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Climate Action: Part 2 - Down to Business

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Last year, the Yale Project on Climate Change Communication conducted a survey of American attitudes on climate change. In one question, it asked who should be doing more to fight global warming. The top answer, chosen by 73 percent of the respondents: corporations.

Next, it asked whom people trusted for information about climate change. The least trusted institution: corporations.

Despite the public's low trust level, corporations are one of our best hopes for helping the global community avoid catastrophic climate change. Three emerging factors are encouraging companies to enter a clean energy economy, even before a climate bill from Congress or regulation by EPA. The three factors are opportunity, risk and transparency.

Hunter Lovins, the founder and president of Natural Capitalism Solutions, is one of our sharpest experts on the business case for "climate capitalism". With examples lined up like bullets on a bandolier, Lovins cites company after company that has boosted its profits and market share with energy efficiency and renewable energy technologies. DuPont cut its carbon emissions 80 percent, saved $3 billion over five years and saw the value of its stock rise 340 percent, Lovins says. In 2005, Lee Scott set out to cut Walmart's energy consumption 30 percent over three years and to double the fuel efficiency of its fleet. Walmart expects these measures to save $300 million by 2015. It's already saving $25 million every year just by installing a device that reduces idling time of its trucks, Lovins says.

She believes the pull of profits and global market share will bring climate capitalism to the planet's rescue. The international carbon-cutting sector already is developing rapidly. HSBC Global Research reports the number of companies providing climate-related products and services has grown 140 percent since 2004. The sector now produces $530 billion in revenues worldwide and will reach $2 trillion by 2020, HSBC says.

However, some companies, perhaps many, will continue betting on the carbon-intensive economy. That's where risk and transparency come into play. Climate change already is creating a variety of risks for corporations; unless they manage or avoid those risks, companies are likely to see an exodus of investors, lenders and shareholders.

Some risks are physical as sea levels rise, extreme weather events take their toll and other disruptions, from floods to drought, threaten corporate facilities and operations. Some risks are legal as victims of climate change seek compensation from carbon-intensive industries - an emerging area of law called "climate tort". New technologies, scientific findings, renewable energy portfolio standards - and yes, EPA regulation or a price on carbon -- all constitute risks for the producers and consumers who continue betting on the carbon economy.

Corporations will be less able to hide these risks from investors, shareholders and lenders because of a trend toward greater transparency. Groups like Ceres and the Climate Disclosure Project have encouraged companies for many years to voluntarily disclose their environmental policies and performance. Now transparency is becoming a requirement of doing business. Ceres notes that public and private policies both are moving toward "robust climate risk disclosure across various industry sectors".

In the public sector, the Securities and Exchange Commission (SEC) issued guidance this year on how publicly traded companies should disclose climate risks. Said to be the first of its kind in the world, the guidance advises companies that their obligation to inform investors of climate risks may be trigged not only by extreme weather, lawsuits, technological breakthroughs and regulations, but also by international accords, political and scientific developments, or business trends

The Environmental Protection Agency also is contributing to corporate transparency by requiring large greenhouse gas polluters to publicly report their emissions starting next year.

In the private sector, Walmart launched an initiative last year to create a "sustainability index" that discloses the social and environmental impacts of all the products it sells. The company's first step was to survey its 100,000 suppliers around the world on their sustainability practices, including whether they monitor and publicly report their greenhouse gas emissions. Walmart's goal is to produce a comprehensive electronic product rating system that will become the standard in the retail sector.

The National Association of Insurance Commissioners requires insurers with annual premiums of $500 million or more to disclose climate risks to regulators, shareholders and the public.

Sometimes companies incur risk by association. For example, a number of banks are protecting their public images by backing away from companies engaged in harmful environmental practices. The New York Times reports:

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

In the most recent example, the banking giant Wells Fargo noted last month what it called "considerable attention and controversy" surrounding mountaintop removal mining, and said that its involvement with companies engaged in it was "limited and declining" ...

