Global warming could melt your portfolio
A coalition of environmentalists and institutional investors lays out which companies will be better prepared for climate change.
NEW YORK (FORTUNE) - Long-term investors, take heed: Global warming will have a significant impact on the financial performance of companies in your portfolio.
Some companies -- General Electric, DuPont, Cinergy, American Electric Power, BP, Toyota and Honda -- are seriously grappling with the risks and opportunities posed by climate change. They will be better prepared as governments and shareholders focus on the issue.
Many others -- ExxonMobil, Dominion Power, Sempra Energy, Nissan, BMW and Volkswagen -- have been slow to address climate change, and they could put their owners at financial risk.
Those, at least, are the findings of a report released Tuesday that takes a close look at how 100 of the world's largest companies are positioning themselves to compete in what's called a "carbon-constrained world" -- that is, a world in which emissions of greenhouse gases are regulated, as they are today in Europe and Japan and probably will be before long in the United States.
The report, which ranks the companies on a 100-point scoring system, comes from a group called Ceres, a coalition of environmentalists and institutional investors, including government pension funds, socially responsible mutual funds and religious investors, with $3 trillion in assets. It's worth checking out at www.ceres.org.
"Climate change is no longer a fringe issue, no longer an issue that can be ignored," said Mindy Lubber, the president of Ceres, at a news conference. "These trends present enormous risks and opportunities."
Political support for regulation of greenhouse gas emissions is growing both in Congress and in state governments. U.S. Sen. John McCain and New York Gov. George Pataki are among the Republican elected officials who support some form of carbon regulation. So do a growing number of CEOs, including GE's Jeffrey Immelt and Jim Rogers of Cinergy.
The risks posed by global warming aren't only regulatory. There's compelling evidence that world temperatures are rising, glaciers are melting and storms are becoming more fierce. Food, fishing and forestry businesses could all be affected, the report says.
The cost of natural disasters exceeded $225 billion in 2005, up from the previous record of $118 billion in 2004, according to reinsurance giant Swiss Re. A Swiss Re executive is quoted in the report as saying, "Global warming has accelerated from a problem that might affect our grandchildren, to one that could significantly disturb the social and economic conditions of our lifetime."
Much of the report delivers encouraging news. In 2003, Ceres surveyed 20 big firms and found that most were doing little about climate change. Since then, more corporate boards have addressed the issue and corporate thought leaders like GE's Immelt responded with new business strategies. GE's "EcoMagination" initiative includes a pledge to invest $1.5 billion annually in clean technologies by 2010, up from $700 million in 2004. GE (Research) thinks it can make money by selling wind turbines, more efficient locomotives and jet engines, among other products.
Other favorable developments cited by Ceres include Ford Motor's (Research) announcement that it will boost production of hybrid vehicles tenfold (albeit from a small base) by 2010, Chevron's (Research) promise to invest in alternative energy and curb its emissions, and American Electric Power's decision to build the nation's first so-called "clean coal" plant. Coal companies are especially threatened by proposals to regulate or tax carbon emissions.
DuPont (Research), the leading scorer among U.S. companies, has already reduced its greenhouse gas emissions by 72 percent since 1990. It is developing and marketing an array of "green" products such as Tyvek insulation, energy-efficient refrigerants and corn-based raw materials that can replace plastic produced from oil.
William K. Reilly, head of the U.S. Environmental Protection Agency during the first Bush Administration and a DuPont director, said at a Ceres news conference: "We've already saved a significant amount of money by moving in this direction."
Ceres' Lubber noted that European firms BP (Research), the top-scoring company overall, and Royal Dutch Shell scored highest in the crucial oil and gas sector. Japan-based Toyota (Research) and Honda led the way among automakers because of their commitment to hybrids. U.S. firms will face a competitive disadvantage if they don't improve their practices, she said.
ExxonMobil (Research) was singled out for criticism by Meredith Miller, the assistant state treasurer of Connecticut, because she said the company won't meet with investors to discuss climate change. Last year, nearly 30 percent of ExxonMobil's shareholders supported a shareholder resolution asking the company to disclose its plans for complying with greenhouse gas reductions targets in countries that have adopted the Kyoto Protocol, which regulates emissions.
ExxonMobil, which opposed the shareholder resolution as unnecessary, says it is currently seeking "economically competitive and affordable future options to reduce long-term global greenhouse gas emissions while meeting the world's growing demand for energy."
The issue clearly isn't going away. A flurry of new books focus on climate change. In May, Paramount Classics will release a documentary called "The Inconvenient Truth," about Al Gore's crusade to curb global warming. Silicon Valley technologists are taking the problem seriously, as my colleague David Kirkpatrick recently wrote.
Ceres has worked on the issue for years. The question is, how long will it take for mainstream investors and the laggards of corporate America to respond?