Carbon Disclosure Project Report 2007 USA S&P500 Disclosure Project 2007 This report is based on the...

Carbon Disclosure Project (CDP)www.cdproject.netPaul Dickinson+44 7 95877 [email protected]

RiskMetrics Group Inc.Douglas G. Cogan+1 603 675 [email protected]

Carbon DisclosureProject Report 2007USA S&P500On behalf of 315 investors with assets of $41 trillion

Report written by

RiskMetrics Group

Carbon Disclosure Project

Carbon DisclosureProject 2007This report is based on the submissionsof S&P500 corporations in response to the fifth information request sent by theCarbon Disclosure Project (CDP5) on 1st February 2007. This summary report,the full report and all responses fromcorporations are available without chargefrom www.cdproject.net. The contents of this report may be used by anyoneproviding acknowledgment is given.

CDP Members 2007In 2007, CDP launched a Membershipoption for signatories. CDP Membershipallows signatories to have a leading role in the development of CDP and gives theability to perform improved comparativeanalysis of company responses throughthe new online database. The followinginvestors are CDP Members in 2007:

ABN AMRO Bank N.V.Netherlands

ABP Investments Netherlands

AIG Investments U.S.

ASN Bank Netherlands

AXA Group France

BlackRock U.S.

BNP Paribas AssetManagement (BNP PAM) France

BP Investment ManagementLimited UK

Caisse de Dépôts et Placementsdu Québec Canada

Caisse des Dépôts France

California Public EmployeesRetirement System U.S.

California State Teachers Retirement System U.S.

Calvert Group U.S.

Canada Pension PlanInvestment Board Canada

Catholic Super Australia

Ethos Foundation Switzerland

Folksam Sweden

Generation InvestmentManagement UK

Hermes InvestmentManagement UK

HSBC Holdings plc UK

KLP Insurance Norway

London Pensions FundAuthority UK

Merrill Lynch U.S.

Morgan Stanley U.S.

Morley Fund Management UK

Neuberger Berman U.S.

Newton InvestmentManagement Limited UK

Pictet Asset ManagementSwitzerland

Rabobank Netherlands

Robeco Netherlands

SAM Group Switzerland

Signet Capital Management LtdUK

Sompo Japan Insurance Inc.Japan

Swiss Reinsurance CompanySwitzerland

The Ethical Funds CompanyCanada

The RBS Group UK

Zurich Cantonal BankSwitzerland

CDP Members and Signatories 2007

CDP Signatories 2007315 investors were signatories to theCDP5 information request dated 1stFebruary 2007 including:

Aachener GrundvermogenKapitalanlagegesellschaft mbH Germany

Aberdeen Asset Managers UK

ABN AMRO Bank N.V. Netherlands

ABP Investments Netherlands

ABRAPP – Associação Brasileira dasEntidades Fechadas de PrevidênciaComplementar Brazil

Acuity Investment Management IncCanada

Aegon N.V. Netherlands

Aeneas Capital Advisors U.S.

AIG Investments U.S.

Alcyone Finance France

Allianz Group Germany

AMP Capital Investors Australia

AmpegaGerling Investment GmbHGermany

ANBID – National Association of Brazilian Investment Banks Brazil

ASN Bank Netherlands

Astra Investimentos Ltda Brazil

Australia and New Zealand BankingGroup Limited Australia

Australian Ethical Investment LimitedAustralia

Australian Reward Investment Alliance(ARIA) Australia

Aviva plc UK

AXA Group France

Baillie Gifford & Co. UK

Banco Bradesco S.A. Brazil

Banco do Brazil Brazil

Banco Fonder Sweden

Banco Pine S.A. Brazil

Bank Sarasin & Co, Ltd Switzerland

Barclays Group UK

BayernInvest KapitalanlagegesellschaftmbH Germany

BBC Pension Trust Ltd UK

Beutel Goodman and Co. Ltd Canada

BlackRock U.S.

BMO Financial Group Canada

BNP Paribas Asset Management (BNP PAM) France

Boston Common Asset Management, LLC U.S.

BP Investment Management Limited UK

Brasilprev Seguros e Previdência S.A.Brazil

British Coal Staff Superannuation SchemeUK

British Columbia Investment ManagementCorporation (bcIMC) Canada

BT Financial Group Australia

BVI Bundesverband Investment und Asset Management e.V.Germany

CAAT Pension Plan Canada

Caisse de Dépôts et Placements duQuébec Canada

Caisse des Dépôts France

Caixa Econômica Federal Brazil

California Public Employees RetirementSystem U.S.

California State Teachers Retirement System U.S.

California State Treasurer U.S.

Calvert Group U.S.

Canada Pension Plan Investment BoardCanada

Canadian Friends Service CommitteeCanada

Carlson Investment Management Sweden

Carmignac Gestion France

Catholic Super Australia

CCLA Investment Management Ltd UK

Central Finance Board of the Methodist Church UK

Ceres U.S.

CERES-Fundação de Seguridade SocialBrazil

Cheyne Capital Management (UK) LLP UK

Christian Super Australia

CI Mutual Funds Signature Funds Group Canada

CIBC Canada

Citizens Advisers Inc U.S.

ClearBridge Advisers Social AwarenessInvestment U.S.

Close Brothers Group plc UK

Comité syndical national de retraite Bâtirente Canada

CommerzbankAG Germany

Connecticut Retirement Plans and Trust Funds U.S.

Co-operative Insurance Society UK

Credit Agricole Asset ManagementFrance

Credit Suisse Switzerland

Daegu Bank South Korea

Daiwa Securities Group Inc. Japan

Deka FundMaster InvestmentgesellschaftmbH Germany

Deka Investment GmbH Germany

DekaBank Deutsche GirozentraleGermany

Delta Lloyd Investment Managers GmbH Germany

Deutsche Bank Germany

Deutsche Postbank Privat InvestmentKapitalanlagegesellschaft mbH Germany

Development Bank of Japan Japan

Development Bank of the Philippines(DBP) Philippines

Dexia Asset Management France

DnB NOR Norway

Domini Social Investments LLC U.S.

DPG Deutsche Performancemessungs-Gesellschaft für Wertpapierportfolio mbHGermany

DWS Investment GmbH Germany

Environment Agency Active Pension Fund UK

Epworth Investment Management UK

Erste Bank der OesterreichischenSparkassen AG Austria

Ethos Foundation Switzerland

Eureko B.V. Netherlands

Eurizon Capital SGR Italy

Evli Asset Management Finland

F&C Asset Management UK

FAELCE – Fundação Coelce deSeguridade Social Brazil

FAPES – Fundação de Assistencia ePrevidencia Social do BNDES Brazil

Fédéris Gestion d’Actifs France

FIPECq – Fundação de PrevidênciaComplementar dos Empregados eServidores Brazil

First Affirmative Financial Network, LLCU.S.

First Swedish National Pension Fund(AP1) Sweden

FirstRand Ltd. South Africa

Five Oceans Asset Management PtyLimited Australia

RiskMetrics Group


Folksam Sweden

Fondaction Canada

Fonds de Réserve pour les Retraites –FRR France

Fortis Investments Belgium

Fourth Swedish National Pension Fund,AP4 Sweden

Frankfurt Trust Investment-GesellschaftmbH Germany

Frankfurter Service Kapitalanlage-Gesellschaft mbH Germany

Franklin Templeton Investment ServicesGmbH Germany

Frater Asset Management South Africa

FUNCEF Brazil

Fundação Assistencial e Previdenciária daExtensão Rural no Rio Grande do Sul-FAPERS Brazil

Fundação Atlântico de Seguridade SocialBrazil

Fundação Banrisul de Seguridade SocialBrazil

Fundação CESP Brazil

Fundação Codesc de Seguridade SocialBrazil

Fundação Copel de Previdência eAssistência Social Brazil

Fundação Corsan – dos Funcionários daCompanhia Riograndense deSaneamento Brazil

Fundação Real Grandeza Brazil

Fundação Rede Ferroviaria de SeguridadeSocial – Refer Brazil

Fundação São Francisco de SeguridadeSocial Brazil

Fundação Vale do Rio Doce deSeguridade Social – VALIA Brazil

Gartmore Investment Management plc UK

Generation Investment Management UK

Genus Capital Management Canada

Gjensidige Forsikring Norway

Goldman Sachs & Co. U.S.

Green Century Capital Management U.S.

Green Kay Asset Management UK

Groupe Investissement Responsable Inc.Canada

Guardians of New ZealandSuperannuation New Zealand

Hastings Funds Management LimitedAustralia

Helaba Invest KapitalanlageggesellschaftmbH Germany

Henderson Global Investors UK

Hermes Investment Management UK

HESTA Super Australia

Hospitals of Ontario Pension Plan(HOOPP) Canada

HSBC Holdings plc UK

I.DE.A.M – Integral Dévelopment AssetManagement France

Ilmarinen Mutual Pension InsuranceCompany Finland

Indexchange Investment AG Germany

Industry Funds Management Australia

ING Investment Management EuropeNetherlands

Inhance Investment Management IncCanada

Insight Investment Management (Global)Ltd UK

Instituto Infraero de Seguridade Social –INFRAPREV Brazil

Instituto Sebrae De Seguridade Social –SEBRAEPREV Brazil

Interfaith Center on CorporateResponsibility U.S.

Internationale KapitalanlagegesellschaftmbH Germany

Jarislowsky Fraser Limited Canada

Jupiter Asset Management UK

KBC Asset Management NV Belgium

KLP Insurance Norway

KPA AB Sweden

La Banque Postale AM France

LBBW – Landesbank Baden-WürttembergGermany

Legal & General Group plc UK

Libra Fund U.S.

Light Green Advisors, LLC U.S.

Local Authority Pension Fund Forum UK

Local Government SuperannuationScheme Australia

Lombard Odier Darier Hentsch & CieSwitzerland

London Pensions Fund Authority UK

Macif Gestion France

Maine State Treasurer U.S.

Man Group plc UK

Maryland State Treasurer U.S.

Meag Munich ErgoKapitalanlagegesellschaft mbH Germany

Meeschaert Asset Management France

Meiji Yasuda Life Insurance CompanyJapan

Meritas Mutual Funds Canada

Merrill Lynch U.S.

Metzler Investment Gmbh Germany

Midas International Asset ManagementSouth Korea

Mitsubishi UFJ Financial Group (MUFG) Japan

Mitsui Sumitomo Insurance Co Ltd Japan

Mizuho Financial Group, Inc. Japan

Monte Paschi Asset Management S.G.R.– S.p.A Italy

Morgan Stanley Investment ManagementU.S.

Morley Fund Management UK

Münchner Kapitalanlage AG Germany

Munich Re Group Germany

National Australia Bank Limited Australia

National Bank of Kuwait Kuwait

National Pensions Reserve Fund ofIreland Ireland

Natixis France

Nedbank Group South Africa

Needmor Fund U.S.

Neuberger Berman U.S.

New York City Employees RetirementSystem U.S.

New York City Teachers RetirementSystem U.S.

New York State Common RetirementFund U.S.

Newton Investment Management LimitedUK

NFU Mutual Insurance Society UK

Nikko Asset Management Co., Ltd. Japan

Norinchukin Zenkyouren AssetManagement Co., Ltd Japan

Northern Trust U.S.

Old Mutual plc UK

Ontario Municipal Employees RetirementSystem (OMERS) Canada

Ontario Teachers Pension Plan Canada

Opplysningsvesenets fond (TheNorwegian Church Endowment) Norway

Oregon State Treasurer U.S.

Orion Energy Systems, Ltd U.S.

Pax World Funds U.S.

Pension Plan for Clergy and Lay Workersof the Evangelical Lutheran Church inCanada Canada

PETROS – The Fundação Petrobras deSeguridade Social Brazil

PGGM Netherlands

Phillips, Hager & North InvestmentManagement Ltd. Canada

PhiTrust Active Investors France

Pictet Asset Management Switzerland

Pioneer InvestmentsKapitalanlagegesellschaft mbH Germany

Portfolio 21 and Progressive InvestmentManagement U.S.

Portfolio Partners Australia

Prado Epargne France

PREVI Caixa de Previdência dosFuncionários do Banco do Brasil Brazil

Prudential Plc UK

PSP Investments Canada

Rabobank Netherlands

Railpen Investments UK

Rathbone Investment Management /Rathbone Greenbank Investments UK

Reynders McVeigh Capital ManagementU.S.

RLAM UK

Robeco Netherlands

Rock Crest Capital LLC U.S.

Royal Bank of Canada Canada

SAM Group Switzerland

Samsung Investment Trust ManagementCo., Ltd. South Korea

Sanlam Investment Management South Africa

Sauren Finanzdienstleistungen GmbH &Co. KG Germany

Savings & Loans Credit Union (S.A.)Limited. Australia

Schroders UK

Scotiabank Canada

Scottish Widows Investment PartnershipUK

SEB Asset Management AG Germany

Second Swedish National Pension Fund(AP2) Sweden

Seligson & Co Fund Management PlcFinland

Service Employees International Union U.S.

Seventh Swedish National Pension Fund(AP7) Sweden

Shinhan Bank South Korea

Shinkin Asset Management Co., Ltd Japan

Shinsei Bank Japan

Siemens Kapitalanlagegesellschaft mbHGermany

Sierra Club Mutual Funds U.S.

Signal Iduna Gruppe Germany

Signet Capital Management Ltd UK

SNS Asset Management Netherlands

Société Générale France

Société Générale Asset Management UKUK

Sompo Japan Insurance Inc. Japan

Standard Chartered PLC UK

Standard Life Investments UK

State Street Corporation U.S.

State Treasurer of North Carolina U.S.

Storebrand Investments Norway

Stratus Banco de Negócios Brazil

Sumitomo Mitsui Financial Group Japan

Sumitomo Trust & Banking Japan

Superfund Asset Management GmbHGermany

Swedbank Sweden

Swiss Reinsurance Company Switzerland

Swisscanto Switzerland

TD Asset Management Inc. and TD AssetManagement USA Inc. Canada

Teachers Insurance and AnnuityAssociation – College Retirement EquitiesFund (TIAA-CREF) U.S.

Terra Kapitalforvaltning ASA Norway

TfL Pension Fund UK

The Bullitt Foundation U.S.

The Central Church Fund of FinlandFinland

The Collins Foundation U.S.

The Co-operative Bank UK

The Co-operators Group Ltd Canada

The Daly Foundation Canada

The Dreyfus Corporation U.S.

The Ethical Funds Company Canada

The Local Government PensionsInstitution (LGPI)(keva) Finland

The RBS Group UK

The Russell Family Foundation U.S.

The Shiga Bank, Ltd (Japan) Japan

The Standard Bank Group Limited SouthAfrica

The Travelers Companies, Inc. U.S.

The United Church of Canada – GeneralCouncil Canada

The Wellcome Trust UK

Third Swedish National Pension Fund(AP3) Sweden

Threadneedle Asset Management UK

Tokio Marine & Nichido Fire InsuranceCo., Ltd. Japan

Trillium Asset Management CorporationU.S.

Triodos Bank Netherlands

Tri-State Coalition for ResponsibleInvesting U.S.

UBS AG Switzerland

Unibanco Asset Management Brazil

UniCredit Group Italy

Union Asset Management HoldingGermany

Unitarian Universalist Association U.S.

United Methodist Church General Boardof Pension and Health Benefits U.S.