(T)he policy shift by Wells Fargo follows others over the last two years, including moves by Credit Suisse, Morgan Stanley, JPMorgan Chase, Bank of America and Citibank, to increase scrutiny of lending to companies involved in mountaintop removal -- or to end the lending altogether.

HSBC, which is based in London, has curtailed its relationships with some producers of palm oil, which is often linked to deforestation in developing countries. The Dutch lender Rabobank has applied a nine-point checklist of conditions for would-be oil and gas borrowers that includes commitments to improve environmental performance and protect water quality.

There's also competitive risk. Fossil energy costs will rise as easy supplies disappear, international competition for resources grows, government agencies enforce environmental laws, and Congress finally puts a price on carbon. Meantime, the cost of several renewable energy technologies is coming down. These trends make stockholders nervous.

The story of the Rockefeller revolt against Exxon Mobil is familiar by now. Two years ago, several members of the family introduced resolutions at Exxon's annual meeting, calling on the company to invest more in renewable energy.

The Rockefellers were concerned that Exxon - the descendent of the oil company founded by their patriarch, John D. Rockefeller - was not investing in the energy technologies that will be most competitive in a carbon-constrained world.

If oil companies are earning huge profits the old-fashioned way, why should stockholders care? Because traditional energy companies that don't invest in the growing market for clean energy will become the General Motors of tomorrow, going broke by focusing too much on near-term profits and too little on emerging market forces.

The Rockefellers' resolutions failed, but they may have been the early sign of a shareholder revolution. The SEC announced last March that it received nearly 100 shareholder resolutions dealing with corporate behavior on climate change, a 40 percent increase over last year and a new record. Some resolutions were filed by investors who have gambled very big money on corporations likely to be most affected by climate policies and climate change.

Earlier this month, 68 investors representing $415 billion in assets issued a statement urging California voters to defeat Proposition 23, the Nov. 2 ballot initiative backed by oil companies to kill the state's progressive climate law. According to the Los Angeles Times, the shareholder resolutions "mark the beginning of a concerted campaign by a group of large investors to...preserve the California law cutting industrial and vehicle emissions".

Oil, coal and gas companies argue their fuels will remain America's principal energy supply for a long time to come. Perhaps. But a perfect storm is developing around fossil energy. That storm may become disruptive enough to trigger the industry's own positive feedback loop as lenders, investors and shareholders move away from carbon-intensive fuels.

In addition to tighter enforcement of environmental laws, more competitive renewable energy technologies and growing pressure to phase out taxpayer subsidies for oil, coal and gas, the clouds on the horizon for fossil energy include the nationalization of foreign oil fields; increasing incidents of climate-related disasters that undermine confidence in oil and coal; growing recognition in the Pentagon and the intelligence community that our reliance on fossil energy is a serious threat to national security and military effectiveness; and the growing costs and environmental risks of fossil energy extraction.

According to one recent analysis, an investor exodus could render the world's remaining fossil energy reserves worthless:

The emergence of a budget on carbon emissions within a tight timeframe is a 'rubber band' of tension waiting to break. When it does, the impact will be felt directly and heavily by coal, oil and gas extractive industries because the valuations of those companies are driven by the potential value of their proven and probable reserves. Downstream energy intensive industries will also be at risk. This makes business-as-usual an unrealistic planning assumption. As a result, coal, oil and gas extraction companies face substantial risks, including 75% of their reserves being potentially worthless.

For the time being, congressionally created market mechanisms will not be the principal driver of climate capitalism. EPA regulation under the Clean Air Act, at the moment the subject of a variety of lawsuits, will target only the nation's largest carbon polluters. But smart companies won't wait for new laws or regulations. Rising risks and growing opportunities will motivate them - and those who finance them - to participate in building a clean energy economy.

Next, in Part 3, a few thoughts about the role of the citizen-consumer.

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