petroleum shortages and a surge in gas prices. Climate change also poses risks for billions of dollars of pipelines and other infrastructure built on melting permafrost in Alaska, Canada and elsewhere.

A growing number of companies are boosting their investments in alternative energy sources such as wind, solar and hydrogen. Both BP and Shell have built a large stake in wind power, with Shell being one of the top five wind power generators in the US. Chevron, a major US oil producer, recently announced plans to invest US$400 million annually into renewable energy, including emerging technologies such as wave power and geothermal energy.

Some oil companies are also aggressively pursuing energy efficiency. BP’s energy efficiency initiative has been the company’s most profitable project in the last decade; with a US$100 million investment, the company realised US$400 million in savings. Statoil of Norway emits less than a third of the industry average of GHGs per barrel produced thanks to an intense focus on energy conservation throughout its production chain.

Many companies are also factoring carbon costs into long term capital spending plans, setting targets to reduce GHG emissions and calling for federal policies with mandatory carbon caps. Among those urging strong federal action are ConocoPhillips, BP America and Shell. Exxon Mobil is unique in its dismissal of both renewable energy and mandatory carbon limits.

BANKING/FINANCE

No one yet knows the exact combination of measures society will need to avoid the hazardous effects of climate change, or the new technologies that will produce energy with less climate impact. Regardless, the banking and financial sector, which decides who borrows what money at what cost, will play a huge role in helping to deliver the innovation to meet the climate challenge.

Citigroup’s 10 year, US$50 billion climate change commitment exemplifies strategies employed by financial firms. In addition to investments reducing its own energy use and carbon footprint, about US$30 billion will finance the development and commercialisation of its clients’ low carbon technologies. Citigroup has also developed expertise to advise clients on environmental risk management, including climate risk management. At the retail customer level, Citigroup is financing home equity loans specifically for the installation of solar electric systems and encouraging the use of efficient ‘paperless’ statements, planting a tree for each customer who selects this option.

Bank of America has made a similar 10 year, US$20 billion commitment to achieve internal and external GHG reductions. In addition to making its own facilities more energy efficient, US$18 billion will support activities such as the development and financing of ‘green’ buildings, advising clients participating in carbon markets, lending to support development of low carbon and low emissions technologies and favourable lending rates for mortgage customers whose homes meet certain energy efficiency standards.

Reducing the GHG footprint of their lending portfolios is a key step financial institutions can take to address global warming. In 2004, Bank of America adopted an environmental policy that calls for a seven per cent reduction in GHG emissions in its energy and utility portfolio by 2008, along with a nine per cent reduction in its own operational GHG emissions by 2009. Citigroup has also set targets to reduce its operational GHG emissions, but has not addressed the climate change impacts from its lending portfolio. A growing number of investors and environmental groups are pushing Citigroup, Wells Fargo and other major banks to lower the carbon footprint in their lending portfolios.

AUTOMOTIVE

With the transportation sector accounting for roughly 28 per cent of US CO2 emissions, car makers have good reason to be concerned about climate change risks and opportunities. The long term value of car companies will depend in part on their ability to deliver appealing products in a competitive marketplace that is increasingly shifting towards fuel efficient, low emission vehicles and technologies.

Canada, the European Union, China, Australia, Japan and many US states are implementing legislation to reduce GHG emissions and increase vehicle fuel efficiency, ensuring that virtually all of the world’s major car markets will be covered by increased fuel economy and air emissions standards. In China, which is projecting double-digit annual growth in vehicle sales, the government has set emissions standards for 2008 that less than a quarter of US manufactured passenger cars and light-duty trucks will be able to meet.

Honda and Toyota are far ahead of their US counterparts in the development of climate-friendly, fuel saving technologies. Honda builds the most fuel efficient cars in the world, while Toyota dominates the gasoline/electric hybrid market. Indeed, more than a million of Toyota’s eco-friendly cars, the Prius, have already been sold. Both Toyota and Honda plan to introduce fuel efficient hybrids to China’s burgeoning car market. US car makers are trying to catch their overseas counterparts, with Ford offering two hybrid models and General Motors developing cars that run on ethanol, but both companies continue to lag behind.

