“The Bush administration has gotten itself in a box. It continues to say global warming may not really be a problem, even though by now almost everyone who has seriously looked at the issue says this is a problem.”
        Marc Levinson, economist JPMorgan Chase³⁹ 

 Regulatory requirements allow businesses some amount of certainty when planning for the future, allow reassurance that long-term capital investments are sound, and provide structure around which to base a business plan.  Because there are currently no federal legislation or regulations covering climate change, U.S. businesses are left to speculate about potential regimes and plan accordingly. On the one hand, they are fairly certain that in the relatively near future they will have to contend with national limits on these emissions.  On the other hand, the federal government’s inaction prevents them from being able to accurately plan for what these requirements will be.  To compound this difficulty, many are finding they must contend with a variety of state policies aimed at filling the void left by federal inaction, and many are under pressure from their shareholders to address climate change. Recently, some in business, industrial and financial sectors have begun to speak out about their need for certainty in order to make sound investments and live up to their fiduciary responsibilities.

2.1 INSTITUTIONAL INVESTORS

"Assessing climate change is now an essential aspect of intelligent investing. Global warming will cause major shifts in the global economic landscape. For investors, those changes hold both risks and opportunities and understanding these risks and opportunities is an important part of fiduciary responsibility.”
        William C. Thompson Jr., comptroller for New York City

In October 2006, nine institutional investors representing over $300 billion in assets called on S&P 500 companies for the first time to improve their public disclosure to shareholders on environmental issues.  The investors urged companies to use the Global Reporting Initiative (GRI), an organization established by Boston-based CERES that is now an independent organization based in Europe, that provides a framework for corporate reporting.⁴⁰

At the Institutional Investor Summit on Climate Risk, in November 2003, 10 leading institutional investors launched the Investor Network on Climate Risk (INCR.) The purpose of the INCR is to promote better understanding of the risks of climate change among institutional investors.  At a second Institutional Investor Summit in May 2005, INCR leaders announced a new Investor Call for Action.

Two dozen leading U.S. and European institutional investors managing over $3 trillion in assets released a 10-point action plan calling on U.S. companies, Wall Street firms and the U.S. Securities and Exchange Commission to intensify efforts to provide investors with comprehensive analysis and disclosure about the financial risks presented by climate change.  The group also pledged to invest $1 billion in prudent business opportunities emerging from the drive to reduce greenhouse gases.⁴¹

The action plan calls for specific measures by institutional investors, fund managers and financial advisors, companies, and the federal government.  Among the investor commitments:

•    Urge publicly held companies in the electric power, auto, oil and gas sectors to report within a year to investors on how greenhouse gas emissions limits and other climate change scenarios will affect their businesses and steps they are taking to reduce those risks and seize new market opportunities;
•    Require investment managers overseeing their fund assets to describe their resources, expertise and strategies for assessing financial risks associated with climate change;
•    Evaluate and rank 100 of the world’s largest, publicly-held companies on their actions for reducing climate change risks and share the scorecard report with investors later this year; and
•    Urge the Securities and Exchange Commission to require companies to disclose financial risks related to climate change.⁴²

2.2 SHAREHOLDER RESOLUTIONS

During the 2005 proxy season, oil and gas companies, electric power producers, real estate firms, manufacturers, financial institutions and automakers faced a record number of global warming resolutions filed by shareholders.  Thirty resolutions requested companies to disclose financial risk and plan to reduce greenhouse gas emissions.  This surpassed the record 22 global warming shareholder resolutions in 2004.  Many of the 2004 resolutions received extremely high voting support – in some cases as high as 37 percent.  Filers withdrew numerous resolutions after companies agreed to undertake climate risk assessments and committed to specific greenhouse gas reduction targets.

Shareholder resolutions on climate change continued in the 2006 proxy season with over two dozen resolutions filed with U.S. companies.  In the electric power sector, Dominion Resources was notable with 22.5 percent of the company’s shareholders supporting a resolution that requires the company to analyze and disclose the financial impacts of global warming and how it is responding to pressure to reduce greenhouse gas emissions.⁴³ Five other electric power providers had resolutions withdrawn after the companies agreed to take the suggested actions regarding climate change.  In the oil and gas sector, a resolution was withdrawn at Devon energy after the company agreed to disclose information about its emissions.  In addition, sixteen members of the Investor Network on Climate Risk (INCR) sent a letter to the chair of the board at ExxonMobil expressing concern that the company has neglected to examine the potential financial impacts of climate change on the global energy market.⁴⁴  In addition, there was a record vote of 39 percent on a shareholder resolution requiring Standard Pacific to assess its energy efficiency and prepare a report for shareholders.⁴⁵

2.3 LENDERS

“We, at Bank of America, recognize that climate change and atmospheric pollution represent a risk to the ultimate stability and sustainability of our way of life. Bank of America is committed to addressing climate change issues even more so today, when we believe we can set real and achievable targets for greenhouse gas reductions in both our operations as well as investment opportunities.”
        Eugene M. McQuade, President Bank of America;
        Chairman, Bank of America Environmental Council

Recently, some of the nation’s largest lending institutions have begun to integrate climate change concerns into their operations at many different levels.  Two high-profile lenders to take proactive positions on climate change are Bank of America, and JPMorgan Chase. 