Universal Investment Gesellschaft mbHGermany

Universities Superannuation Scheme(USS) UK

Vancity Group of Companies Canada

Vermont State Treasurer U.S.

VicSuper Proprietary Limited Australia

Vital Forsikring ASA Norway

Wachovia Corporation U.S.

Walden Asset Management, a division of Boston Trust and InvestmentManagement Company U.S.

Warburg-HendersonKapitalanlagegesellschaft mbH Germany

West Yorkshire Pension Fund UK

WestLB Mellon Asset Management(WMAM) Germany

Winslow Management Company U.S.

YES BANK Limited India

York University Pension Fund Canada

Zurich Cantonal Bank Switzerland

CDP Members and Signatories 2007


New York, August, 2007

Message from the President

Earlier this year, as a founding member of the Carbon Disclosure Project and a strong supporter ofCDP’s mission to create a rigorous global database of corporate carbon emissions, Merrill Lynchassisted the CDP in distributing a survey to more than 2,400 of the world’s largest publicly tradedcompanies, seeking detailed information on the business risks and opportunities presented byclimate change and global greenhouse gas emissions.

Concurrently, Merrill Lynch sponsored an extension of the survey to cover all S&P500 companies,which are located mainly in the United States. A total of 56% responded, representing a significantincrease over last year’s response rate of 47%.

While I urge you to read the accompanying report for further details and results, among the mostintriguing findings is the fact that a wide majority of responding companies from the S&P500 view climate change as posing a material commercial opportunity as well as a significantcommercial risk.

In fact, while 81% of responding companies reported that they regard climate change as posing a commercial risk, 69% of those firms also consider it an important business opportunity.

Furthermore, half of the responding firms considered the issue significant enough to warrantattention from board members or upper management.

On behalf of Merrill and the CDP, I’d like to personally thank all of the companies that participated inthe survey, and urge all respondents to continue to support an institution dedicated to providing anobjective benchmark of carbon production and corporate contributions to its mitigation.

We’re confident that as CDP5 deepens our collective understanding of the myriad risks andresponsibilities associated with climate change, a majority of leading companies worldwide will joinus in achieving our common objective of rigorously measuring and managing an issue described asthe greatest long-term challenge facing the international community today.

Gregory J. FlemingPresident, Merrill Lynch & Co., Inc.

RiskMetrics Group

Foreword

ForewordRiskMetrics Group is pleased to present the survey results of the second Carbon DisclosureProject (CDP5) questionnaire addressed to S&P500 Index companies. That more than half of theS&P500 — 56% — responded to this year’s survey is a further sign that American industry is gettingready to address climate change in a meaningful way. Significantly, a vast majority of respondentssee risks and opportunities presented by this issue. America’s leading companies are pursuingenergy efficiency programs and promoting renewable energy development. Yet hard work remains insetting and attaining goals to curb greenhouse gas emissions, which is at the root of this challenge.

This report describes recent activities of the Carbon Disclosure Project and of U.S. firms in trackingGHG emissions, providing disclosure to investors and embarking on GHG management programs.The report also contains eight guest commentaries that make the following points:

Science is certain (#1)Dr. Michael MacCracken, Climate InstituteRising CO2 concentrations, global average temperature and sea level rise all point to rapid changesin our climate brought about by human activity.

More disclosure is needed (#2)Jane Ambachtsheer and Craig Metrick, Mercer Investment ConsultingDisclosure on climate change remains in its infancy, but synergies between CDP and otherinitiatives, such as the U.N. Principles for Responsible Investment, will enhance corporate disclosureand make data more accessible to investors.

Physical risks affect the environment and economy (#3)Dr. Paul Epstein, Harvard Medical SchoolClimate change is affecting human health, agriculture, forests, marine life and water resources. A life-cycle analysis can help avoid unintended consequences of some proposed solutions, such as clean-coal technology and nuclear power.

Sea level rise is putting coastal development at risk (#4)Dr. Stephen Leatherman, International Hurricane Research CenterThe rate of sea level rise has increased up to 50% in the last decade, adding to coastal erosion,inundation and salt-water intrusion. Better testing procedures are needed in order to upgrade safetystandards and building codes.

Business is taking an active role in setting climate change policy (#5)Hon. Eileen Claussen, Pew Center on Global Climate ChangeThis has been a milestone year when American business has stepped forward to help lead the drivetoward federal GHG legislation. CDP can help by calling on companies to disclose their positions onclimate change policy proposals.

Congress is likely to act soon (#6)Jason Grumet, National Commission on Energy PolicyThe broad elements of federal legislation are falling into place. A key issue is whether a ‘safetyvalve’ to limit prices on carbon emissions might eventually give way to a firm emissions cap toprovide greater environmental certainty.

Renewable energy development is booming (#7)Angus McCrone, New Energy FinanceU.S. investment in clean energy has quadrupled in three years and is quickly catching up to Europe,but most major U.S. corporations have not yet made major investments in renewables. This may bea case of ‘watch this space.’

A massive transformation of our economy and energy sources is needed (#8)Dr. William Moomaw, Fletcher School, Tufts UniversityDeveloped and developing countries must approach climate change as the central challenge tosustainable development, not as just another pollution problem. Long-term GHG reduction goalswith intermediate benchmarks will be required to assure investors and companies that there is anenduring market for low-carbon energy supplies and energy-efficient equipment.

Lead authors of this report:

Douglas G. CoganDirector of ClimateChange ResearchRiskMetrics Group Inc.

Heidi WelshResearch ManagerSocial Issues ServiceRiskMetrics Group Inc.

Written on behalf of 315 institutional investors,representing more than $41 trillion of assetsunder management, CDP5 provides investorswith a unique analysis of how S&P500 Indexcompanies are responding to climate change.The report summarizes key trends identified in companies’ responses to the CDP5questionnaire and highlights commercial risksand opportunities that climate change ispresenting to these widely held, American-based companies. Through increased supportand improved quality of responses, CDP5shows that the private sector in the UnitedStates is increasingly engaged in addressingthe global challenges presented by climatechange. This Executive Summary provides asummary of key findings from the CDP5S&P500 respondents.

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Executive Summary

Executive Summary

Disclosure Trends

¥ S&P500 response rate increases.56% (282) of S&P500 companiesanswered the CDP5 survey, comparedwith 47% for CDP4. (The CDP4 surveywas the first addressed specifically toS&P500 companies.) The response rateincreased across all industry sectorsrepresented in the index.

¥ S&P500 response rate still lagsFT500. 77% of the world’s largestpublicly traded companies, asrepresented in the FT500 index,responded to the CDP5 survey.However, the large percentage increasein this year’s S&P500 response rate is inline with historical trends for the FT500CDP survey (see table).

¥ Electric utilities have the highestresponse rate. Nearly 84% of S&P500utilities (26 of 31) responded to CDP5.Materials companies also had a highresponse rate of 78% (22 of 29). Theseare the two most carbon-intensiveindustries represented in the S&P500Index.

¥ Most industry sectors have responserates exceeding 50%. Nine of the 10industry sectors represented in theS&P500 had a CDP5 response rate ofgreater than 50%. The ConsumerDiscretionary sector had a responserate of only 37% (32 of 87 companies).

¥ More S&P500 companies seestrategic risks than opportunitiesfrom climate change. 81% ofresponding companies consider climatechange to present commercial risks fortheir businesses, compared to only 69%that see climate change as presentingcommercial opportunities. This is largely the reverse of the FT500 surveysample, where 82% see commercialopportunities, and 79% have identifiedcommercial risks.

More than 50% of S&P500companies responded to thisyear’s CDP survey, providingmore evidence that Americanindustry is getting serious aboutglobal warming

CDP Response Rate

CDP response 1st 2nd 3rd 4th 5thrate survey survey survey survey survey

FT500 index 47% 59% 71% 72% 77%

S&P500 index 47% 56% (2008) (2009) (2010)

Per

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Res

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Consumer

Discret

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Consumer

Staples

Energy

Financia

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Health

Care

Industrial

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Materia

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Utilitie

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RiskMetrics Groupiii


Management Response

• Climate issues are receiving moreattention from management anddirectors. Fully half of the S&P500responding companies have assignedboard and/or upper-level managementresponsibility for overseeing climaterelated issues. 65% of respondentshave publicly disclosed greenhouse gas(GHG) emissions data.

• Action to reduce emissions lags wellbehind climate awareness. Only 29%of responding companies haveimplemented GHG reduction programswith specific targets and timelines. Thisincludes companies that have settargets to reduce the intensity of theirGHG emissions, without setting limitson their absolute emissions.

• Energy efficiency and renewableenergy are drivers of GHG emissionreductions. 78% of respondents areengaged in energy efficiency initiatives,and 37% are involved in renewableenergy projects or have set targets forrenewable energy purchases. Inaddition, 36% of respondents areconsidering or are actively engaged incarbon emissions trading.

Financial Implications

• Material effects of climate changeremain largely undetermined andundisclosed. While most S&P500respondents can identify regulatory andphysical risks associated with climatechange, few have attempted to quantifythese risks in dollar terms or havediscussed them in securities filings. Justnine respondents in the Utility sectordisclosed the potential for a materialbusiness impact in their latest Form 10-K filings. Although risk assessmentswere more substantive in CDP5responses, only two firms (anautomobile manufacturer and a utility)indicated that climate change regulationposes a potential material risk to theirbusinesses. A third firm (a beveragebottler) disclosed in its CDP responsethat physical risks of climate changecould result in a material impact on itsoperations. Though respondents in allsectors acknowledged potential adverseimpacts — even ‘significant’ impacts —no firm placed a dollar value estimateon that risk.

• Carbon pricing is rarely factored intocapital investment decisions. Whilemany capital investment decisionsinvolve multi-year planning processesand have long payback periods, only8% of survey respondents say they arefactoring projected costs of carbonemissions into their decisions. Half (12of 24) that are doing so are electricutilities. Only a few have set an explicitcarbon price (or range of prices) as partof their decision-making process.

• Energy cost disclosure is mixed. Justover half of the companies thatresponded to CDP5’s question onenergy costs (55 of 107) providedfigures. These S&P500 firms reportedspending more than $87 billion onenergy in 2006.

Few companies report onclimate change in theirsecurities filings, and fewer stillfactor carbon pricing in theircapital investment decisions

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Executive Summary

Emissions Trends

• More S&P500 firms are disclosingtheir GHG emissions. 65% of S&P500respondents provided emissions data,compared with 54% of respondents inCDP4. By comparison, 79% of FT500companies disclosed emissions data intheir CDP5 responses. Total emissionsreported by S&P500 respondents were2,013,518,771 metric tonnes of carbondioxide equivalent. This representsapproximately 6% of global GHGemissions (CO2e).

• Most reported GHG emissions areScope 1 (direct) emissions. Scope 1emissions accounted for two-thirds ofthe total emissions reported by S&P500respondents. Scope 2 (purchasedpower) emissions accounted for 11%.Scope 3 (indirect) emissions accountedfor 22%. Most of Scope 3 emissionsdisclosures were for business travel,although one petroleum companyestimated emissions from customerend-use of its products.

• Three industry sectors account for90% of reported Scope 1 and 2emissions. In the CDP5 survey of S&P500 companies, the Utility, Energy and Materials sectors reportedcombined Scope 1 and 2 emissions of 1,403,741,186 tonnes of CO2e.

• Four sectors account for 76% ofScope 2 emissions from purchasedelectricity. Respondents in the Utilitiessector accounted for 38% of the Scope2 total; Energy companies 17%;Consumer Staples 12%; and ConsumerDiscretionary 9%.

• Scope 3 reporting by S&P500 firmslags the FT500. S&P500 respondentsreported 429,311,922 tonnes of Scope3 emissions, including emissions frombusiness travel, upstream suppliers andproduct end-use. These Scope 3emissions represented 22% of the totalemissions reported by S&P500respondents, compared to 50% forFT500 respondents in the CDP5 survey.Calculating the ‘carbon footprint’ ofcompany operations remains one of themost elusive and vexing challenges ofcarbon emissions accounting.

Calculating the ‘carbon footprint’remains one of the biggestobstacles to full accounting of the climate change effects of a company’s operations

Reported Scope 1 Emissions by Sector

Materials 12%

Industrials2%

Energy 24%

Utilities59%

All Others3%

Reported Scope 2 Emissions by Sector

Materials 38%

Industrials7%

Energy 17%

Consumer Staples

12%

ConsumerDiscretionary

9%

All Others12%

InformationTechnology

5%

Table of Contents

01

Contents

1. The Carbon Disclosure Project (CDP) 2

2. Global Key Trends 6

3. America Wakes Up to Climate Change 10Climate Disclosure Standards Board 15

4. Climate Governance Index 18

5. Disclosure of Greenhouse Gas Emissions 24

6. Climate Disclosure Practices 32

7. GHG Emissions Management 50

8. Conclusion 66

9. Appendices 68Appendix I: Scores and Emissions 69Appendix II: CDP5 Questionnaire 73Appendix III: S&P500 Company

Responses to CDP4 & 5 76

Guest Commentaries

Climate Past, Climate Future: 16Key Findings from the IPCCDr. Michael MacCracken

Factoring “ESG” in Investment Analysis: 22Carbon Disclosure Project Helps Set the StandardJane Ambachtsheer and Craig Metrick

Changing Climate: Effects on Health, 30Environment and Economy Dr. Paul R. Epstein

Coastal Collision Course: Sea Level, 39Hurricanes and Development Dr. Stephen P. Leatherman

Business in the Driver’s Seat: 48A New Standard for Corporate Engagement in Climate Policy Hon. Eileen Claussen

Climate Change Legislation: 54The Time is NowJason Grumet

Renewable Energy Finance: Big Steps for 58US Investors, Smaller Ones for IndustryAngus McCrone

Catching Up to Climate Change: 64Prospects for the Kyoto Protocol after 2012Dr. William R. Moomaw

Contents

1CDP provides a coordinating secretariat andinnovative forum for investor and corporate

collaboration on climate change. Based onanswers to its questionnaire, CDP provides theinvestment community with information aboutcorporations’ greenhouse gas emissions andclimate change management strategies. ThroughCDP’s database, this information is available ina comparable format that adds value forinvestors and a wide range of stakeholders.

03

CDPÕs mission is to facilitate a dialogue between investors andcorporations, supported by high quality information from which a rational response to climate change will emerge.

The Carbon DisclosureProject (CDP)

The Carbon Disclosure Project (CDP)

In February 2007, CDP issued its fifthinformation request on behalf of 315institutional investors with assets of USD 41 trillion under management. Therequest was sent to 2,400 of the largestquoted companies in the world bymarket capitalization for disclosure of investment-relevant informationconcerning the risks and opportunitiesfacing these companies due to climatechange. These companies included the largest listed companies in Asia,Australia, Brazil, Canada, France,Germany, India, Italy, Japan, NewZealand, Scandinavia, South Africa,Switzerland, UK, US, and the ElectricUtilities and Transport sectors.

As in previous years the requestfocused upon the issues CDP hasidentified in conjunction with manysignatory investors, corporations andother experts as being most pertinent to the effect of climate change oncompany value. Those issues includeregulatory risk/opportunity (e.g. limits on emissions); physical risk/opportunity(e.g. changes in weather patternsimpacting operations); consumersentiment risk/opportunity (e.g.reputation); total company wide globalgreenhouse gas emissions and stepstaken to manage and reduce emissions.

USD 41 trillion of assets undermanagement represents more than one third of total global invested assets and is a marked increase fromthe USD 4.5 trillion that participated in the first CDP request in 2002.

