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Smart money eyes climate change

Meteorologists aren't the only ones interested in weather patterns: Financial analysts are calculating economic impact.

While no one is certain of the future effects of global warming, many businesses are already placing their bets.

Companies in a range of industries are starting to figure in the business impact of climate changes stemming from global warming, according to experts.

The calculations go along two lines, depending on the industry: Corporations are either mitigating risk associated with climate changes or seeking out business opportunities in fields such as clean energy.

Faced with a higher frequency of storms, and more severe ones, insurance companies are re-examining their exposure to risk and, in some cases, cutting off policies.

But there's an upside, too: Investors are flocking to so-called clean, or green, technologies that cut down on greenhouse gas emissions, notably carbon dioxide. The motive may not be unselfish, however.

Corporations "recognize there are tangible risks and tangible opportunities," said Fred Wellington, a senior financial analyst at think tank World Resources Institute. "It's not out of the need to be a socially responsible corporation."

There continue to be political debates on how to address climate change and global warming. But the businesses now adjusting for climate change are motivated entirely by financial reasons, said Wellington, who advised Citigroup on a June report entitled "Investing in Solutions to Climate Change."

cleaningup

"Climate change and policies to combat its impacts are going to fundamentally change the energy makeup of a lot of economies. As the shift away from fossil-based to more renewables happens, companies will win or lose depending on how that shift occurs," he said.

Interest in climate-related business strategies is growing rapidly, but so far activity is limited to forward-looking companies within different industries, said Wellington.

Cash in cutting carbon
General Electric's initiative is a high-profile example of a company seeking business opportunities in a range of green technologies, including solar and wind, water purification and energy efficiency.

The products the global manufacturer is developing are a deliberate attempt to capitalize on environmental problems, including climate changes, according to the company.

"That (Ecomagination initiative) wasn't some epiphany," said MIT physics professor Ernest Moniz, the former undersecretary of the Department of Energy, who spoke at an MIT conference on energy in May. "Look at what they've been acquiring the last 10 or 15 years....They put together a portfolio to make money in a carbon-constrained world."

Services industries are taking part as well. Goldman Sachs last fall published an Environmental Policy Framework to "find effective market-based solutions to address climate change, ecosystem degradation and other critical environmental issues."

The plan calls for a range of steps, from cutting down on emissions from its own operations to creating investment research that figures in the financial impact of environmental factors.

Reinsurance giant Swiss Re has been calculating the effect of climate change on its business for more than 10 years. The company employs three climatologists, including a paleontologist to study ice cores, which shed light on historical weather patterns.

As a company that provides insurance to the insurance industry, Swiss Re is the "canary in the mine shaft with regards to climate change" because it does long-term risk analysis, said Chris Walker, managing director and head of sustainable business development at Swiss Re.

"We do believe the climate is truly changing and that it could potentially disrupt how we do business, which is based on a predictive model," said Walker.

If, for example, so-called 100-year hurricanes occur every 25 years because of global warming, firms like Swiss Re will have a harder time absorbing and pricing risks, he said.

Walker listed several liabilities stemming from global warming and climate change, including heat waves affecting life expectancy, droughts harming crops or pine beetles destroying lumber in British Columbia because winters are not cold enough to kill them.

In another indicator of the insurance industry addressing the issue, the National Association of Insurance Commissioners earlier this year established a task force to examine climate change and address changing climate patterns.

Insurance company Allstate has already started to act. To reduce its risk exposure, the company has started to limit insurance coverage to people who live in coastal communities from Texas to New York, because there have been more natural disasters in the past few years.

"We don't get into the reasons why we are having more storms, but we are having more storms," said Mike Siemienas, a company spokesman. "The facts and the experts show we're in a period where we will have more storms."

Seven of the 10 most expensive catastrophes for Allstate have occurred in the last two years, he added.

Experts see a host of other risks in addition to those related to natural disasters.

Like health issues related to asbestos and tobacco did in the past, climate change could lead to lawsuits. Such litigation could target companies that either contribute to global warming or did not take sufficient steps to address regulations, said Wellington. Higher energy prices can also disrupt company supply chains and product development, he added.

Even a company's brand can be affected: Carbon Trust, a U.K.-government funded company, published a report last fall saying that industries, such as airlines or even food and beverage companies, can increase their brand value with eco-conscious consumers by being "carbon responsible."

"What's happening is that carbon is becoming a commodity," said Swiss Re's Walker. "It's another risk that (businesses) have to manage."

Regulatory catalyst?
Swiss Re is not just hedging against risk; it's also devising new products linked to climate change and greenhouse gases.

The company is about to close a clean energy investment fund and is in the process of setting an emissions-trading capacity that will allow corporations to trade in carbon and other greenhouse gases, Walker said.

It is also devising personal liability insurance for directors of companies, who could be sued by shareholders for dragging their feet on meeting carbon regulations, said Walker.

"We've been asking companies how they are managing climate and carbon exposure, and based on that feedback, that's part of our underwriting rating," he said. "This is a little bit of a warning to companies, saying this is a risk which we will take seriously."

In its June investment opportunity report, Citigroup named its "Clean Dozen," 12 North American companies poised to profit from climate technologies. The list includes Arthur Daniels Midland for its biofuels development and Kinder Morgan for its carbon dioxide transportation.

Citigroup's report noted that there is a significant amount of regulatory activity worldwide to reduce greenhouse gas emissions, which will serve as a "catalyst" to investment.

"Markets are inherently forward looking," said Wellington. "The debate has shifted from whether or not climate policies will hit us but rather when and in what form. And markets are trying to grapple with the second half of that question."

MIT's Moniz agreed that it's mainly a question of when and how federal emissions regulations in the U.S. will take hold. A European Union system for trading greenhouse gas emissions, called the Emission Trading Scheme, or ETS, was launched in January 2005.

Moniz said "virtually all companies" are factoring carbon into their planning, despite differences on how the issue should be approached. Exxon, for example, has resisted regulations, while BP endorses development of government policies, Moniz noted.

"Industry, generally speaking, says: 'Hey if you give me rules, I'll compete,'" said Moniz. "It's uncertainty that drives them nuts."