Bank of America has committed to address greenhouse gas emissions resulting from its own operations and the impact resulting from or related to its investment decisions. Specifically, the bank set a goal to reduce greenhouse gas emissions from its operations seven percent by 2008.  In addition, the bank committed to assess climate change risk and take necessary action to limit risk and invest in change where appropriate.   To begin the latter process they are assessing greenhouse gas emissions from their energy and utilities portfolio with the intent of realizing a seven percent reduction in indirect emissions within the energy and utility portfolio.  Beyond managing its own impact, the bank has committed to use its position as a community and industry leader to serve as an agent of change in elevating the public and private sector’s commitment and approach to addressing climate change.⁴⁶ 

JPMorgan Chase is another lending institution that has committed to take action on climate change.  JPMorgan Chase’s approach is very similar to Bank of America.  JPMorgan Chase intends to reduce its greenhouse gas emissions five to seven percent below 2005 emissions levels by 2012. In addition, it will encourage clients that are large greenhouse gas emitters to develop carbon mitigation plans. The plans will include measurement and disclosure of greenhouse gas emissions and descriptions of plans to reduce or offset emissions. JP Morgan Chase will add carbon disclosure and mitigation to its client review process beginning by year-end 2005. In project transactions in the power sector, it will quantify the financial cost of greenhouse gas emissions and integrate them into financial analysis of the transaction. Internalizing the cost of carbon in this way may alter investment choices, and JP Morgan Chase has committed to encourage clients to evaluate alternative energy technologies.⁴⁷ 

2.4 INSURERS

European insurers such as Swiss Re and Munich Re have long spoken out about the risk that climate change poses to the insurance industry.  Their U.S. counterparts on the other hand have been more circumspect.  Recent events, however, may cause U.S. insurers to become engaged. 

In 2005, American International Group, Inc. (AIG) looked at how to reflect climate change risks in its modeling and considered whether it should invest only in companies “doing something” about climate change.⁴⁸ In May 2006, AIG became the first American insurer to promote a climate change policy.  AIG also recently joined INCR.  Following AIG’s lead, other American insurers are instituting climate change policies and starting to educate the industry about the importance of climate change.  Travelers already offers a 10 percent discount on auto insurance to driver’s of hybrid vehicles in 41 states, and in October it added California to the list.  Firemen’s Fund recently cut premiums for “green” buildings and instituted a policy that damaged building must be rebuilt or repaired in as “green” buildings.  Marsh, the largest U.S. insurance broker, is set to launch a program in January with Yale University to “teach corporate board members about their fiduciary responsibility to manage exposure to climate change.”⁴⁹ Earlier in 2006, Marsh and McLennan briefed its corporate clients, which include a majority of the businesses on the Fortune 500 list, about the consequences of climate change for the companies.⁵⁰

The 2005 annual fall meeting of the National Association of Insurance Commissioners was scheduled to take place in New Orleans September 10-13.  These meetings were cancelled due to the devastation caused by Hurricane Katrina. One of the topics on the agenda for discussion was how climate change and extreme weather events might affect their industry. The irony of this situation was not lost on participants.  “New Orleans seemed like a superior place to have this conversation because I’d seen maps showing how the city would no longer be there if we lose our polar ice caps,” said Tim Wagner, Nebraska’s insurance director and Chairman of the Insurance Association’s property and casualty committee.  “Little did I envision that the clarity of the issue would hit home in this way.”⁵¹

According to some, the U.S. insurance industry is beginning to assess the threat climate change poses.  Gary Guzy, a senior vice president at the brokerage arm of New York-based Marsh & McLennan, the world’s largest insurance broker, said, “The U.S. insurance industry is coming to realize that global climate change is a significant issue.  The industry needs to be finding ways to help mitigate and reduce potential risks.”

States are also taking action on climate change in the insurance industry.  In March 2006, the insurance commissioners of all 50 states unanimously voted to create a task force, which will investigate the impact of climate change on insurers and their customers.⁵²

2.5 MAJOR EMITTERS

“Duke Energy has long supported voluntary measures to reduce greenhouse gases. But it's clear to me now that we have to move to mandatory measures to get real results in a fair manner.”
        Paul Anderson, Chairman and CEO, Duke Energy ⁵³

In an interesting turn of events, some of the country’s major emitters of greenhouse gas pollution have started to call for responsible action on climate change, and in some cases, support enactment of mandatory regulation.  This is likely a reflection of two challenges these companies face.  First, most of these companies have been the targets of shareholder activism aimed at getting them to proactively assess the risks and opportunities afforded by climate change and related regulation.  Second, many of them accept that carbon “constraints” will be a factor in the near to mid-term and they want more certainty about the nature of these constraints to inform their long-term capital investment.  The following are some of the more striking statements made recently by some of the country’s largest emitters.