77% of FT500 companies and a total of 1,300 corporations answered the fifth CDP request in 2007, evidencing a significant increase in support forCDP’s work from the 45% of FT500companies and 235 corporations thatanswered the first request in 2002.

Having launched at No.10 DowningStreet in 2000, CDP has become theglobal standard mechanism by whichcompanies report their greenhouse gasemissions to investors. Its process hasbeen applauded by Al Gore (Former US Vice President), Sir John Bond (thenChairman HSBC), Jeff Immelt (CEO,General Electric), Angela Merkel (GermanChancellor) and Tony Blair (former UKPrime Minister) among others. CDP isproud to have assisted the pioneeringefforts of global investors in creatingthis comprehensive and internationalsystem of disclosure.

CDP data has also enabled stakeholderssuch as policymakers, service providers,and NGO’s to accelerate their owninitiatives. Last year CDP reports wereproduced in English, French, German,Japanese and Portuguese and launchedat a series of high profile events in themain capital markets in the world. CDPnow hosts the largest registry of corporategreenhouse gas data in the world, andthis information along with reportsanalyzing it can be downloaded free of charge at www.cdproject.net. The CDP Secretariat extends sincerethanks to the signatory investors,responding corporations and regionalpartners for their participation in CDP5.

New CDP Initiatives in 2007

In addition to the expansion of its existingactivity in 2007, CDP is delighted to haveevolved its service offering in a numberof exciting directions:

Improved database. CDP is launching a user-friendly interface to itscomprehensive database of responses.This will enable users to easily and quicklyperform comparative analysis by sortingcompany information by sector, geography,emissions and the CDP questions.

“The aim of CDP is to graduallyimprove information on CO2

emissions and climatestrategies as well as to initiatelong-term plans for the future. I wish the Carbon DisclosureProject success with its furtherefforts both in Germany andworldwide.”

Angela Merkel,German Chancellor

CDP5 Signatories by Region

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CDP Membership. CDP is nowproviding a premium service for thosesignatory investors who have becomeCDP members. This service providesmembers with enhanced recognitionand access to the entire functionality of the database.

Supply Chain Initiative. In 2007, CDPwas delighted to enter into partnershipwith Wal-Mart Stores to send the CDPinformation request to a subset of theirsuppliers. This contract represents thestart of an exciting development for CDPas it begins to mirror its activity withshareholders and corporations viacorporations and suppliers. The Wal-Martwork is now being developed for broaderreach and impact with the launch of theSupply Chain Leadership Collaborationproject (SCLC project) aimed at workingwith key sector leaders including: Retail,Brands, Aviation, Automotive andGovernment among others. This workwill help identify and reduce emissionswithin their supply chains. The CDPSecretariat expresses sincere thanks toWal-Mart for their leadership in developingthis new system for corporate disclosureof emissions from supply chains.

Climate Disclosure Standards Board(CDSB). CDP became a member of the CDSB consortium convened by the World Economic Forum in January2007 and has been funded by the UKDepartment for Environment to providethe Secretariat to CDSB, supporting itsactivities focused upon climate changereporting standards.

“The first step towards managingcarbon emissions is to measurethem. Because in business whatgets measured gets managed.The Carbon Disclosure Projecthas played a crucial role inencouraging companies to take the first steps in thatmeasurement and managementpath. If more businessesprogress further down thatmeasurement and managementpath, within the context of publicpolicy, which spurs on thebusiness leaders and drags upthe business laggards, then wewill be able — and at surprisinglysmall economic cost — to offsetthe dangers which climatechange poses to our world.”

Lord Adair Turner,Standard Chartered plc

Going Forward

CDP’s primary goal is to continue to improve the quality and quantity of responses for its core disclosureactivity and in doing so better informthe decision-making of investors andcorporations regarding the implicationsof climate change.

CDP will also continue to respond tostakeholder requests to expand, and inaddition to the new initiatives for 2007,is developing further projects including:

• Expansion of the CDP process intofurther geographies and sectors.

• Expansion of the CDP process intoprivate equity and private companies.

• Workshops for corporations and investors.

• Further development of theCDP database.

• Assisting Pension Funds to developmandates incorporating climate change criteria.

CDP would be delighted to hear fromparties interested in participating orpartnering with CDP and invites them to approach the Project [email protected]

05

The Carbon Disclosure Project (CDP)

“It’s not surprising that investorsare worried and that they aresupporting the CarbonDisclosure Project. In BT weshare their concern – and wehave good business reasons fordoing so. We have a hugeinvestment in the UKtelecommunicationsinfrastructure and that will beincreasingly at risk… the CarbonDisclosure Project does us all agreat service in bringing thesematters to the attention of theinvestment and businesscommunities. It is an importantcatalyst for change — thechange without which the worldwill be a very dangerous place.”

Sir Christopher Bland,Chairman BT Group

“…the members of the CarbonDisclosure Project haverecognised that the cost benefitanalysis points to it being in theinterest of business to takeaction. The growth of the CarbonDisclosure Project itself showsthat investors are increasinglyaware of the impact climatechange will have on shareholdervalue... this is a project that hasconsiderable momentum andthat in itself is significant.”

Rt Hon Margaret Beckett MP,then Secretary of State for Environment, Food & Rural Affairs UK Government

“CDP works to improve theinformation flow, seeks toimprove City engagement, toimprove understanding andultimately to improve economicperformance… and it tackles itat the highest level with a crossborder span, with force and withdirectness… CDP represents a very positive aspect ofshareholder engagement and ifthere are more shareholdersready to sign up that can onlybe, from my perspective, a verygood thing.”

Derek Higgs,author Higgs Report onCorporate Governance

“Initiatives such as the CarbonDisclosure Project (CDP) canplay a meaningful role in ourshared endeavours to reducegreenhouse gas emissions. The project shows that bothcompanies and investors havekey roles to play. It is verypositive and inspiring that the capital markets areconsidering climate relatedaspects more and more in theirinvestment decisions. It provesthat the climate challenge is notonly a matter of technology it isalso an important economicissue. As Deputy Prime Ministerand Minister of Enterprise and Energy it is especiallyencouraging to see thatcompanies go ahead withoutstate intervention.”

Maud Olofsson, Deputy Prime Minister Sweden

“It has been a really interestingexperience to watch thedevelopment of the CarbonDisclosure Project and Icongratulate those who haveworked so hard. It’s extremelysignificant because there is a major shift in awareness of the climate crisis and the need to integrate the behavior ofcompanies public and privatetowards the climate crisis, both its risks and its opportunities in the investment market place and in the business market place generally.”

Al Gore, speaking at the CDP2006launch in New York

“CDP’s reporting mechanismoffers a trusted solution forconsistent and transparentreporting of our energy andcarbon numbers, as well as a wayto share our reduction strategieswith our shareholders and othercompanies. News Corp. is stillat the very beginning of ourenergy and climate change work and we’re delightedto have access to the wealth ofinformation that CDP provides for us to learn from.”

News Corporation

2Following successful expansion in CDP4, theCDP5 universe was expanded even further in

2007 to include over 2,400 companies. Thiswas made possible by sixteen geographicaland two sector expansions. This sectionprovides details of these partnerships, theoverall response rates, and some headlineanalysis of the key trends.

Please visit the CDP websitewww.cdproject.net in order to view anddownload the analytical reports based on the responses from the specificgeographical locations. Reports will be available for the Asia, Australia & New Zealand, Brazil, Canada, France,

Germany, India, Japan, Scandinavia,South Africa, Switzerland, UK and USA samples.

The key trends from CDP expansionshighlighted in the table overleaf produce anumber of interesting findings, including

the fact that the majority of respondingcompanies around the world see climatechange as posing commercial risks. Withthe lowest rate of companies recognizingpotential impacts showing 72%, it istelling that the majority of businesses are identifying climate change as an

Global Response Trends

07

Global Key Trends from CDP Geographic and Sector Expansions

CDP5 Response by Region / Sector

CDP4 Response by Region / Sector

Unlike other analysis, the graph above reflects all responses received up to August 2007.

The graph below shows the response rates from the various regions last year in CDP4.

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Number of Responses

Analysed**

Respondingcompanies that

said they considerclimate change

to representcommercial risks

Respondingcompanies that

said they considerclimate change

to representcommercial

opportunities

Respondingcompanies

that disclosedtheir GHG data

Respondingcompanies

that allocated board-level or

upper managementresponsibility forclimate change-related issues *

Respondingcompanies

that consideredemissions

trading opportunities *

Respondingcompanies

that implementedemission

reduction programs with targets *

Key Trends

77% 79% 49% 38% 47% 38% 15

97% 89% 60% 93% 77% 36% 68

100% 100% 59% 59% 61% 52% 46

85% 86% 66% 53% 27% 24% 86

90% 95% 79% 70% 54% 44% 113

88% 84% 72% 34% 31% 43% 67

80% 82% 79% 64% 46% 77% 378

98% 82% 83% 53% 38% 41% 91

83% 80% 69% 24% 2% 37% 151

77% 80% 67% 38% 20% 35% 104

79% 84% 39% 39% 47% 34% 38

89% 83% 89% 33% 33% 22% 18

78% 82% 95% 93% 69% 81% 112

81% 80% 76% 41% 37% 23% 77

81% 69% 65% 50% 36% 29% 269

80% 92% 56% 60% 44% 44% 25

72% 77% 72% 36% 15% 44% 39

83% 85% 77% 79% 42% 46% 48

Asia 80

Aust/NZ 150

Brazil 60

Canada 200

Electric Utility 250

France 120

FT500

FTSE100

FTSE250

Germany 200

India 110

Italy 40

Japan 150

Nordic 125

S&P500

South Africa 40

Switzerland 50

Transport 100

* Section B responders only** some responses will have been received after this analysis was carried out, the analysis was carried out by different report writers.

imminent threat. With the Brazilian rate at 100% of responding companiesrecognizing hazards, the FTSE 100 at98%, and the Australia 150 at 97%, these samples are showing that corporate awareness of risks is high. If business wants to be a significant forcein addressing climate change, it is equallyimportant that corporations recognize theopportunity and potential to adjust toshifting markets, resource availability,government regulation and consumerdemand. The recognition of businessopportunities corresponds accordingly tothe trends concerning risks, showing thatthe potential for development is alreadybeing integrated into corporate planning. In ten of the samples, the recognition ofopportunities was actually higher than therecognition of risk, showing market foresightalongside possible product development.

It should be noted that the questionsregarding management strategies andtrading opportunities were only answeredby corporations who completed the entirequestionnaire (Section B). As it was notmandatory, this can account for the lowerpercentages witnessed in the tableoutlining key trends above. Additionally,the question regarding emissions tradingschemes is expected to be lower, withmany companies falling outside the scope of such schemes. Interestingly, the number of companies in developingcountries such as Brazil, India and South Africa who see emissions tradingopportunities is higher than companiesbased in Europe showing high interest in the CDM market.

09

Global Response Trends

Country/Expansion Partner Web Address

Asia Association for Sustainable and Responsible Investment in Asia (ASrIA) www.asria.org

Australia & New Zealand Investor Group on Climate Change (IGCC) www.igcc.org

Brazil Banco ABN Amro Real www.abnamro.com

Brazil ABRAPP www.abbrapp.org.br

Brazil Fabrica Ethica www.fabricaethica.com.br

Canada Conference Board of Canada www.conferenceboard.ca

Electric Utilities CDP Secretariat www.cdproject.net

France AXA www.axa.com

France Agence de L’Environnement et de la Maitrise de l’Energie (ADEME) www.ademe.fr

France BNP Paribas www.bnpparibas.com

Germany BVI Bundesverband Investment und Asset Management e.V www.bvi.de

Germany WWF Germany www.wwf.de

India Confederation of Indian Industry www.ciionline.org

India WWF India www.wwfindia.org

Italy CDP Secretariat Europe www.cdproject.net

Japan CDP Secretariat Japan www.cdproject.net

Nordic Region CDP Nordic Secretariat www.cdproject.net

Nordic Region KLP www.klp.no

Nordic Region Folksam www.folksam.se

Nordic Region Nutek (Swedish Agency for Economic & Regional Growth) www.nutek.se

South Africa Incite www.incite.co.za

South Africa National Business Initiative (NBI) www.nbi.org.za

Switzerland Ethos www.ethosfund.ch

Switzerland Pictet Asset Management www.pictet.com

Transport CDP Secretariat www.cdproject.net

UK Department for Environment, Food and Rural Affairs (DEFRA) www.defra.gov.uk

UK – Adaptation UK Climate Impacts Programme www.ukcip.org.uk

U.S. Merrill Lynch www.ml.com

U.S. CDP Secretariat www.cdproject.net

Emission Target Trends

While the emissions target question islocated within Section B, there is anopportunity for companies to disclosetarget information at the end of Section A,Question 1(d), so all responses shouldhave been included in the analysis. Allcompanies were asked if they have anemissions reduction target. Manycompanies do have reductionprogrammes in place, however thequestion specifically asks for targets andunless those were disclosed, theresponse was not counted in the analysis.As such, the average number ofcompanies with a specific reductiontarget stands close to 50%, showingrobust leadership in setting reductiontargets. The FT500 and Japanese 150companies stand out as the two samplesworking most stringently to limit theiremissions. Whilst we have seen a greatincrease in the number of companiessetting emission reduction targets, thisremains an area for global improvement.

3In embracing greenhouse gas controls,American industry will have greater certainty

in investment planning decisions and newbusiness opportunities to exploit.

America and Climate Change

America Faces Up toClimate ChangeAmerica has reached a turning point inthe fight against global warming. Thescience has grown stronger, and the needfor action more compelling. Industryopposition to greenhouse gas (GHG)controls is melting away. Now the federalgovernment is poised to adopt GHGcontrol measures, ending a decade-longimpasse that has put the United Statesout of step with its major trading partners.

Just how America will address climatechange through legislation remains to beseen. But for the next U.S. president takingoffice in 2009, the issue will be a toppriority. Not only are there internationalcalls to re-engage in the Kyoto Protocol,the international control agreementadopted by Europe, Canada and Japan;the U.S. Supreme Court also ruled thisspring that the federal government has aduty to act under the Clean Air Act whenpollutants — including greenhouse gases— threaten human health and safety.

Meanwhile, American sentiment inaddressing global warming has reachedan all-time high:

• More than three-quarters of theAmerican public say they are ready totake action on climate change, accordingto recent polls conducted by Gallup,Opinion Research and others.

• Mayors of more than 600 cities,representing some 70 million people inall 50 states, have signed onto the U.S.Mayors Climate Protection Agreement,an initiative to advance the goals of theKyoto Protocol within their communities.

• More than a dozen states have adoptedGHG control regulations. California leadsthese efforts, and ranks as the world’stwelfth largest carbon emitter.

• Fully half of U.S. states have adoptedRenewable Portfolio Standards to shifttheir electricity supplies away fromreliance on carbon-based fuels.

More major U.S. corporations and influentialtrade organizations are also now embracing

the need for mandatory GHG controls. Onthe one hand, they want greater certainty intheir investment planning decisions. On theother, they want to exploit new businessand investment opportunities in a carbon-constrained world.

