Investor Network on Climate Risk

The risk that climate poses to any individual business varies, but nearly every company will face some type of pressure from the changing climate including:

• Regulatory Risk.

Companies with significant greenhouse gas (GHG) emissions or energy-intensive operations face risks from new state, national and international regulations limiting carbon emissions and imposing a cost on carbon. While momentum for mandatory federal climate legislation is growing, California and 10 Northeastern states have already taken regulatory action to require emission reductions. Japan, China and other leading trading partners have instituted GHG emission reduction targets, fuel emission standards and renewable energy mandates. Meanwhile, all of Europe is reducing GHG emissions under a cap-and-trade carbon emissions trading program already valued at over 64 billion a year. All U.S. companies – including oil producers, banks and automakers – will be impacted by these fast-spreading regulations.

• Physical Risk.

Businesses are at risk from the physical impacts of climate change, including the increased intensity and frequency of severe weather events such as prolonged droughts, floods, storms and sea level rise. Among the more recent examples is the $10 billion of insured losses, including the destruction of 116 oil platforms, that offshore oil producers suffered from the 2004-2005 Gulf Coast hurricanes.

• Reputational and Competitive Risk.

Tightly linked to regulatory risk in the global and domestic marketplaces, climate risk preparedness will be a key driver in a company's ability to compete. General Electric, for example, sees huge growth opportunities from its many new climate-friendly product lines, such as wind turbines, high efficiency gas turbines, IGCC power plants and hybrid diesel-electric locomotives. Ford and General Motors are currently engaged in a high-stakes struggle to remain competitive as customers turn away from gas-guzzling SUVs in favor of hybrids and other lower-emitting vehicles from Japanese competitors. In China, auto sales are surging well beyond growth rates that the U.S. market has seen in recent decades. Yet, less than a quarter of current U.S. passenger cars and light-duty trucks can meet China's 2008 emission standards.

• Litigation Risk.

Companies in carbon-intensive industries such as oil and gas, electric utilities, and automobile manufacturing are already starting to face litigation concerning corporate contributions to global climate change. For example, eight state attorneys general, the City of New York and three land trusts brought suit in 2005 against the five largest electric utilities in the U.S., on the grounds that they were substantial contributors to the "public nuisance" of global warming. These and other similar cases pose a significant risk to businesses. Should the courts find against companies in such cases, the potential liability is immense. Even if some of the suits are unsuccessful, the costs of litigation and the reputation damage incurred by companies involved could be damaging in their own right.

• Business leaders are increasingly finding that indeed, addressing global warming is good for the bottom line. Companies at the vanguard no longer question how much it will cost to reduce greenhouse gas emissions, but how much money they can make doing it. Climate change poses risks to industry, but it also presents opportunities: astute companies are already taking advantage of new products, markets, and competitive advantages inherent in the low-carbon economy.

The challenges and risks that climate change presents are enormous, but where there is challenge, there is the potential for growth. Companies are already finding space for new products and services within an increasingly "green" economy, and the momentum of this trend will only increase as the US and other countries embrace a low-carbon future. With the financial and competitive risks that climate change brings, forward-looking companies are finding the potential for enormous business opportunities as well.

Clean technology, renewable energy sources, carbon emissions trading markets and energy efficiency efforts are the most vivid examples of these opportunities: the growth of global markets for renewable energy, for example, hit $50 billion in 2005, and the market is projected to eclipse $150 billion by 2015. Companies are seizing on opportunities for creating new low-carbon energy-efficient products — GE's "ecomagination" program, for example, is expected to have sales of $20 billion by 2010. But companies in other sectors are reaping the benefits, too—banks, insurers, and others in the financial industry are also finding innovative ways of proving that for business, "green is green." Climate change, like any momentous challenge, provides opportunities for growth for companies willing to be leaders. Hand in hand with the financial and competitive risks of climate change come opportunities to increase shareholder value, increase brand value and enhance competitiveness and profitability.

Since 2004, corporate leaders in many industries and leading investors have begun to meet the climate challenge. Consider the following examples:

• In 2004, US-based financial institutions were focusing little or no attention on climate change as a core business strategy. In 2007, Bank of America and Citigroup announced $20 billion and $50 billion programs, respectively, to support the growth of environmentally sustainable business activity to address global climate change. The decade-long initiatives include a major focus on lending, investing and other activities to support 'green' economic growth, whether in building design, carbon emissions trading or low-carbon technologies.
• Before 2004, few U.S. electric power companies acknowledged the risks related to climate change. In 2004, American Electric Power released a comprehensive strategic analysis of the risks and opportunities posed by climate change, and in 2007 announced plans to build the first commercial-scale power plant using coal gasification technology, calling it the "right investment" given foreseeable GHG regulations. More than a dozen leading power companies are indicating that GHG regulations are likely and are now advocating for a national climate policy with mandatory controls.
• In 2004, U.S.-based petroleum companies had virtually a single-minded focus on oil and gas development. In 2007, ConocoPhillips announced its support for a mandatory federal policy to cap greenhouse gas emissions and committed $150 million towards alternative fuels research.
• In 2004, no U.S.-based insurance companies incorporated the risks of climate change in their business. In 2006, AIG became the first U.S. insurance company to adopt a corporate climate change policy to actively seek ways for AIG and its clients to cut greenhouse gas emissions.
• In 2004, few companies were willing to advocate for mandatory federal carbon regulation. In 2007, more than 20 leading companies, including Alcoa, BP America, Caterpillar, Dow Chemical, DuPont, Ford Motor Co., Johnson & Johnson, and others, issued a formal call for national legislation calling for significant reductions in GHG emissions. And these companies are among a growing chorus of voices: In March 2007, more than 60 leading investors, asset managers and companies managing $4 trillion in assets released a climate policy call to action requesting prompt tangible action by US lawmakers to tackle global climate change.

And companies have begun to reap the benefits:

• Cost Savings. DuPont reduced greenhouse gas emissions by 70 percent between 1990 and 2004, increasing production by 33 percent during that time while also saving over $2 billion.
• Increased Productivity. Walmart has committed to improving the fuel efficiency of its trucking fleet by 25 percent over the next three years, and stands to save $50 million per year from an improvement of only one mile per gallon in fleet efficiency.
• New Markets. General Electric’s "ecomagination" program has a goal of $20 billion of sales by 2010; it had $12 billion in sales in 2006 alone, with $50 billion worth of back orders for products such as diesel-electric hybrid locomotives, components for hydrogen power and energy-efficient LED bulbs.