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Enron in its day was big on "corporate social responsibility," which tells you all you really need to know about that fad. Nine parts PR, one part charity, the movement was the boardroom response to a growing cottage industry of green investors and consultants who never seriously altered the corporate credo: make money. Yet in these more sober times, changing laws are forcing CEOs to put real time and resources behind their talk about good corporate citizenship.
The catalyst is global warming. To meet its Kyoto Protocol obligations, the European Union will place a cap on carbon emissions from each of its 12,000 smokestack plants come January and will slap steep penalties on violators. Accountants are preparing to count carbon as a liability, analysts are factoring pollution into share prices and insurers are threatening to raise rates on companies for "carbon risk." AXA, the big French insurer, says climate risk is now more important than currency or interest-rate risk. A global group of 95 fund managers representing more than $10 trillion in assets surveyed 500 multinationals on emissions and published the results on May 19. "Climate change is the vehicle through which sustainability questions are going mainstream," says Matthew Kiernan, CEO of Innovest, a Toronto-based research firm.
The bottom line: pollution now has a price. The EU is creating tradable allowances for each ton of carbon emitted; some companies will profit by selling unused allowances, while others will be forced to shut or refit plants to stay within their limit. Just over a year ago, Dresdner Kleinwort Wasserstein issued the first Europewide report on carbon trading, calling it the greatest disruption since the Industrial Revolution. By autumn, investment houses were handicapping companies, starting with utilities, the heaviest carbon polluters. These issues are no longer just for green "nerds," says Benedikt von Butler of Evolution Markets, a London energy broker. "Suddenly we've entered a world where carbon is a key part of risk management."
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The impact is on dramatic display at RWE of Germany, Europe's third largest power company. An RWE task force has spent two years studying its options and running its own scenarios for a wide range of prices. RWE will manage its options day by day, switching between coal and natural gas, depending on price and supply, or buying allowances. If the EU approves the German allocation plan, RWE expects to modernize some of its German fleet of more than 100 plants, build two more state-of-the-art plants starting in 2008 and invest more heavily in natural gas.
Commercial banks and insurance companies are now grilling borrowers on carbon risk. Spooked by natural catastrophes like last summer's European heat wave, Swiss Re, the world's second largest reinsurer, is asking applicants for liability coverage how they are planning for the new climate-change regulations. Once the laws are in effect, they will be a factor in approving coverage. In the Netherlands, Fortis Bank studied its 14 billion Euro in loans to the energy industry and found that its clients will probably not be able to cut emissions enough to meet their allowances in 2005-07. So the bank is now building up a reserve of carbon credits by loaning money to projects that reduce emissions. It will take the credits in payment and sell them to clients. "We believe in carbon allowances and credits as hard currency," says Seb Walhain, who runs the bank's new environmental-products unit.
Though the Bush administration has rejected Kyoto, individual U.S. states assume that America cannot remain outside the treaty forever. The big California and New York pension funds are demanding that firms estimate their exposure to global-warming costs. In the post-Enron world, environmental liability is seen as the new off-balance-sheet risk, says Leslie Lowe of the Interfaith Center on Corporate Responsibility, a coalition of 250 religious funds representing more than $100 billion. This year they filed 28 shareholder resolutions asking companies about emissions risks. They cite as a model ChevronTexaco, which is cutting emissions, factoring the cost of carbon into investment decisions and building a strategy for carbon market trading. "It's good risk management," says ChevronTexaco vice president Georgia Callahan.
Even skeptical greens say these are real steps. The next trick for the activists: how to get corporations to take other social issues as seriously as global warming.
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