Yet time is running out on the KyotoProtocol — the control agreement the U.S.opted out of in 2001, citing economicconcerns and lack of binding controls ondeveloping nations. With the Kyotoframework due to expire in 2012, theEuropean Union is pressing the United

For the next U.S. presidenttaking office in 2009, climatechange will be a top priority

11

Recent U.S. industry statements on climate change

U.S. Climate Action Partnership: “We are committed to a path that will slow, stopand reverse U.S. emissions while expanding the U.S. economy…. In our view, theclimate change challenge will create more economic opportunities than risks for theU.S. economy…. Policies are needed to realize the full potential of energy efficiencyas a high-priority energy resource and a cost-effective means of reducing GHGemissions.” — A Call to Action, January 2007

More than 25 major U.S. firms or operating subsidiaries as well as six leadingenvironmental groups have joined USCAP. They support a goal to achieve a 60-80%reduction in U.S. CO2 emissions by 2050.

Business Roundtable: “[W]e support collective actions that will lead to the reductionof GHG emissions on a global basis with the goal of slowing increases in GHGconcentrations in the atmosphere and ultimately stabilizing them at levels that willaddress the risks of climate change…. [T]here is a range of views and preferencesamong our members about the policy tools that will best achieve that objective.Some companies support mandatory approaches; others do not.” — Climate Change Statement, July 2007

Business Roundtable is an association of CEOs of 160 major firms, with more than$4.5 trillion in combined annual revenues. This policy statement "marks the first timethat a broad cross-section of business leaders from every sector of the U.S. economyhave reached consensus on the risks posed by climate change and the need foraction," according to Business Roundtable President John Castellani.

National Petroleum Council: “The world is not running out of energy resources, butthere are accumulating risks to continuing expansion of oil and natural gasproduction from the conventional sources relied upon historically. These risks createsignificant challenges to meeting projected energy demand…. Policies aimed atcurbing CO2 emissions will alter the energy mix, increase energy-related costs, andrequire reductions in demand growth.” — Facing the Hard Truths About Energy,July 2007

The National Petroleum Council is an advisory body of oil and gas firms to the U.S.Secretary of Energy. The chairman for this report was former ExxonMobil CEO LeeRaymond.


RiskMetrics Group12

States for a deal that will bring it backinto the agreement. The U.S., in turn,wants China, India and the other fastest-growing developing nations to join. Sinceit takes time for all the member countriesto ratify a new agreement, the hardbargaining is about to begin.

Hard Math

The current Kyoto agreement calls on thenation’s major industrial nations to reducetheir GHG emissions by an average of5.2% by 2012, relative to 1990 emissionlevels. Despite this modest objective,progress to date has been spotty at best.

• The European Union has faced a steeplearning curve in implementing a first-of-its-kind, regional GHG emissions tradingscheme. Because the E.U. was toogenerous in allocating emission credits toindustrial firms in the first round oftrading, it now faces a tougher task ofreaching its compliance goals for 2012.

• In North America, Kyoto’s targets for2012 are well out of reach. Both Canada,which has ratified the agreement, andthe United States, which has not, areexpected to have GHG emissions 20%above their 1990 levels by 2012 — a farcry from Kyoto’s goals.

• China, meanwhile, has just surpassedthe United States as the world’s largestcarbon emitter. Under business-as-usual forecasts, global energy use andcarbon emissions are expected toincrease by more than a third through2030. Fossil fuels — oil, coal andnatural gas — are projected to provideas much of the world’s energy supplythen as now, some 80% of the total,absent major shifts in energy policy.

Yet, by 2050, scientists advising theworld’s governments believe a 60 to 80%reduction in GHG emissions may benecessary to keep Earth’s climate fromspinning dangerously out of control. Thisputs business-as-usual forecasts ofenergy use and economic growth on acollision course with global warminginertia. Like a speeding train spottingtrouble down the tracks, the emissionbrakes must be applied forcefully andsoon to prevent a collision — unless thereis another track the train can switch onto.

Stabilization Wedges

Fortunately, there are other options. Butthey won’t come easily. To head off CO2

levels in the atmosphere that are twicepre-industrial levels, or 550 parts permillion, there must be tens of trillions ofdollars of investment in low- and no-carbon technologies that is sustainedover the next several decades.

To put this investment challenge inperspective, two Princeton Universityprofessors have identified strategies thatcould return CO2 emissions to today’slevels by shortly after 2050 — even asworld energy use is projected to double.This would hold the future atmosphericlevel of CO2 to under 550 ppm. Toachieve this, the professors haveidentified about 20 options, or‘stabilization wedges,’ each of whichwould be capable of offsetting about 1 billion metric tonnes of annual CO2

emissions from fossil fuels.

Seven of these wedges would have to beput in place over the next 50 years inorder to offset 7 billion tonnes of carboncoming from projected annual growth infossil fuel use over the period. The global

NON-OECD

OECD

60%

40%

Projected Growth in Global CO2 EmissionsBaseline forecasts call for a 50%increase in energy demand overthe next quarter-century, withmost CO2 emissions growthoccurring in developing countries

13

America and Climate Change

Seven wedges are needed tobuild the stabilization triangle.Each wedge avoids 1 billiontonnes of carbon emissions peryear by 2054

between asset owners and assetmanagers will hasten the pace and scaleat which the low-carbon energy revolutionunfolds in the 21st century.

Here in the United States, the InvestorNetwork on Climate Risk (INCR), a groupof more than 50 institutional investorswith $4 trillion in assets undermanagement, is helping to spearheadthese efforts. As part of a 10-point ‘Callfor Action,’ INCR members have askedmoney managers to demonstrate theircapabilities and strategies to assess the

investment implications of employingthese wedges to back out of fossil fuelsare enormous. They include:

• A 30-fold increase in wind power bybuilding the equivalent of nearly onemillion 2-megawatt wind turbines.

• A 700-fold increase in solarphotovoltaics, covering a land area thesize of New Jersey.

• Using natural gas in place of coal at1,400 new 1,000 megawatt generatingplants.

• Capturing and storing CO2 emitted at800 (1,000 MW) coal plants or 1,600gas-fired generating plants.

• Tripling the world’s nuclear powercapacity by building 700 new (1,000MW) reactors.

• Producing 34 million barrels of bio-fuelsdaily, utilizing around 250 millionhectares of arable land (around one-sixth of the world’s available agriculturalresources).

• Increasing fuel economy in cars so that2 billion vehicles in 2050 run at anaverage of 60 miles per gallon ratherthan at the current average of 30 mpgfor 1 billion vehicles.

• Replacing every incandescent light bulbin the world with a compact fluorescentbulb and changing building codes,especially in the developing world, sothat energy use and CO2 emissionsfrom buildings are cut by at least 25%.

Investor Call to Action

Given the pivotal role that investmentcapital will play in the success or failure ofthis Herculean effort, it’s little wonder thatinstitutional backing of the CarbonDisclosure Project has grown nearly 10-fold over the last five years. Theinvestment community’s burgeoninginterest in climate change has alsospurred investment banks, brokeragefirms and insurance companies tochannel their expertise into identifyingclimate risks and opportunities, with newanalytical tools emerging in the field ofcarbon finance. Such positive interplay

Stabilization Triangle to Flatten CO2 Emissions

Predicted Path of CO2 Emissions

Source: R. Socolow and S. Pacala, Princeton University


RiskMetrics Group14

financial risks and opportunities posed byclimate change. In addition, INCRmembers have pledged to invest $1billion of their own capital in companieswith carbon-reducing technologies — agoal they surpassed in late 2006.

The INCR has for many years worked inpartnership with CDP, and is forgingalliances with like-minded groups such asthe Global Reporting Initiative.Recognizing that “what gets measuredgets managed,” these groups recentlyjoined a consortium convened by theWorld Economic Forum to supportactivities around the globe on thereporting of GHG emissions and thecreation of consistent corporate reportingstandards on climate change.

This new Climate Disclosure StandardsBoard (CDSB) has selected CDP to serveas its Secretariat. Its objective is to makeit common practice for corporations toinclude four climate change-reportingelements in their annual shareholderreports — and for investment banks andcredit ratings agencies to do the same intheir assessments of companies.

Shareholder Campaign

Forward-looking shareholders have longrecognized the profound effects thatclimate change will have on changing theregulatory landscape. Rules of commerce

that were well established and allowed forpredictable rates of investment return areentering a state of flux. A new regulatoryframework is being created that will factorin a price for carbon dioxide emissions —until now a market externality.

Investors in U.S. securities have beenfortunate in that they have been able topose questions directly to corporateboards and managers about their plans torespond to this changing regulatoryenvironment. As part of the annual meetingprocess, shareholders started with filingone proxy proposal at Exxon Corp. in1990. The campaign has been growingever since, with the number of resolutions,filers and industries targeted all increasingsubstantially in recent years. More than150 climate change resolutions have beenfiled in the last five years alone, including arecord 47 proposals filed in 2007. Most ofthese resolutions share the commonobjective of a new set of reporting criteria,like those espoused by the ClimateDisclosure Standards Board.

Results of this shareholder campaignreveal a strong upsurge in investorsupport for increased corporatedisclosure on climate change. Averagesupport levels for these proxy proposalshave nearly doubled in the last threeyears. Just as important, about half of thecompanies receiving such proposals nowtypically negotiate withdrawals, based ontheir willingness to stay engaged withconcerned shareholders and provideadded disclosure on climate change.

The longer-term objective of investorsleading this campaign is to create anaccounting regime for climate reportingthat becomes part of the generallyaccepted standards used in financialreporting. Only then — when the privatesector, professional bodies andgovernments embrace such disclosure ona routine basis — can markets expect todeploy capital efficiently and effectively ina carbon-constrained world.

*Average support level excludes filings by climatechange skeptics

Global Warming Shareholder Proposals

Filings andaveragesupportreached recordlevels in 2007*

Investor support is growing for ashareholder proxy campaign thatseeks to standardize corporatedisclosure on climate change

Safer Riskier

Stability of regulatory framework

Past Regulatory PolicyRegulatory framework is fullydeveloped, predictable and stable;high expectation of timely recovery ofcosts and investments

Current Regulatory UncertaintyFramework is still being developed,undergoing considerable change andmay have to remain flexible andadaptable

15

Climate Disclosure Standards Board

CDP has been appointed Secretariat to a consortium of seven business andenvironmental organizations called the Climate Disclosure Standards Board (CDSB or ‘the Board’). CDSB’s mission isto build upon the work of their membersto create and advocate a generallyaccepted framework for reporting bycorporations with respect to climate risksand opportunities, carbon footprints, andcarbon reduction strategies and theirimplications for shareholder value. Byaligning basic requests for information,the Board’s aim is to make carbon-relatedreporting by companies in their AnnualReports and related analysis by theinvestment research community common,and not just best, practice.

Background

In recent years, important progress hasbeen made in raising awareness of theimportance of climate-related disclosureamong corporations and their boards andshareholders as evidenced by theresponse to CDP. Disclosure frameworksand tools have seen considerableelaboration and refinement, helpingcompanies to understand better how theyshould disclose footprints, reductionstrategies and the related implications forshareholder value. Disclosure hasincreased substantially and more firmshave begun to manage their emissions,whether because of the scrutiny thatgreater transparency brings, the prospectof government regulation or otherconsiderations.

It is widely recognized that although theyare evolving fast and becoming ever moresophisticated, current climate reportinginitiatives are at a relatively early stage ofdevelopment. Opinions, suggestions andconclusions are emerging from interestedparties at different rates and times. All ofthese help to enhance consensus but canappear fragmented when originating frommultiple sources. In response, CDSB aimsto identify where there are consistenciesand opportunities for harmonizing regimes

Creating a Generally Accepted Climate Reporting Framework

Climate DisclosureStandards Board

Founding CDSB members:California Climate ActionRegistry; Carbon DisclosureProject; Ceres; The ClimateGroup; International EmissionsTrading Association; WorldEconomic Forum GlobalGreenhouse Gas Register andWorld Resources Institute

Advisory Committee

CDSB is supported by an AdvisoryCommittee to guide its work, comprisedof leading industrial, financial services andaccounting firms, as well as distinguishedgovernmental and non-governmentalspecialists. The Board and the AdvisoryCommittee were first convened at theWorld Economic Forum’s 2007 AnnualMeeting with representatives of Alcan,American International Group, CapitalGroup, Duke Energy Corporation, Ernstand Young, Royal Dutch/Shell, JP Morgan Chase, PricewaterhouseCoopers, SUNGroup of Companies, Swiss Re andTokyo Electric Power as well as UKForeign Minister David Milliband, State ofCalifornia Assembly Speaker FabianNúñez, and UNEP Director General,Achim Steiner.

and where there are recurring themes onbest practices and to build upon these tocreate a single unified Framework forclimate reporting.

Objectives

• Disclosure of actual and projected GHGemissions, using a reporting standardconsistent with the Greenhouse GasProtocol developed by the WorldBusiness Council for SustainableDevelopment and the World ResourcesInstitute

• Assessment of the physical impacts thatclimate change could have on thecompany’s business and operations

• Assessment of the material legal andfinance effects that climate-relatedregulation may have on the company’sbusiness and operations

• Management’s discussion and analysisof the actions it is taking to addressidentified climate risks andopportunities.

Facilitation of Dialogue onAccounting Standards

The accounting community and regulatorsremain at an early stage of dialogue onthe establishment of carbon-relatedfinancial accounting standards. In theinterest of assisting this process, CDSBmember organizations will offer acommon venue for such discussionsamong the industrial, financial,accounting, governmental and otherrelevant communities.


RiskMetrics Group16

by Dr. Michael MacCracken

In 1965, the President’s Science Advisory Committeewarned President Johnson that continuing reliance oncombustion of coal, oil and natural gas would causefurther increases in the atmospheric carbon dioxide(CO2) concentration and lead to global warming. In1985, scientists and government representativesbrought together by the World MeteorologicalOrganization warned that nations should no longer relyon past climatic conditions as a basis for futureplanning. In 1990, 1995, 2001 and again in 2007, theinternational scientific community — through theIntergovernmental Panel on Climate Change (IPCC) —has prepared scientific assessments regarding human-induced climate change that have gained unanimousacceptance and approval by the world’s nations.

The IPCC’s Fourth Assessment Report (www.ipcc.ch),even in the very measured tone of scientific discourse,makes clear that there is ‘unequivocal’ evidence thatthe climate is changing due to human activities. Nearsurface air temperatures at stations around the globeaverage almost 1.5ºF higher in the early 21st century ascompared to the late 19th century; changes have beenlarger in higher latitudes, over land, and in winter, andsmaller in low latitudes, over the ocean, and in summer.The effects of these changes include shortening thecold season and lengthening the warm season, leadingto fewer frost days and longer growing seasons; loss ofsnow and sea ice cover; intensified evaporation and dryperiods that increase the likelihood of wildfires; andshrinking habitats for cold-favoring species.

While the Earth’s climate has always varied to someextent, human activities have become the dominantinfluence, overwhelming the influences of variations inthe Sun’s output and major volcanic eruptions.Considering all of the possible natural and human-induced factors that could be affecting the climate, the

IPCC assessment makes clear that only humaninfluences could be causing the temporal and spatialpattern of changes that are now occurring.

