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The $31.5 Trillion Question: Is Your Company Prepared for Climate Change?

Climate change has become a major concern among leading US financial institutions and companies, according to a new report by the Carbon Disclosure Project (CDP), a coalition of global investors with more than $31.5 trillion in assets.

The $31.5 trillion in assets behind CDP4 represents an increase of over $10 trillion (50%) from the $21 trillion behind CDP3 in 2005. Much of the increase is the result of US financial giants AIG, Goldman Sachs and Morgan Stanley joining Merrill Lynch, and other US institutional investors, to become CDP signatories.

"The findings of CDP4 confirm that awareness of the risks and opportunities posed by climate change has risen dramatically among investors and the companies they own," says James Cameron, Chairman of the CDP. "But awareness alone will not drive the changes in investment and corporate strategy needed if disastrous climate change is to be avoided, for that investors will have to put the CDP data to work."

On behalf of its 225 signatory investors, CDP on February 1, 2006, requested information on corporate risks and opportunities associated with climate change from more than 2,000 companies globally including the world's 500 largest publicly-owned companies (FT500). The institutional investors represented by CDP will receive the companies' answers and CDP's fourth annual report (CDP4) on the FT500 companies' responses written by consultancy Innovest and released this morning at the New York headquarters of Merrill Lynch (a founding signatory to CDP) and on the CDP Web site.

Among CDP4 report's key findings:

Disclosure Trends

  • CDP4 generates highest-ever response rate, with 72%, or 360 of the FT500
    companies responding, up from 47% of the companies that responded when CDP first surveyed the FT500 in 2003.

  • CDP4 sees a dramatic increase in the response rate from US companies, with 58% answering the questions, up from 42% in 2005. But many US companies continue to lag.

  • US companies responding for the first time to CDP's request for information include American Express, Boeing, Home Depot, Disney and Wal-Mart.

  • US companies appearing in the CDP4's Climate Leadership Index, which identifies best in class responses, include Chevron, Citigroup, Ford, FPL Group, GE and Marsh and McLennan.

  • 87% of responding companies indicated climate change represented "commercial risks and/or opportunities."

  • Action to reduce emissions trails awareness of the issue. Less than half
    (48%) of companies that consider climate change to present commercial risks and/or opportunities to their business have implemented a greenhouse gas (GHG) reduction program.

    Financial Implications

  • GHG regulation creates winners and losers. The best positioned company in the Innovest GHG regulatory model could have windfall revenues yielding $298 million or 10.6% of 2005 earnings (EBITDA). The worst could lose 25% of its EBITDA due to regulatory compliance costs.

  • GHG reduction less costly than expected. At a fixed marginal abatement cost of $25 per tonne, many companies could reduce their "business as usual" 2012 emissions to 10% below 2005 levels for less than 1% of their reported 2005 earnings.

  • Clean energy grows up. In North America "clean tech" has become the fifth largest venture capital investment category, trailing only Biotechnology, Software, Medical and Telecommunications. It is estimated
    that the clean energy market will grow from $39.9 billion currently to $167.2 billion by 2015.

  • Investors taking action on climate change. Numerous financial institutions, including AIG, Allianz and Goldman Sachs have released dedicated climate change policies in the past 12 months. Moreover, Citigroup, JP Morgan Chase, Merrill Lynch and Morgan Stanley among others have published equity research reports analyzing the financial performance of the carbon markets.

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