Verdict: Improving but Could Do Better

19 May 2004, London - The Carbon Disclosure Project (CDP), a group of institutional investors representing assets in excess of US$10 trillion, today launches its report on climate change and shareholder value. The report, authored by Innovest Strategic Value Advisors, is based on responses to CDP's second information request to the FT500 Global Index of companies.

The number of leading institutions backing CDP demonstrates that the mainstream investment community is now seriously engaging with the strategic and financial implications of responding to climate change. Over the last year the number of participating institutions nearly tripled to 95 from 35, and represented assets more than doubled to over US$10 trillion from US$4.5 trillion.

"Investors are saying that climate change can impact shareholder value both positively and negatively, and the market needs information to assess and value the issue," said James Cameron, CDP Chairman. "Companies are now acknowledging they should communicate what they know to their investors, or at the very least, find out what they don't know."

Accordingly responses from the FT500 are up sharply from 47% for CDP1 to 59% for CDP2. A clear majority of those responding consider climate change to present risks and opportunities to their business.

However, the percentage of corporations that failed to respond to the disclosure request remains large, including a dozen companies of whose common stock the CDP signatories own more than 10%.

"Companies failing to respond or providing weak responses to those that own a significant share of their business will invite particular scrutiny from the investment community," said James Cameron. "Investors now have ample understanding and opportunity to reallocate assets to reduce climate change risk and invest in companies offering solutions to accelerated global warming."

Based on the responses, Innovest has constructed a Climate Leadership Index (CLI), comprising the 50 companies whose responses best addressed the breadth of climate change issues. The CLI includes the following UK companies: Abbey National, Aviva, BP, Cadbury Schweppes, HBOS, HSBC, Imperial Tobacco and BG. UK Companies who did not answer the questionnaire include Compass Group and InterContinental Hotels Group (Previously Six Continents).

Recent Developments Driving Responses
CDP cites a range of developments as responsible for the greater attention to climate change, including:
• Companies are facing pressure from financial market authorities and fiduciaries to deal with climate risk. The introduction of "Generally Accepted Carbon Accounting Principles", appears likely, and litigation against major emitters is possible. Companies in the OECD face rules favouring a shift to a low carbon economy;
• More FT500 firms took strategic positions in climate change solutions and opportunities. Investing in the 'clean tech' sector has quadrupled to $2.5 billion over the past 2 years.
• Climate change awareness and action is not just coming from energy intensive sectors, as companies recognise that impacts on product use and disposal, and on the supply chain, will affect every industry from tobacco to ice cream;
• Greater volatility now exists in certain industrial and commodity markets due to more extreme weather. Weather related disasters cost US$70 billion in 2003 (an increase of 6x from 1960s)
• Rising wholesale electricity prices are expected to impact profitability and encourage energy risk management and efficiency.

Key Issues from CDP Report
Responses to CDP demonstrate that many FT500 companies are responding positively to the risks and opportunities of climate change:
• Climate change and shareholder interest are becoming more closely intertwined. 59% of firms responded (vs 47% in CDP1). 45% of the FT500 believe climate change represents risk and/or opportunity.
• 65% of companies in high-impact sectors are now measuring and reporting emissions versus 51% in CDP1. Responses were up 40% in the US utilities sector and 23% in the oil and gas industry. Twice as many banks now have a stake in the renewables sector.
• More firms are quantifying GHG emissions and preparing to trade emissions; climate strategies are more coherent and comprehensive; more firms have multi-disciplinary teams to manage climate risk; the use of standardized measurement systems such as WRI/WBCSD GHG protocol is up;
However, some worrying trends are apparent:
• Many companies remain firmly 'behind the curve'. Only one firm promoted its CEO as being responsible for managing the issue.
• Certain GHG management tasks, including supply chain questions and integration of carbon costs into management accounting, are proving troublesome;
• The absence of greater regulatory certainty appears to be holding some companies back;
• Major 'disconnects' still exist between some company's response status and what is known publicly about their actual climate change stance.
• Not all companies respond to shareholders. At least 12 companies failed to respond to the CDP letter despite having over 10% of their outstanding common shares owned by signatories to the CDP letter.