While data provide a solid basis for understanding pastconditions, looking ahead 100 years is a majorchallenge. The world is so complex that constructing alaboratory model to conduct more than rudimentaryexperiments is not possible. Understanding how Earth’satmosphere, oceans, land surface and land coverinteract and have changed in the past does provide agood indication, although great care must be taken withanalogs because of the much more rapid pace ofhuman-induced change. Theoretical analyses providemany insights and constraints — among them that wecannot expect to forecast the weather on particular daysin the future. All we can expect is to generate a senseabout potential changes in the likely statisticaldistributions of future conditions (e.g., likely decadalaverages of typical summer conditions). As a result,projections of future change have had to rely onnumerical models. These models subdivide the globeinto many small ‘tiles’ (or boxes) and then couple themtogether based on the universally applicable laws ofconservation of mass, momentum, energy and species(like water vapor and ozone). IPCC’s 2007 assessmentreport described substantial progress in quality checkingthe model simulations, finding that, for example, theyquite reasonably represent the latitudinal and longitudinaldistribution of climate change over the 20th century.

To project conditions through the 21st century,economists and energy experts have prepared a rangeof scenarios of how the global population, economy,productivity and energy system are likely to evolve.Assuming ongoing efficiency improvements and thatno additional actions are taken to curb emissions ofgreenhouse gas (GHG) concentrations, plausiblescenarios suggest that emissions of CO2 and otherGHGs in 2100 are likely to be one to four times greaterthan at present, reflecting a likely increase in populationto 8-10 billion and a significant increase in the standardof living (and so in energy use). Even the lowest-emission scenario takes the atmospheric CO2

concentration to roughly double its pre-industrial level,while the highest ones cause the concentration toreach at least three times the pre-industrial level — and keep rising.

Imposing the scenario-based projections of changes inGHG concentrations, climate model simulations projectthat annual-average surface air temperatures around

G U E S T C O M M E N T A R Y

“Warming of the climate system is unequivocal,

as is now evident from observations of increases

in global average air and ocean temperatures,

widespread melting of snow and ice, and rising

global average sea level…. Most of the observed

increase in global average temperatures since the

mid-20th century is very likely due to the

observed increase in anthropogenic greenhouse

gas concentrations.” — IPCC, 2007

Climate Past, Climate Future: Key Findings from the IPCC

17

Guest Commentary

the world in 2100 will be roughly 4 to 8ºF above theirpre-industrial levels (about 3 to 7ºF above present). Thechanges will be larger in high latitudes (due toreductions in snow cover and sea ice allowing greaterabsorption of solar radiation) and less in low latitudes(due to the limiting influence of evaporation of water),larger over land areas than over the ocean, and largerat night and during winter than during the day and thesummer. Rapid reductions in emissions andstabilization of atmospheric composition over the nextseveral decades have the potential to limit the warmingto roughly 4 to 5ºF above their pre-industrial level —still quite a large change relative to changes duringEarth’s history, but hopefully low enough to avoid themost detrimental environmental and societal impacts.

The temperature increase is only the most generalindication of the changes in climate — and indeed inthe weather — that are likely. Faster evaporation will dryout soils and lead to more rapid onset of drought. Moreevaporation will also lead to more intense precipitationevents and more powerful, rain-dumping hurricanes.Warmer conditions will lead to higher snowlines andless springtime snowpack, reducing water available forirrigation and communities during hotter summers. Andwarming oceans and melting glaciers, which havealready caused sea level to rise about 8 inches in the20th century, are projected to lead to a further increaseof perhaps 20 inches by 2100 — and quite likely evenmore as the warming starts to cause deterioration of theGreenland and West Antarctic ice sheets. Evidence ofthe potential for much larger increases in sea levelcomes from study of the last interglacial (about 125,000years ago), when global average temperatures wereperhaps 1-2ºF higher than at present — and sea levelwas roughly 13-20 feet higher.

As was made clear in the special international panel report done for the U.N. Commission onSustainable Development in February 2007 (seewww.confrontingclimatechange.org), there is no moretime to wait — modest changes are already occurring,and what was once just a risk of significant climatechange is becoming a likelihood and soon will be areality. Although there is still much to be learned to beable to assist society in adapting to the inevitablefurther changes that will result from past and futureemissions, failing to act aggressively now will leave alegacy to future generations that will require them todevote increasing resources to making up for coastalinundation and damage from extreme weather —resources those generations (our children andgrandchildren) will have to divert from sustaining andenhancing their standard of living.

— Michael C. MacCracken is Chief Scientist for ClimateChange Programs with the Climate Institute inWashington, DC. Previously, he was a climate modelerand led atmospheric studies at the Lawrence LivermoreNational Laboratory. He then served as executivedirector of the Office of the U.S. Global ChangeResearch Program and its National AssessmentCoordination Office.

D r . M i c h a e l M a c C r a c k e n

While IPCC projections reflect consensus

positions in the world’s scientific community,

recent observations indicate that CO2

concentration, global average temperature and

sea level are rising at higher rates than IPCC

assessments have been projecting. This suggests

that the magnitude and pace of human-induced

global warming may be underestimated.(Rahmstorf et al., 2007: Recent Climate Projections Compared toObservations, Sciencexpress, www.sciencexpress.org, 1 February2007, 10.1126/scienc.1136843).

4This Climate Governance Index provides an evaluation of S&P500 companies

responding to the Carbon Disclosure Project2007 survey (CDP5).

Climate Governance Index

Ranking S&P500 Company Responses to Climate Change

Climate GovernanceIndexToday’s business and political leadersmust recognize that Earth’s climate is nolonger a static boundary condition forconducting their affairs. Strategicinvestment decisions now have a directbearing on the climate and the naturalenvironment that supports economicgrowth. New governance principles mustemerge that account for the effect ofhuman decisions on the globe, andinnovative strategies must be developedto sustain economic growth whilereducing the drivers of climate change,especially dependence on fossil fuels.

This will be an intergenerational challengethat causes the planning horizon for keyinvestment decisions to expand beyondthe time that a CEO or government leadertypically stays in office. While investmentreturns typically are pegged to periods offive years or less, they often create assets— automobiles, appliances, housingstock, factories and power plants — withlife spans from a decade to 50 years ormore. Even after these assets are retired,the greenhouse gases associated withthem may linger in the atmosphere for100 years or more.

This creates a ‘governance gap’ indecision making whereby investmentsmade in real time by industry andgovernment leaders have century-longimplications. To bridge this gap,conventional thinking must be turned onits head: those pursuing fundamentalchanges in production methods andenergy use may realize the greatestinvestment opportunities. Those intendingto carry on with business as usual maybear the greatest investment risks andliabilities resulting from climate change.

Since 2003, the Investor Network onClimate Risk, comprised of more than 50U.S. institutional investors with $4 trillionin assets, has supported research on therelationship between corporate

governance and climate change. In 2004,INCR published an Investor Guide toClimate Risk to serve as an action planand resource guide for asset owners,money managers and corporations. Thisreport is available at www.incr.com.

In addition, through Ceres, an investorand environmental coalition that serves asthe secretariat for INCR, two editions ofCorporate Governance and ClimateChange: Making the Connection havebeen published, in 2003 and 2006. CDP ispleased to have worked with Ceres andINCR during this formative time.

For these earlier reports, InstitutionalShareholder Services (now a division ofRiskMetrics Group) created a 14-pointClimate Governance Index to evaluatecorporate climate change activities in fivemain governance areas:

¥ Board oversight¥ Management execution¥ Public disclosure¥ Emissions accounting¥ Emissions reductions and strategic

opportunities

This Climate Governance Index has beenadapted to provide an evaluation ofS&P500 companies responding to theCDP5 survey.

19

Capital Life Cycles vs. Natural Life Cycles

Carbon Dioxide Gas

Pension Beneficiaries

Average Lifetime (years)

*Source for capital cycles: U.S. Department of Commerce, Bureau of Economic Analysis

Steam Turbines*

Industrial Machinery*

Personal Vehicles*

CEO/Board Tenure

Semiconductors*

While investment returns areusually based on periods of fiveyears or less, they often createassets designed to last 10 to 50years — and greenhouse gasesthat stay in the atmosphere for a century or more

RiskMetrics ClimateGovernance Index Adapted to CDP5 Report Analysis

The tables below explain the scoringsystem used to evaluate the responses ofS&P500 Index companies to the CDP5questionnaire; it has been adapted fromthe RiskMetrics Climate GovernanceIndex. The points awarded are based ondisclosure from CDP5 responses (25points maximum) and from therespondents’ climate change disclosure intheir most recent Form 10-K filings withthe Securities and Exchange Commission(three points maximum).

Board oversight and managementexecution scores (four points maximum)are included only for industry sectorswhere a majority of S&P500 respondentscompleted Section B of the CDP5questionnaire. To make scorescomparable, RiskMetrics calculated apercentage grade for each companybased on the amount of points itachieved out of the total points availablefor its sector, up to a maximum of 100%.

Emissions intensity targets are normalizedreductions relative to units of productionor revenue. (Such targets may allow afirm’s absolute emissions to grow.)Absolute emissions targets are set toachieve total emission reductions below aspecified baseline.

Targets must be company-wide in orderto receive scores for emission reductions.Targets do not have to include Scope 3(indirect) emissions from upstreamsuppliers or downstream product end-use. In some industry sectors, Scope 3emissions are much greater than Scope 1(direct) emissions or Scope 2 (purchasedpower) emissions.

See Appendix 1 of this report for acomplete list of Climate GovernanceIndex scores, calculated as a percentagegrade, for S&P500 respondents to theCDP5 questionnaire.

Section B Company Responses

Board ManagementOversight Execution

2 2

Section A & B Companies — Disclosure and Opportunities

Risk Disclosure Emissions Disclosure Commercial(6 pts. max.) (4 pts. max.) Opportunities

Regulatory Physical Scope of Emissions Accounting (# opportunities listed:

CDP 10-K CDP 10-K 1* 2* 3* Global only 1 if 1, 2 if 2, 3 if >=3)

2 2 1 1 2 1 1 2 1–3

Section A & B Companies — Efficiency and Renewables

Efficiency/Renewables Targets

Energy Efficiency (pick one, two pts. max) Renewables (pick one, two pts. max)

Facility Region Company Facility Region Company

1 1.5 2 1 1.5 2

Section A & B Companies — Emission Targets

Emissions Reductions** (7 pts. max.)

Target Type <1%/yr 1–2%/yr >2%/yr

Intensity 1 2 3

Absolute 5 6 7

*Scope 1 = direct emissions; Scope 2 = purchased power emissions; Scope 3 = indirect emissions

**Annualized emission reduction figures are calculated as follows: Total target percentage reduction / Totalreduction program years (target year - baseline year = reduction program years). To account forcompanies with second-generation targets, emissions reductions achieved in earlier periods (often with a1990 baseline) are summed with second-generation emission targets to determine a projected combinedpercentage reduction in emissions from the original baseline.

RiskMetrics Group20


See Appendix 1 of this report for a complete list of ClimateGovernance Index scores,calculated as a percentagegrade, for S&P500 respondentsto the CDP5 questionnaire

“It can take over two decadesfor newly commercializedvehicle technology to beincorporated into the vehiclefleet actually on the road.Improvements in buildingefficiency are made slowly —because buildings can stand formany decades, and retrofittingefficiency steps such asincreased insulation and betterwindows can be difficult andcostly. Power plants andindustrial facilities often last 50years or more, limiting the rateof capital turnover in thesesectors. Achieving anysignificant increase in efficiency,shift in fuels used, and captureof CO2 emissions for storage willrequire major changes overdecades to vehicles, buildings,industrial plants, electricgeneration facilities, andinfrastructure.”

— “Hard Facts about Energy,”National Petroleum Council, July 2007

21

Climate Governance Index

Climate Governance Index Ñ Top Company Scores by Sector

Additional Top Scoring Companies

Du Pont

GM

Con Ed 3M

Citigroup

Merrill

Lynch

Morgan S

tanley

Hewlet

t-Pac

kard

Chevron

Wal-mart

Hospira

Verizo

n

Utilitie

s

Materia

ls

Energy

Industrial

s

Consumer

Staples

Informati

on

Tech

nology

Consumer

Discret

ionary

Health

Care

Financia

ls

Telec

ommunicatio

n

Service

s

Entergy

Exelon

Alcoa

Ford M

otorUTC

AEP

News C

orp.

Weyerh

aeuse

r

Johnso

n Contro

ls

Keysp

an

Xcel E

nergy

Clim

ate

Gov

erna

nce

Poi

nts

Clim

ate

Gov

erna

nce

Poi

nts

Clim

ate

Gov

erna

nce

Poi

nts

Tie

Climate Governance Index Ñ Average Sector Scores by Component


RiskMetrics Group22

by Jane Ambachtsheer and Craig Metrick

The success of the Carbon Disclosure Project (CDP)speaks to the increasing attention paid to climatechange by the world’s largest corporations. But equallyimportant and impressive is the commitment by manyof the world’s largest investors to address the impact of climate change on their portfolios. Integratingenvironmental, social and governance (ESG) issues intocorporate engagement and stock selection is now atrend that the CDP has helped to create.

Increasingly, the institutionalization of ESG factors byinstitutional investors and asset managers occursbecause issues such as climate change pose real risksand business opportunities, not just moral and ethicalconcerns. As evidence of climate change and modelsof its impact are further established, it becomes clearerthat climate change will have real long-term impacts onthe physical and financial future of investmentbeneficiaries. In this light, the moral perspectivecoincides with the financial one — reinforcing thefiduciary argument for considering ESG factors withinthe investment and ownership processes.

In April 2006, a set of global Principles for ResponsibleInvestment (PRI) was launched by the United NationsSecretary General at the New York Stock Exchangeafter a year-long process led by the UN EnvironmentProgramme Finance Initiative and the UN GlobalCompact. The PRI provide a valuable framework forESG integration and include six broad principles andsuggested actions,1 all of which are designed toencourage and promote the integration of ESG factorsinto investment processes. At the time of launch,owners with more than $10 trillion of assets undermanagement had signed up to the principles, withmore than 220 signatories (40% asset owners, 40%asset managers and 20% professional servicepartners).

The PRI has also formalized a detailed assessmentreview that seeks to demonstrate progress and changein mainstream practices — both key factors formaintaining the credibility and legitimacy of theinitiative over time.

As part of the first PRI assessment review process,some exciting trends and innovations were identifiedthat highlight the various ways environmental factorsare being integrated into how institutional investors andtheir agents oversee the management of theirportfolios.

Mercer sees important and encouraging synergiesbetween the CDP and the PRI. The first two principlesunder the PRI commit signatories to consider ESGissues in their investment and ownership decisions.There are many ways this can be done. Signatorieshave an opportunity to formalize their own ESGconsiderations and/or encourage their managers to dothe same. The thorough and compatible nature ofresponses makes CDP an ideal tool for complying withthese principles. Moreover, the development of a user-friendly database housing responses by the CDPsecretariat will make more accessible the current andhistorical responses to the CDP questionnaire.

Through Mercer’s work with PRI signatories and ourinvestment manager research, we know thatinvestment analysts are increasingly buildingsustainability criteria into valuation models andinvestment standards to support their search for alpha.Sell-side firms and an increasing number ofmainstream investment managers are also finding ituseful to reconcile climate change indicators withfinancial criteria in their research processes.Previously, this was the domain of managersspecializing in socially responsible mandates. Now thePRI, CDP and others are encouraging increased uptakeof climate-specific and ESG data by the broaderinvestment community through education, research,provision of information and collaboration.