Duke Energy is taking a comprehensive approach to the issue of climate change.  CEO Paul Anderson has committed to shareholders that the company will be active in three areas relating to climate change: policy development, power generation and promoting awareness.  He has specifically stated that any approach should be mandatory, economy-wide and federal in scope.   Though he admits it is not likely to garner much favor, the approach Mr. Anderson supports is a carbon tax.⁵⁴

Duke Energy merged with Cinergy, another energy company, in 2006. Before the merger, Cinergy had also joined the climate debate in support of regulation.  The company specifically stated that the uncertainty it faces in the current regulatory climate makes it difficult to plan capital expenditures.  Cinergy asked Congress to pass a long-term multi-emissions bill that would take the unnecessary uncertainty out of national environmental policy.  As Cinergy believes it will operate “in a carbon-constrained world” and that it is the company’s responsibility to prepare for that likelihood, it has set an emissions reduction target of five percent below 2000 levels between 2010-2012.⁵⁵ The merger of Duke and Cinergy creates a powerful company calling for federal action on emissions regulation.

American Electric Power is the largest user of coal in the United States.  Therefore, there is much at stake for AEP in the climate policy debate.  The company has publicly stated “enough is known about the science and environmental impacts of climate change for us to take actions to address its consequences.” Like Cinergy, AEP has acknowledged that mandatory carbon constraints are probable in the long term but that uncertain public policy and rapidly evolving technology pose a real challenge when making decisions about large investments in long-lived assets in a setting of uncertain public policy and rapidly evolving technology.⁵⁶

Pacific Gas & Electric Company (PG&E), a California-based utility, already produces 12 percent of its energy using renewable sources and aims to raise that percentage to 14 by the end of 2006.  By California law, the company must raise its renewable energy production to 20 percent by 2010.  Peter Darbee, chairman, president and chief executive officer of PG&E, praised the stringent emissions regulations passed by California earlier this year, and called for similar federal regulation to be instituted.⁵⁷

In September 2006, David Crane, CEO of NRG Energy, a predominantly coal-fired power company, spoke at the Merrill Lynch Power and Gas Leaders Conference. In his speech, he urged the power industry to realize its opportunity of being uniquely positioned to take action to reduce carbon and committed NRG to take such action, saying, “a carbon position based on voluntary restraints to me is unwise and ultimately self defeating because it’s increasingly out of touch with the rapidly hardening positions of mainstream America on the issues of carbon emissions and global warming…”

2.6 OTHER BUSINESS ACTIONS

Several business communities are taking the initiative to reduce their greenhouse gas emissions by investing in renewable energy.  Silicon Valley businesses are devoting more research and development resources to solar cell technology that relies on silicon.  Google is planning to use solar energy to meet 30 percent of the energy needs of its headquarters in Mountain View, CA.⁵⁸

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³⁹_{Kim Chipman “Bush Faces Wall Street Pressure on Global Warming”, Bloomberg News, September 28, 2005.http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=INIY650D9L35}  

⁴⁰_{Ceres, Press Release, “Investors Press S&P 500 Companies for Better Disclosure on Social and Environmental Challenges,” October 5, 2006, http://www.ceres.org/news/news_item.php?nid=235}

⁴¹_{Investor Network on Climate Risk, “2004 Summit Press Release”, http://incr.com/05investorsummit/.}

⁴²_ibid.

⁴³_{Investor Network on Climate Change, Investor Actions, http://www.incr.com/index.php?page=ia&nid=209}

⁴⁴_ibid.

⁴⁵_ibid.

⁴⁶_{Bank of America, Bank of America Climate Change Position,http://www.bankofamerica.com/newsroom/presskits/view.cfm?page=climateandforests.}

⁴⁷ _{JPMorgan Chase, Our Environmental Commitment,}

⁴⁸ _ibid. 

⁴⁹_{“New Combatant Against Global Warming: Insurance Industry,” Christian Science Monitor, October 13, 2006, http://www.csmonitor.com/2006/1013/p01s01-usec.html}

⁵⁰_{Jim Lobe, “States Calculate Global Warming Pricetag,” Inter Press Service News Agency, http://ipsnews.net/news.asp?idnews=32500}

⁵¹_{“Insurers brace for more ‘Katrinas’: ”, The Royal Gazette, 09/08/2005 (Bloomberg)}
 
⁵²_ibid.

⁵³_{Duke Energy, Our Viewpoint, Charlotte Business Journal’s 10th Annual Power Breakfast, April 7,2005. http://www.duke-energy.com/news/viewpoint/050407.asp.}
 
⁵⁴_ibid.

⁵⁵_{Cinergy Corp., Air Issues Report to Stakeholders; An Analysis of the Potential Impact of Greenhouse Gas and Other Air Emission Regulation on Cinergy Corp., December 2004.}

⁵⁶_{American Electric Power, An Assessment of AEP’s Actions to Mitigate the Economic Impacts of Emissions Policies,  August 31, 2004.  http://www.aep.com/environmental/performance/emissionsassessment/docs/ReportOnly.pdf and  http://www.aep.com/environmental/climate/docs/Climate_Change_Position_Paper.pdf}

⁵⁷_{Scott Malone, “PG&E Chief Calls For U.S. Law On Carbon Emissions,” Reuters, October 5, 2006,}
  
⁵⁸_{Pew Center on Global Climate Change, Business and Climate News,}