New WRI, Ceres report highlights investor tools for assessing climate change
The World Resources Institute (WRI) and
Ceres, a coalition of investors and
environmental groups seeking ways to align investment dollars with social and environmental responsibility, recently released a report designed to help investors analyze
business risks and regulatory uncertainties associated with global
Citing the growing prevalence of limits on international greenhouse gas
(GHG) emissions and the likelihood that national carbon limits will
eventually be adopted in the United States, the report recommends that
investors assess climate risk posed to their investments and include
climate-risk adjustments when valuing companies due to climate-change
policies and other related impacts.
"Investors should be assessing which companies are best positioned to
adapt to present and future climate policies in the U.S. and abroad,"
said WRI senior financial analyst Fred Wellington, who co-authored
'Framing Climate Risk in Portfolio Management' with WRI's Amanda Sauer.
"Climate change is increasingly being viewed by leading companies as a
competitive issue and investors should be assessing climate
competitiveness in their investment decisions."
The report comes as more U.S. companies, including General Electric,
JP Morgan Chase, American Electric Power and Cinergy, are forging their
own policies and strategies to improve their competitive positioning on
the climate change issue. Many of the same companies are also calling on
U.S. policymakers to end the existing regulatory uncertainty, saying
that carbon regulations are inevitable and that U.S. companies are
potentially losing new market opportunities and facing unnecessary risk
when making investment decisions in such an uncertain environment.
"Financial analysts and stock-portfolio managers who are not factoring
carbon costs or potential carbon costs into their assessments of
companies and entire sectors are not adequately serving their clients,"
said Mindy S. Lubber, president of Ceres. "Whether it's a new
coal-fired power plant or a new line of engines for the airline or
railroad industries, carbon emissions and carbon costs are an important
factor companies and investors will need to consider before making such
Last month, at a climate risk summit organized by Ceres at the United
Nations, two-dozen U.S. and European investors managing more than $3
trillion of assets announced they will require investment managers
overseeing their fund assets to describe their specific resources and
strategies for assessing financial risks associated with climate change.
The group of investors also pledged to stake $1 billion in businesses
and technologies that are well positioned to reduce GHG emissions.
While each company's climate-risk exposure is unique, the new report
provides investors with an analytical framework to assess how climate
risk can affect corporate value. The authors recommend that investors
account for climate risk across their portfolios, especially in the
electric power, oil and gas and auto industries. These analyses should
- Impacts of climate risk throughout a company's
- Scope for passing on costs to customers
- Strategic response to climate policies
But the report makes clear that an assessment of climate risk is limited
due to uncertainty about future climate policies in the United States.
While the report does not advocate using a specific method, it
highlights existing financial tools that investors can use to adjust for
uncertainty on climate risk. For instance, in standard discounted cash
flow analyses, investors can apply:
- Cash flow adjustments. Cash flows likely to be
affected by potential GHG regulations can be separated and adjusted to
reflect climate risk.
- Risk-adjusted discount rates. Discount rates
could be adjusted upward to reflect greater uncertainty in GHG intensive
"In the absence of political leadership, companies such as GE and
Cinergy are fine-tuning their strategies and investments to improve
their competitive positioning on the climate change issue," Wellington
said. "Yet without certainty on U.S. climate policy, investors are
having a difficult time clearly differentiating which companies will be
best positioned in the future."
The report can be downloaded at http://business.wri.org/pubs_description.cfm?PubID=4075.
This article originally appeared in the 06/01/2005 issue of Environmental Protection.