Synergies between CDP and the UN Principles

for Responsible Investment will enhance

corporate disclosure on climate change and

make data more accessible

Factoring ÔESGÕ in Investment Analysis: Carbon Disclosure Project Helps Set the Standard

23

Guest Commentary

Another PRI principle (# 3) requires investor signatoriesto encourage portfolio companies to further discloseinformation on ESG matters. Again, CDP offers a wayto fulfill this requirement. Signing on to the CDP growsthe assets represented by the initiative and appliesmore pressure to companies to respond, while sendingmarket signals that investors want companies toconsider climate change in their strategic policies,planning and disclosures. The results and responses of CDP demonstrate the growing success of this approach.

The risks and opportunities related to climate changehave now been documented, and investmentmanagers and asset owners around the worldincreasingly have internalized the ‘investment case’ for proactive responses to the issue. As a result thereare now hundreds of sustainability ‘branded’ fundsavailable in the market globally, launched and managedby a combination of mainstream and specialistinvestment firms whose products are available to bothretail and institutional investors.

There are various investment strategies thatsustainability funds might adopt, such as negativescreens to eliminate exposure to high-polluting sectorsand companies within those sectors. Other strategiesinclude a best-in-class approach that is underpinnedby a sustainability ‘rating’ of companies. These fundsoverweight highly rated sustainability companies andunderweight those with poor ratings. Another quicklygrowing category of emerging investment productsinvolves clean technologies. These funds often includeboth listed and private equities (and sometimes realestate and other asset classes), and focus ongenerating alpha by investing in the companies that willbe winners in the global shift towards a lower-carboneconomy.

Despite the flurry and seeming appeal of sustainabilityfunds, there are still relatively few examples ofmainstream investment managers who have formallyintegrated ESG criteria into the core stock selectionand value enhancement of their traditional fundofferings. Fortunately, the outlook is improving.According to a recent PRI assessment, more than halfof asset owners adhering to the principles in someway, now assess the capacity of managers to integrateESG considerations.2 Request for proposals andinvestment management agreements are additionalindicators of how and to what extent the investmentcommunity views ESG issues as important.

Expect to see more progress and examples ofinvestors and investment managers integrating ESGfactors into valuations and the identification of futureinvestment opportunities. Initiatives such as CDP andthe PRI will continue to bolster this trend, whileencouraging collaboration, fiduciary responsibility andflexibility in approaches.

— Jane Ambachtsheer and Craig Metrick are withMercer Investment Consulting’s global ResponsibleInvestment business.

1 See www.unpri.org.2 See wwww.unpri.org/report07/

J a n e A m b a c h t s h e e r a n d C r a i g M e t r i c k

More than half of asset owners supporting the

PRI now assess the capacity of investment

managers to integrate ESG considerations into

their research

5Disclosure of GHG emissions by CDP5respondents in the S&P500 jumped from

54% to 65%, but the completeness of reportingstill varies widely by sector.

Corporate tracking and disclosure ofgreenhouse gas emissions is one of themost basic elements of climate changereporting — and one of the most difficult.As companies enter this process, theymust decide which GHG emissions totrack and the scope and rotation ofemission inventories. Baselines must beset to track emissions trends over time,and accounting procedures must be putin place to adjust for acquisitions,divestitures and joint ventures that affectaggregate emissions totals. To ensureaccuracy and consistency of reporting,companies need to carefully documenttheir accounting assumptions and datacollection methods, which may evolve asreporting standards are refined.

Fortunately, companies do not have tofigure this out all on their own. Since1999, the World Resources Institute andthe World Business Council forSustainable Development have convenedan open, international, multi-stakeholdereffort to design and promote aninternational protocol for reporting GHGemissions. Respondents to the CDPquestionnaire are urged to use the‘Greenhouse Gas Protocol’ that this grouphas developed.

Among this year’s S&P500 respondents:

¥ 65% (175 out of 269 responsesanalyzed) reported their GHG emissions,a sizeable jump from 54% of CDP4respondents. Of the companies thatreported, 146 agreed to make theiremissions figures public.

¥ The largest proportion (150respondents) reported Scope 1 (direct)emissions; a somewhat smallerproportion (133) reported Scope 2(purchased power) emissions; and amuch smaller number (43) reportedScope 3 (indirect emissions)

Calculating the ‘carbon footprint’ of acompany’s operations — all the way fromupstream suppliers and energy providersthrough downstream customer end-use ofproducts — remains one of the mostvexing challenges of carbon emissionsaccounting. Until there is greaterconsistency in disclosure in each industrysector, with clear boundaries set ondeclaring direct and indirect emissions,comparing company disclosures willremain largely an ‘apples-and-oranges’exercise.

Emissions Reporting by Scope

S&P500 companies reported 2,013 milliontonnes of CO2e emissions, although theydid not break down 70 million tonnes ofthis amount by scope. Of the amountbroken down, two thirds — or 1,304million tonnes — were in the GHGProtocol Scope 1 category of directemissions. Another 11% — 211 milliontonnes — were Scope 2 purchased power emissions. The final 22% — 429 million tonnes — were Scope 3indirect emissions.

In all, S&P500 respondents tothe CDP5 survey reported anaggregate total of 2,013 milliontonnes of carbon dioxideequivalent (C02e) emissions,equivalent to about 6% of globalannual GHG emissions

Disclosure ofGreenhouse Gas Emissions

Greenhouse Gas Emissions

25

Emissions Reporting by Scope

Scope 322%

Scope 211%

Scope 167%


RiskMetrics Group26

Companies sometimes reported only aglobal emissions total, with no furtherdetail. Most often, they did not includeScope 3 amounts in their reported globaltotal, while some reported only partialtotals, excluding some regions orcountries.

¥ Scope 1: Among S&P500 respondents,electric utilities dominated Scope 1(direct) emissions; these firmsaccounted for nearly three-fifths of thetotal. Energy companies accounted foranother quarter of these emissions,while the Materials sector contributed12% of the total.

¥ Scope 2: Reporting of emissions frompurchased power was more evenlydistributed among the industry sectors.Materials companies accounted formore than one-third of these emissions,followed by Energy (17%) andConsumer Staples (12%).

¥ Scope 3: Only a small proportion ofrespondents reported on their indirectemissions. Of these, emissions frombusiness travel were most commonlyreported (31 respondents). Just fivefirms reported on emissions from theirproducts. Two were of particular note:Chevron, with 395 million tonnes fromcustomer end-use of its products; andCitigroup, with 21.3 million tonnesreported from new capacity at fossil-fired power plants it has financed. Fourrespondents reported on supply chainemissions, and three on emissions fromlogistics and distribution.

Emissions totals would changedramatically if more oil, auto and durablegoods companies included Scope 3indirect emissions in their carbonfootprints. However, this would also leadto a problem of double counting ofemissions, since, for example, oil andauto companies might both account forthe fuel used in vehicles.

Emissions Reporting bySector

Emissions disclosed by S&P500respondents varied significantly by sector.

¥ Utilities reported 821 million tonnes ofCO2e emissions, about 40% of the totalreported by all sectors. Of this amount,764 million tonnes, or 93%, werereported as Scope 1(direct) emissions.These Scope 1 emissions from utilitiesrepresent 59% of all such emissionsreported by S&P500 respondents.

¥ Energy companies had the secondhighest amount of aggregate reportedemissions for any sector, with 739million tonnes. The overall figure isheavily skewed by Chevron’s response,however, whose Scope 3 (indirect)emissions accounted for 53% of theemissions reported by all Energy sectorrespondents. Had the otherrespondents in this sector made similardisclosures of their estimated Scope 3emissions, they would have faroutranked Utilities in terms of aggregateemissions totals.

Top Emitting Sectors by Scope

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Emissions totals would changedramatically if more oil, auto and durable goods companiesincluded Scope 3 indirectemissions in their carbonfootprints

27


¥ Materials came in a clear but distantthird in terms of aggregate emissions,with 241 million tonnes reported. Both itand Industrials — the next highestemitting sector with 65 million tonnesaggregated emissions — had Scope 1emissions roughly twice their Scope 2amounts.

Among the six remaining lower emittingsectors, Consumer Staples, InformationTechnology and Telecommunicationscompanies stood out for having Scope 2 emissions significantly higher than Scope 1 emissions, while ConsumerDiscretionary and Health Care firmsreported largely equivalent amounts ofScope 1 and 2 emissions. For all thesefirms, energy efficiency programs aremost likely to improve their emissionsprofiles, with a positive impact on theirbottom lines, given rising energy costs.

Emissions Intensity by Sector

Another useful gauge of respondents’GHG emissions is to measure their Scope 1 and Scope 2 emissions againstthe firms’ annual revenues; this provides a measure of their emissions intensity ofproduction. For the most part, industrieswith higher absolute emissions also havehigher emissions intensity rates.

Not surprisingly, the Utility sector ranksfar above all others in emissions intensity,because its revenues derive largely fromcombustion of fossil fuels to generateelectricity. Respondents in the Materialsand Energy sectors have emissionsintensity ratings that are only about one-fifth and one-tenth that of the Utilitysector, respectively. However, the Energysector’s intensity rating would exceed thatof the Utility sector if Scope 3 emissionsfrom customer end-use were taken intoaccount. Except for Industrials, all othersector respondents in the CDP5 surveyhave average emissions intensity ratingsof less than 100 tonnes of CO2e per dollarof revenue generated.

mill

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Top Carbon Intensity Sectors

Lowest Carbon Intensity Sectors

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RiskMetrics Group28

Carbon Intensity by Sector

Sector S&P500 Respondents Total EmissionsEmissions1 Intensity2

Utilities

Materials

Energy

Industrials

Consumer Staples

Consumer Discretionary

Health Care

Information Technology

Telecommunications

Financials

Sector Response 819,838,866 3,842

Highest American Electric Power 145,400,000 11,520

Lowest FPL Group 4,914,112 313

Sector Response 240,598,247 738

Highest United States Steel 48,500,456 3,086

Lowest Ecolab 294,872 60


Highest Occidental Petroleum 16,220,000 474

Lowest Halliburton 3,150,000 140


Highest 3M 6,540,000 285

Lowest Rockwell Automation 169,163 30


Highest Kimberly-Clark 6,849,439 409

Lowest Altria Group 513,453 7


Highest Carnival 9,005,483 761

Lowest Nike 77,684 5


Highest Eli Lily 2,296,224 146

Lowest McKesson 42,248 0


Highest Corning 1,002,457 194

Lowest Microsoft 152,600 3


Highest Simon Property Group 574,976 167

Lowest Freddie Mac 41,000 1

Highest/Lowest Verizon 7,171,103 81

1 Scopes 1 & 2 or total global emissions where companies reported only a total figure; tonnes CO2e.

2 Emissions total noted above divided by annual revenue.

29


Top Emitting Companies by Sector

Sector S&P500 Scope 1&2 EmissionsScope 1 Scope 2

Scope 3Respondents Emissions1 Intensity2

Energy

Utilities

Materials

Consumer Staples


Industrials

Telecoms


Health Care

Financials

Exxon Mobil 158,800,000 474 3 3

Chevron 65,850,331 321 3 3 3

ConocoPhillips 62,289,206 372 3 3

Marathon Oil 19,590,000 327 3 3

Occidental Petroleum 16,220,000 918 3 3

American Electric Power 145,400,000 11,520 3

Southern 145,000,000 10,100 3

Duke Energy 98,400,000 6,481 3

Xcel Energy3 62,208,515 6,322 3

Progress Energy 53,580,026 5,599 3

Alcoa 60,100,000 1,978 3 3

United States Steel 48,500,456 3,086 3 3

Dow Chemical 37,700,000 767 3 3

Air Products & Chemicals 18,000,000 2,034 3 3

International Paper 14,766,407 671 3 3

Wal-Mart Stores 20,388,574 59 3 3

Kimberly-Clark 6,849,439 409 3 3

Coca Cola 4,867,779 202 3 3 3

Anheuser-Busch 3,032,000 193 3 3

Procter & Gamble 2,889,000 42 (combined)

General Motors 11,021,420 53 3 3

Carnival 9,005,483 761 3

Ford Motor 6,800,000 42 3 3

Target 2,634,300 44 3 3

Johnson Controls 2,497,804 77 3 3 3 3

General Electric 10,835,295 67 3 3

United Parcel Services 7,373,000 155 3 3 3

3M4 6,540,000 285 3 3

United Technologies 2,345,176 49 3 3 3

Caterpillar 2,343,115 56 3 3

Verizon Communications 7,171,103 81 3 3

Intel 3,870,000 109 3 3

Int’l Business Machines 2,824,361 31 3 3

Hewlett-Packard 1,598,500 17 3 3 3

Corning3 1,002,457 194 3 3

Xerox4 447,991 28 3

Pfizer 2,408,317 50 3 3 3

Eli Lilly 2,296,224 146 3 3

Merck3 1,146,000 51 3 3 3

Wyeth 1,106,626 54 3 3

Bristol Myers Squibb 997,776 56 3 3 3

Citigroup 1,387,412 9 3 3 3 3

Bank of America 1,380,000 12 3 3

Fifth Third BanCorp3 778,068 96 3

Simon Property Group 574,976 167 3 3

Wells Fargo4 551,437 11 3

1Emissions are for period ending in 2006 unless otherwise footnoted.

2Emissions total (Scopes 1 & 2 or total global emissions where companies reported only a total figure) divided by annual revenue.

3Emissions reporting year ending in first half of 2007

4Emissions reporting year 2005

Disclosure

Products Supply Logisitcs/ BusinessChain Distribution Travel


RiskMetrics Group30

by Dr. Paul R. Epstein

Earth’s climate is changing. Human activities arecontributing, biological systems are responding, andweather is growing more extreme. These were the mainconclusions of the Intergovernmental Panel on ClimateChange (IPCC) Report in 2001.

Since then we’ve learned a great deal more: polar icemelt is accelerating, ocean warming is spawning moreintense storms, and — most ominously — global windpatterns have shifted. These changes indicate growinginstability in Earth’s climate regime.

Over the last half century, Earth’s vast oceans haveabsorbed 22 times more heat than the atmosphere.Coral bleaching from higher sea surface temperaturesand increased acidification from CO2 absorptionthreaten ocean organisms and ancient coastal habitat.

Over land, global warming is increasing evaporationfrom plants and soils, intensifying droughts, whilegreater evaporation from warmed seas createsconditions for heavier downpours. When droughts yieldto heavy rains, destructive flash flooding can occur.

Rising CO2 levels

The IPCC’s first assessment in 1990 calculated that a60-80% reduction in carbon dioxide (CO2) emissionswould stabilize atmospheric concentrations. Nearly twodecades later, CO2 emissions and concentrations arestill rising. Atmospheric levels of CO2 now exceed 380parts per million (ppm), well outside the 180-280 ppmenvelope in which they remained for more than700,000 years.

• At 180 ppm, large ice caps extended well into theUnited States, and the average global temperaturewas 10˚C (50˚F).

• At 280 ppm, ice caps receded and the global averagetemperature was 15˚C (59˚F);

• At 380 ppm, we are headed for small ice caps andrising sea levels — or a ‘cold reversal’ from meltingglaciers and release of Greenland and West Antarcticice.

Models based on CO2 alone underestimate the fulleffect of warming on our planet. As calculated in theIPCC 2007 Report, the combined global warmingpotential of all heat-trapping gases minus toxiccoolants is approaching 460 ppm of ‘CO2-equivalent’concentrations.

Reviewing our options

The impacts of climate change are broad and will belong-lasting. The financial services sector — the centralnervous system of the global economy — senses thepossibilities, both good and bad. Substantially reducingGHG emissions will require a concerted effort,comprehensive plans and a well-coordinated suite offinancial and policy instruments.