TECHNOLOGY SECTOR

Technology companies are a major contributor to GHG emissions, mostly because they require massive amounts of energy to power their operations and servers, as well as their products. As major information hubs, technology firms also have a unique opportunity to shape and facilitate positive societal responses to global warming. For example, Sun Microsystems recently introduced a first-of-its-kind online community, OpenEco.org, which helps companies and other organisations track and compare GHG emissions and share strategies for reducing them.

Many technology companies are responding to these risks and opportunities by launching progressive climate change strategies that focus on minimising direct and indirect emissions impacts. Dell Computer is committed to reducing its operational GHG emissions 15 per cent by 2012 and is asking major suppliers to identify and report their own GHG emissions.

IBM is spending US$1 billion a year on a new energy efficiency initiative, Project Big Green, that it hopes will enable the average 25,000ft2 data centre to cut its energy bills by nearly half. IBM has also set a goal of doubling the computing capacity of its worldwide data centres by 2010 while keeping power consumption levels steady.

Sun Microsystems is partnering with California-based utility PG&E on a programme that provides PG&E customers with US$700 to US$1,000 cash rebates for each energy efficient computer server they purchase from Sun. Similar partnerships between vendors and utilities are being explored in other parts of the country.

CONSUMER PRODUCTS

In addition to consuming prodigious amounts of energy to power their stores, retail companies impact climate change through their massive supply chains, transportation needs and the products they sell. Large chain stores such as Home Depot, Wal-Mart and Bed, Bath and Beyond operate tens of millions of square feet of space that must be heated in winter and cooled in summer. They also operate thousands of trucks that are driven millions of miles each year. Because such a large portion of retailers’ expenses is related to energy consumption, they have a significant incentive to become more energy efficient. Among those seizing this opportunity is retail giant Wal-Mart, which is re-tooling its truck fleets to cut fuel use and building energy efficient Supercenters that will use 20 per cent less energy. The programmes are saving the company tens of millions of dollars a year and most are paying for themselves within two years.

Climate change can impact consumer products companies in other ways. Manufacturers of soft drinks and computer chips, for example, are major consumers of water, a natural resource that is and will continue to be profoundly affected by climate change. Coca-Cola is partnering with the World Wildlife Fund to protect the world’s seven main watersheds and become neutral in terms of water use, while Pepsico has become the nation’s largest purchaser of renewable energy credits. Renewable energy credits, or RECs, allow consumers to purchase a specified amount of their energy from a renewable energy supplier, such as a wind farm. In 2006, Whole Foods, another major retailer, purchased enough RECs to offset all of the electricity consumed by all of its stores.

Consumer product companies are also beginning to use carbon labels, which disclose the quantity of GHG emissions involved in making a specific product. Timberland has included carbon labels on its shoes, making it the first major US company to do so. Carbon labels are also taking hold in the UK where they are used for products such as potato crisps and shampoo.

CONCLUSION

Business is responding to the risks and opportunities from climate change. Companies have begun integrating climate change into their business strategies by reducing the GHG emissions from their operations, products, supply chains and employees. But more companies will need to accelerate and deepen their actions if global greenhouse gas emissions are to remain at levels scientists consider safe.

Author

Mindy S Lubber is the President of Ceres, a leading US coalition of investors and environmental leaders working to improve corporate environmental, social and governance practices. She also directs the Investor Network on Climate Risk (INCR), an alliance that coordinates US investor responses to the financial risks and opportunities posed by climate change.
Ms Lubber has held leadership positions in government as the Regional Administrator of the US Environmental Protection Agency; in the financial services sector as Founder, President and CEO of Green Century Capital Management; in the private sector as the President of an environmental law and policy consulting group; and in the not-for-profit sector leading environmental and public interest law organisations, including the National Environmental Law Center, which she founded.

Organisation

Ceres is a US-based network of investors, environmental organisations and other public interest groups working with companies and investors to address environmental and social challenges such as global climate change. Its mission is to integrate sustainability into company practices and the capital markets to protect the health of the planet and its people. Ceres directs the Investor Network on Climate Risk, a network of more than 60 institutional investors managing more than $4 trillion in assets focused on the business impacts from climate change.

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