Oil — the current lifeblood of our economy — demandsutmost scrutiny. Using a health and environmental lens,oil — throughout its life cycle — exacts an enormoustoll on human health, the environment and socialsystems. Coal, tar sands and shale oil contain heavymetals and carcinogens that present their own healthand ecological hazards.

Carbon capture and storage (CCS) — pumping CO2

underground or into ocean beds — may be a way ofameliorating the carbon problem. But more study isneeded. A special report of the IPCC lists theconcerns: possible leaching of lead and arsenic,altered microbial communities, limestone fractures and,with increased pressure, leaks and releases of CO2 thatare toxic to mammals and forests.

Meanwhile, nuclear power is seeking a revival. Butreplacing carbon pollution with radioactive pollutioncarries its own risks. While nuclear plant safety may be‘containable,’ security and safe storage — againstearthquakes (like that in Kashiwazaki, Japan, in July2007) — may prove intractable. Moreover, buryinghigh-level waste from an expanded nuclear programwould soon fill the proposed Yucca Mountain site inNevada (which faces its own seismological questions),and an additional site every five to 10 years until 2050.

Some renewable energy sources also deserve scrutiny.Biofuels, for example, are a promising fuel for


By the end of this century, Earth could be

warmer than at any time in human history, and

since the age of the dinosaurs 60 million

years ago.

Changing Climate: Effects on Health, Environment & Economy

31

Guest Commentary

transportation. But an estimated one-sixth of theworld’s cropland would need to be devoted to ethanolto offset a billion tons of carbon emissions annually.Corn-based ethanol has already contributed to foodprice increases. In Southeast Asia, land-clearing firesfor palm oil plantations to produce biodiesel harmhabitat and primates, and release a huge carbon pulse.Non-edible cellulose fibers offer more long-termpromise, but burning anything generates pollution.

Life cycle analysis

A life-cycle analysis (LCA) of practices and technologiescan help separate solutions for near-term adoption fromthose warranting further study. Those meeting multiplegoals of adaptation and mitigation — and having health,environmental and economic co-benefits — rise to thetop of the list.

Conservation and efficiency can halve energy demand.Decreased vehicular miles traveled, improved publictransport and plug-in hybrids with better batteries canhelp meet transportation goals. For the builtenvironment, ‘green buildings,’ rooftop gardens, bikingpaths, and ‘smart urban growth’ will create healthiercities and boost enterprises focused on innovativetechnologies.

Natural lighting and insulating windows, computer-optimized switches and meters, and technologies fordistributed power generation, including cogenerationand fuel cells, can constitute a resilient, ‘smart, self-healing’ grid — improving adaptation and mitigation. Topower the utility grid, solar thermal arrays in the South-west, wind farms in the Plains states and geothermal inthe West could replace fossil generating stations.

All of this will take time and money. But aligninginvestments, loans and underwriting with regulationsand rewards — and removing financial and bureaucratic‘disincentives’ — can create the foundation for ahealthy, environmentally-sound, low carbon economy.

— Paul R. Epstein, M.D., M.P.H., is Associate Directorof the Center for Health and the Global Environment atHarvard Medical School.

D r . P a u l R . E p s t e i n

Some proposed solutions — such as

corn-based ethanol, clean-coal technology

and nuclear power — still face considerable

obstacles. A life-cycle analysis can help avoid

unintended consequences.

Climate Impacts: Health,Environmental and Economic

Human health: Prolonged heat waves and

smog-related air quality alerts; expanded range

of infectious diseases (malaria, dengue fever,

Lyme disease); clusters of water-, mosquito- and

rodent-borne diseases following floods;

increased asthma-producing ragweed pollen and

strengthened poison ivy from higher CO2 levels.

Agriculture: Crop damage from drought,

flooding and hail; more pests, pathogens and

weeds.

Forests: Spread of pests such as pine bark

beetles and ash borers with warmer winters;

increased wildfires from reduced winter

snowpack, hot dry summers, and pest damage.

Wildlife and livestock: Spread of diseases; herd

losses from heat waves, drought and winter ice

storms.

Marine life: Widespread coral bleaching and

disease, harmful algal blooms and ‘dead zones’.

Drinking water: Reduced water quality from

droughts and floods; water scarcity that

generates refugees.

Sea level rise: Coastal infrastructure

undermined; island nations produce refugees.

Security and conflict: Regional conflicts

spawned by food, water and resource

shortages; military protection of natural

resources.

Energy sector: Blackouts from heat waves and

storms; thermal plant shutdowns from too

warm/too little cooling water; subsidence of

pipelines, ice roads and drilling platforms on

Arctic permafrost; increased hurricane damage

to offshore rigs and coastal refineries.

Finance: Volatility and losses affecting

underwriting, investments, equity and fixed

income markets.

6The rate and quality of climate disclosureamong S&P500 Index CDP5 respondents

varies across and within industry sectors.

Perhaps surprisingly, the mostsophisticated climate risk analyses arenot limited to the heavy GHG emittingsectors for which regulation is widelyanticipated. Companies in the ConsumerDiscretionary, Consumer Staples andFinancial Services sectors provided highquality CDP5 responses that oftendiscussed indirect regulatory risks anddirect or indirect physical risks. TheUtilities sector is a leader in terms of thequality of regulatory risk disclosure. Bycontrast, companies in the Energy,Industrials and Materials sectors — all ofwhich are likely to be exposed to futureclimate change regulations — providedcomparatively limited and variable riskdisclosure in their CDP5 responses.

To further analyze respondents’ climatechange disclosure practices, a review ofForm 10-K securities filings also wasconducted. In these filings, companiesare required to disclose competitive,regulatory, legal and environmental risksthat may have a material impact on theiroperations and/or financial condition.Form 10-K disclosure on climate changewas rare across all sectors, andpredominately limited to regulatory risk.

While S&P500 respondents were moreforthcoming with information aboutregulatory and physical risks in theirCDP5 responses, discussions of ‘materialimpacts’ were also rare. As expected,Utilities are most likely to state thatclimate-related regulation couldpotentially have a material effect on theirbusiness; yet only one utility and twoother firms actually used the word‘materiality’ in addressing climate changerisks in their CDP5 responses.Nevertheless, 219 firms across all sectorsacknowledged the possibility for someclimate-related risk, and many stated orimplied that such risks have the potentialto be “substantial” or “significant.”

CONSUMER DISCRETIONARY

The Consumer Discretionary sectorresponses indicate that physical risksare a greater commercial risk thanregulation, except for the automobilemanufacturers. The automakers are theonly firms in this sector to discussclimate change impacts in their Form10-K filings.

CDP5 Disclosure

Regulatory riskFew companies in the ConsumerDiscretionary sector expressed concernabout climate-related regulation. By wayof explanation many noted that regulationdoes not currently target their businessline, that they are not direct emitters ofgreenhouse gases, or that their energyconsumption and/or GHG emissions arerelatively low.

Bed Bath & Beyond acknowledged thatall of the non-climate risk factorsmentioned in its Form 10-K “canconceivably be impacted directly or

Climate DisclosurePractices

Climate Disclosure Practices

33

Risk Disclosure by Sector

Consumer

Discret

ionary

Consumer

Staples

Energy

Financia

ls

Health

Care

Industrial

s

Informati

on

Tech

nology

Materia

ls

Telec

ommunicatio

n

Service

sUtili

ties

# co

mp

anie

sCompanies in the ConsumerDiscretionary, Consumer Staplesand Financial Services sectorsprovided high quality CDP5responses that often discussedindirect regulatory risks anddirect or indirect physical risks


RiskMetrics Group34

indirectly by climate change,” however,the potential risks are not unique to itscompany operations, it said. Carnival isone of the few firms with operations thatdo result in unique risk exposure,because it is subject to changingregulations based on the jurisdiction ofports of call.

Despite the sentiment that regulation willhave little direct effect on the ConsumerDiscretionary sector, nine firms explicitlystated that regulation could result inincreased energy costs; others mentionedincreased operating costs more generally.Several companies expect that regulationor increased energy costs could affecttheir supply chain, cost of raw materialsor cost of transport.

Johnson Controls was the sole companyin this sector to find the impacts ofclimate-related legislation to beoverwhelmingly positive for its energy-efficiency products and services.Nonetheless, the company stated that apatchwork of state and local regulationwas a burden on its operations. Nikereported that it addresses the problem ofvarying regulations by applying the moststringent regional standard to its globaloperations.

Physical RiskMost firms expressed more concern thatthe physical ramifications of climatechange could pose a business risk, butalso felt this risk is not sector-specific. Atleast six firms noted that their emergencypreparedness plans mitigated their riskexposure. In addition, Bed Bath &Beyond, Nike and a third unnamed firm

felt that their store locations in diversegeographical areas buffered their riskexposure. Companies including Nike andBlack & Decker mentioned that supplychain redundancy insulated them fromrisk.

A few companies faced unique risks fromthe physical impacts of climate change.Starbucks was concerned about thephysical impacts on its coffee growers. Acable programming company said it couldforesee programming interruption fromsevere weather events that affect satelliteproviders, which would result in lostadvertising revenue. Tourism-relatedenterprises also cited somevulnerabilities. Although The Walt DisneyCompany stated that it had not identifiedany material physical risks, it didacknowledge that extreme weather couldaffect tourism at its theme parks andperhaps cause damage to its extensiveoutdoor physical infrastructure. Carnivaland Starwood Hotels & ResortsWorldwide both noted that extremeweather could destroy ports or other localinfrastructure, transform the outdoorenvironment and keep tourists away fromcertain destinations that are dependenton outdoor activities.

TimeframeOffice Depot was one of the fewcompanies that provided a timeframe forthe physical risk impacts. The companystated that it is already affected byhurricanes but that the time frame for sealevel rise is hard to predict.

MaterialityOnly General Motors indicated in itsCDP5 response that climate changeregulation is a potential material risk tothe company. Nine other firms in thissector stated specifically that regulationwas not a material risk to their operations.No firm stated that physical impacts ofclimate change posed a material businessrisk, and six firms explicitly stated that therisk was not material.

Form 10-K Disclosure

With the exception of automobilemanufacturers, none of the CDP5respondents in the ConsumerDiscretionary sector included a climatechange discussion in their 2006 Form 10-K filings.

The two automobile manufacturers,however, Ford and General Motors,report at length about current and

To view individual companyresponses to CDP5, please visitwww.cdproject.net

# companies

Consumer Discretionary Sector Climate Risk Disclosure

35


Several companies in theConsumer Staples sector aredependent on water and/oragricultural commodities, andthey are cognizant of the risksclimate change poses to theirsupply chain and businessmodel

pending climate-related regulation andlitigation. Ford provides a comprehensivelitany of regulatory and legal activity, andnotes that its ability to comply may beconstrained by changes in consumerdemand. Ford recounts vehicle specificregulation including California AssemblyBill 1493 that tasks the California AirResources Board with tighteninggreenhouse gas emissions standards forlight-duty vehicles starting with 2009models, the Bush administration’s requestfor the U.S. Congress to provide theneeded authority to reform the currentCorporate Average Fuel Economy (CAFE)standards, and the UK’s vehicle exciseduty and company car tax implemented in2001, which other EU member countriesplan to adopt. Ford says it also faces riskfrom litigation, including petitions in theUnited States for judicial review of thelight truck CAFE standards, and a publicnuisance lawsuit by the State ofCalifornia, alleging that the state hassustained global warming damages fromautomobile manufacturing.

General Motors is similarly concernedwith government regulations, noting that itmay have to severely restrict its productoffering to comply, or failing that, it mayface large civil penalties. Either scenariomay result in “substantial adverseimpacts on GM operations, includingplant closings, reduced employment, andloss of sales revenue,” GM says in itsForm 10-K.

CONSUMER STAPLES

As noted in their CDP responses, fourcompanies face current climatechange-related regulation in theEuropean Union, and 13 face physicalrisks from possible climate impacts onagricultural commodities. However,none identified these as material risksin their Form 10-K disclosures. A smallnumber of firms in this sector state intheir CDP response that sales could fallif consumers purchase fewerdiscretionary items.

CDP5 Disclosure

Regulatory RiskTwo firms, Altria Group and MolsonCoors Brewing, will begin participating inthe European Union Emissions TradingScheme (EU ETS) starting in 2008.Kellogg and William Wrigley Jr. both paythe UK Climate Change Levy. No othercompany in this sector is directly

regulated, but Coca Cola, General Mills,H.J. Heinz, Reynolds American, SaraLee and Wal-Mart Stores all expect tobe indirectly affected by future regulationthrough increased energy costs.

Physical RiskWith regard to impacts and mitigationstrategies for physical risks, theConsumer Staples sector and theConsumer Discretionary sector look verysimilar. Five companies referenced theirstandard emergency planning procedures,and two others noted that their facilitieswere not located in low-lying or coastalareas.

Several companies in this sector aredependent on water and/or agriculturalcommodities, and they are cognizant ofthe risks climate change poses to theirsupply chain and business model. AltriaGroup, Anheuser-Busch, Coca Cola,Colgate-Palmolive, General Mills, H.J.Heinz, Kimberly-Clark, Molson CoorsBrewing, PepsiCo, Sara Lee andWilliam Wrigley Jr. and two others thatdeclined to make their response public allnoted the existence of climate change-related physical risks. Sara Lee alsonoted the potential for reduced availabilityof petroleum-based plastics forpackaging materials.

A small number of companies provided ahigh level of detail in their risk evaluation,including Molson Coors Brewing, whichdiscussed the major physical risk each of

# companies

Consumer Staples Sector Climate Risk Disclosure


RiskMetrics Group36

its facilities faces, and William WrigleyJr., which evaluated the impact of low-,mid- and high-range climate changescenarios on its operations. The companypredicts that mid-range changes wouldprimarily have a “minor impact” on energysupplies and costs. It does not think thatvery dramatic, high-range weather shiftsare very likely; however, this scenariocould reduce its supply of raw ingredientsas well as sales if consumers reduceconsumer discretionary purchases.

TimeframeFirms in this sector generally do notattempt to determine a timeframe forclimate change risk. PepsiCo states thatit considers both near and long termrisks, but it does not elaborate further.

MaterialityWhile many companies indicated thepotential for significant business impactsfrom extreme weather or other relatedevents, which would reasonably beviewed as material, only Coca ColaEnterprises actually stated that “Globalor regional catastrophic events… couldhave a material impact on our salesvolume, cost of raw materials, earningsand financial condition.”


The Consumer Staples sector was quietwith regard to climate change risk in itsForm 10-K disclosures. Only Kelloggreferred to its climate related emissions —

not in its Form 10-K, but in the companyAnnual Report. Kellogg simply stated thatit is a member of the U.S. EnvironmentalProtection Agency’s Climate Leadersprogram, and that it is committed toreducing its GHG emissions.

ENERGY

For the Energy sector, CDP disclosureis much more substantive than Form10-K disclosure, which focusesexclusively on regulatory risk. Only one gas and oil services companymentioned climate change in its latest10-K filing.

CDP5 Disclosure

Regulatory RiskThe Energy sector consists of oil and gasexploration, production, refining andtransport firms as well as oil rig operatorsand other product and service providersto the oil and gas industry; most facecurrent or near-term risk from GHGregulation. All firms in this sector mentionsome type of regulatory risk in their CDPresponse. The oil and gas producersgenerally provided more sophisticatedrisk analysis than did the oil and gasservice providers. Three of the servicesfirms explicitly state that regulatory risk isnot expected to be material. The oil andgas producers are more likely toanticipate a potential adverse impact, butmany state that the extent of the impactcannot be reliably estimated.

ExxonMobil notes that regulation hasalways been a risk factor for the oil andgas industry and states that policydevelopments could affect the viability ofits long-term infrastructure investments.Devon Energy and El Paso noted thatregulation or changes in consumerbehavior could reduce demand for fossil fuels.

At least one firm views natural gas as ahedge against the impact of future carbonregulation. Anadarko Petroleum statesthat its portfolio is “relatively balanced”between oil and natural gas, which wouldspread out the risk. El Paso, which ownsthe largest natural gas pipeline in NorthAmerica, notes that regulation may cause“changes in demand” for natural gas and oil.

Most of the Energy sector respondentsreport that they participate in the policy

For the Energy sector, CDPdisclosure is much moresubstantive than Form 10-Kdisclosure

# companies

Energy Sector Climate Risk Disclosure

37


development process. ExxonMobilelaborated at length on its view as towhat factors should be part of any climatechange regulation. The Energy sector alsoreported on participation in voluntaryprograms to reduce GHG emissions aspart of their risk management strategy.Anadarko Petroleum cited the U.S.Environmental Protection Agency’sNatural Gas STAR program and theAmerican Petroleum Institute’s ClimateAction Challenge. Occidental PetroleumCorporation mentioned the CaliforniaClimate Action Registry and the U.S.Climate VISION program.

Some of the services firms, includingHalliburton, expect that regulation willimprove the chances for carbon captureand storage as a commercial opportunity.

Physical RiskFourteen Energy sector companiesdiscuss physical risks from climatechange. Nine respondents said climate-related physical risk could manifest ingeneral business disruption. Six firmscited the risk of extreme weather eventsin general, and 12 cited hurricane activityas an explicit risk factor. Others namedfreezing pipelines and thawing permafrostas potential physical risks. Some firmsdifferentiated between onshore andoffshore operations in discussing physicalrisks. Devon Energy mentioned that pastphysical damage from hurricanes hasprompted insurance premium increasesfor its offshore drilling platforms. No otherfirm cites increased insurance costs as arisk, although The Williams Companiesmentions insurance as a risk mitigationfactor.

At least two firms that declined to maketheir response public anticipate littlephysical risk from climate change,describing the risk as “miniscule” and“insignificant.”


While every firm in the sector identifiedsome type of potential climate-related riskin their CDP5 response, six of these 16firms — mostly the oil and gas servicesfirms — fail to disclose climate changerelated risks in their Form 10-K. XTOEnergy and Halliburton are among thosethat make no mention of climate changein their Form 10-Ks.

Of the 10 companies with some Form 10-K disclosure, all but one imply thatclimate change regulation poses some

type of commercial risk to their business;only four indicate that it could besignificant. None explicitly state that thecosts could be material. No companymentions physical risk in its latest 10-Kfiling.

FINANCIALS

The Financial Services sector had fairlysubstantive CDP responses, especiallyconsidering that its GHG emissionscome mainly through indirect sources.Form 10-K risk disclosure was scant,however. The sector faces high indirectregulatory risk through its client baseand high indirect physical riskexposure through investment portfoliosand managed assets.

CDP5 Disclosure

Regulatory RiskThe Financials sector, which includesbanks, insurers and real estate servicefirms, generally had comprehensive CDPresponses. Many firms explained that asindirect GHG emitters, the risk fromregulation was remote. However, somecompanies said that the situation couldchange in the future. Citigroupacknowledged the potential for second orthird generation GHG legislation thatcould target energy consumers. MorganStanley made similar comments, as didJP Morgan Chase, which referencedNew York City’s PlanNYC to mandateimproved building energy efficiencystandards.

# companies

Financials Sector Climate Risk Disclosure



RiskMetrics Group38

Despite the low probability of directregulation, several firms provided a moresophisticated assessment of indirectregulatory risk beyond the much-citedprospect of increased energy costs. ACELimited, a provider of insurance andreinsurance, noted that the U.S. state-based regulatory environment forinsurance hampers efforts to pricehurricane risk appropriately. Safeco alsonoted that state insurance commissionerscould change the rules for property andcasualty insurers.

At least 15 firms observed that climateregulation might directly affect clients,and in turn present a new risk to theirfirms. On the other hand, some also sawan opportunity for client advisory servicesor the increased provision of capital tohelp clients meet such regulatorymandates. Banker BB&T Corp.recognized that some of its direct emittingclients may not be prepared for anincreased regulatory burden, which couldin turn affect BB&T. Citigroup noted thatinsufficiently prepared clients pose acredit risk that is more significant thandirect risks to the company, such as risingenergy costs. Synovus Financial Corp.was the only firm to acknowledge thereputational risk that could result fromlending to, or otherwise supporting,environmentally negligent clients.

Physical Risks:Physical risks identified by the Financialssector include damage to property andassets, higher insurance premiums, poweroutages, severe weather that preventsemployees from getting to work, andadverse regional or macroeconomicimpacts. Insurers such as The HartfordFinancial Services Group view physicalimpacts as the greatest risk from climatechange. Citigroup is concerned thatdroughts, biodiversity loss and otherenvironmental problems exacerbated byclimate change would negatively influenceits growth prospects in developingcountries.

A majority of firms in this sector alsomentioned general business interruptionfrom severe weather events, but mostalso indicated that they had anemergency preparedness or businesscontinuity plan in place. At least two firmssaid they have a source of backup poweras a risk mitigation tool. One unnamedfirm explicitly stated that its lack ofgeographical diversity increased itsexposure to physical risks.

TimeframeFinancial firms generally did not provide atimeframe to estimate climate risks.American International Group viewsextreme weather events as a near-termphysical risk of climate change, whilestating that longer-term structural climateshifts will take several decades or more tomaterialize. Citigroup has conducted afive-to-10 year, and a 20-year physicalrisk analysis based on theIntergovernmental Panel on ClimateChange’s (IPCC) latest analysis.

MaterialityWhile the sector as a whole citedpotentially significant or even “dramatic”risks to their operations, no companywent so far as to predict a materialimpact on its operations or financialcondition.


The Financials sector has virtually ignoredclimate change in its Form 10-K reporting.Out of 46 firms, only Morgan Stanley,Simon Property Group, The TravelersCompanies and a fourth firm thatdeclined to make its CDP response publicmade any mention of climate change intheir 2006 Form 10-K filings. OnlyTravelers and the unnamed firm identifiedclimate change as a potential commercialrisk. Travelers stated: “Catastrophe lossescould materially reduce our profitabilityand adversely impact our ratings, ourability to raise capital and the availabilityand cost of reinsurance.” The companygoes on to note that changing climateconditions have increased theunpredictability and the frequency ofsevere weather events.

Fifteen financial services firmsobserved that climate regulationmight directly affect clients and in turn present a new risk to their firms

39

Guest Commentary

by Dr. Stephen P. Leatherman

In the face of rising sea levels, shoreline recession andheightened storm activity, a growing coastal populationand attendant development in low-lying areas have putmuch of our nation’s coasts on a collision course withclimate change.

More than half of the U.S. population now lives within50 miles of the coast; it seems that everyone wantsready access to the beach or a waterfront view.Beachfront property has become some of the mostcoveted and expensive real estate in the country, withsome high-rise, waterfront condominium complexesapproaching eye-popping $500 million valuations. The“gold coast” of Florida from Palm Beach to Miami hasan appraised value exceeding $1.3 trillion.

At the same time, sea level rise is eroding manybeaches and hurricanes are becoming a more regularoccurrence along the U.S. East and Gulf Coasts. Theheightened hurricane activity in recent years has beenattributed to both the Atlantic Multidecadal Oscillation(AMO) and to global warming. Increased activity since1995 appears to be linked to the AMO. In any case,global warming certainly has the potential to makehurricanes more powerful by raising sea surfacetemperatures that fuel these storms. This increasedactivity and the tremendous amount of coastal

construction have resulted in greatly increased stormdamage per annum in recent years:

• $1.3 billion from 1949-1989

• $10.1 billion from 1990-1995, and

• $35.8 billion during the past five years.

The four hurricanes that struck Florida in 2004 caused$42 billion in damage, only half of which was insured.The 2005 hurricane season was exceptionallydestructive with Katrina pushing annual damages over$100 billion.

Climate change is adding to coastal stresses througherosion, inundation and salt-water intrusion. Sea levelrise is a significant driver of beach erosion. The rate oferosion is two orders of magnitude greater than therate of sea level rise, so that even small changes in sealevel result in significant beach loss. While the rate ofsea level rise during the 20th century was fairly low,estimated at 0.2 centimeters per year, satellite altimeterdata show that the rate has increased 50% during thelast decade.


Satellite data indicate that the rate of sea level

rise has increased 50% in the last decade,

adding to coastal erosion, inundation and

salt-water intrusion.

Coastal Collision Course: Sea Level, Hurricanes and Development

Who Covers the Coastal Hurricane Risk?

continued


RiskMetrics Group40

The rate of sea level rise is expected to increase incoming decades as a result of thermal expansion ofthe oceans and melting glaciers. Ice sheets slipping offGreenland and West Antarctica may accelerate the rateof erosion, threatening more and more incrediblyvalued beachfront properties, while making it far moreexpensive and difficult to arrest this process.

Coastal inundation and salt-water intrusion are theprimary problems for low-lying mainland areas. A one-meter rise in sea level — which could happenduring this century — would result in coastalinundation many miles inland, as the ratio of theamount of sea level rise to the horizontal extent ofinundation can be up to four orders of magnitude.Coastal storms often hasten this action by tipping theocean onto the land. Storm surges have alreadycaused abandonment of small islands in theChesapeake Bay and elsewhere.

Coastal wetlands are being drowned where theseecosystems cannot keep pace with the rapid rate ofsea level rise. A preview of wetland disintegration canbe seen in coastal Louisiana where the delta is rapidlysubsiding due to soil compaction and lack of soilreplenishment, as well as the withdrawal of oil, gas andwater so that relative sea level rise approaches 1 cm/yr.The resulting loss of wetlands is about 25 square milesannually, which is increasing the vulnerability ofdeveloped areas to storms. Wetland remediation hasbeen largely unsuccessful in Louisiana and other largewetland systems, such as Blackwater Wildlife Refugein Cambridge, Maryland.

Reducing coastal risk and increasing resiliency is adifficult proposition. Beach nourishment is often seenas a panacea, but it is expensive, has to be repeatedfairly often in most areas, and does not workeverywhere (e.g., the sediment often washes awaywithin a year or two). Armoring the coastline withseawalls can stabilize the shore, but at the cost of thebeach, which is the draw for tourists and hence theeconomic engine for many coastal communities.

The National Flood Insurance Program of FEMA hasprovided a measure of coastal protection by providingincentives for new homes to be elevated above stormsurge levels and to strengthen buildings against

windstorm damage. Unfortunately, there has been noprovision to deal with the degree of shoreline recessionthat is presently occurring, or to accommodate theaccelerating pace of sea level rise, beach erosion andthe likelihood of more intense hurricanes.

The storm resilience of coastal structures is anessential element of planning and sustainability of theeconomy, which depends in turn upon available andaffordable windstorm insurance. Away from theimmediate coastline, most hurricane damage is causedby wind, but our housing stock is not performing well.Witness that barely category 2 Wilma in 2005 resultedin $16 billion in damages in South Florida, which hasthe best building codes in the country.

Roof design, materials and construction methods needto be tested in a repeatable and scientific manner inorder to upgrade standards and building codes.Essential to this effort is the full-scale, destructivetesting of houses, which is analogous to theautomobile crash testing undertaken by the insuranceindustry that has made automobiles much safer inrecent years.

While wind tunnels have been useful in understandingloading on structures, such miniature testing cannotprovide full understanding of wind dynamics and failuremodes. The International Hurricane Research Center(IHRC) is developing an apparatus for first-of-its-kindtesting of houses and low-rise commercial structures.Such full-scale, destructive testing of buildings canopen the public’s eyes to the need for safetyimprovements and lead to the development of a‘culture of mitigation’ that helps take coastal propertiesoff their collision course.

— Dr. Stephen P. Leatherman is the We Will RebuildChair Professor and Director of the InternationalHurricane Research Center in Miami. The IHRC isdeveloping a Wall of Wind 24-fan prototype that cansimulate the effects of categories 1 to 5 hurricanes,wind, rain and debris against a two-story house, withsupport from the State of Florida and privatecontributors. [email protected]; www.ihrc.fiu.edu

D r . S t e p h e n P . L e a t h e r m a n

Coastal Collision Course continued

To view a video demonstrating ‘Wall of

Wind’ hurricane testing on a full-scale house,

visit this website:

www.nbc6.net/newsnet/10062514/detail.html

Better testing procedures are needed in order to

upgrade safety standards and building codes.

41


HEALTH CARE

Although several firms in this sectorare subject to climate regulation underthe EU ETS, none considered itsufficiently material to disclose insecurities filings. Physical riskexposure was similarly disclosed onlyin CDP responses and viewed asgenerally minimal.

CDP5 Disclosure

Regulatory RiskThe Health Care sector includes hospitaloperators, medical benefit providers andhealth care products and research firms.Their CDP5 responses were generallybrief. Most firms noted that as indirectemitters, they are not affected by currentclimate-related regulation. Those that areaffected by current regulation haveEuropean operations covered by theEuropean Union Emissions TradingScheme (EU ETS). These include Eli Lilly,Wyeth, Schering Plough, Bristol MyersSquibb, Baxter International and Pfizer.None of these six companies indicatedthat the regulatory burden has had, or isexpected to have, an adverse financialimpact.

While most Health Care firms determinedthat the risk from either current or futureregulation is minimal, three companies,Baxter International, Becton Dickinsonand Humana acknowledged the potentialfor a broader regulatory focus that mightone day include their operations.

A small number of companies believe thatthey could face unique business risksfrom GHG regulation. Bristol MyersSquibb noted that direct and indirectimpacts could make producing medicinesmore expensive. PerkinElmeracknowledged the competitive risk thatcould arise, should regulation mandateenergy efficiency standards on theequipment it produces. Schering Ploughnoted that its asthma treatment productsuse Kyoto-regulated greenhouse gases(that are also ozone-depletingsubstances) as propellants and that whileresearch into replacements is ongoing,acceptable alternatives have yet to be found.

Nine firms mentioned that regulationscurrently have or will have an indirectimpact through higher energy costs. Thiswas the most frequently cited regulatory-related impact, but no firm stated that therisk was expected to be significant.

Physical RiskPhysical risk disclosure by this sector wassimilarly constrained. The risks disclosedin CDP responses mirrored those of othersectors; no industry-specific risk wasidentified. Two firms did mention a uniqueopportunity and responsibility. BectonDickinson and Medco Health Solutionsnoted that extreme climate events andassociated human health impacts areexpected to increase the need for medicaland pharmaceutical products.

Many companies view climate-relatedphysical events as similar to otheremergencies or natural disasters, andthey say they plan accordingly. Elevenfirms stated that they had company-widebusiness continuity plans and a fewothers, such as Zimmer said that facilitieslocated in at-risk areas engage incontingency planning. Two unnamed firmshave operational or supply chainredundancies to help manage extremeweather or other risk.

Two health care firms noted thatextreme climate events andassociated human health impactsare expected to increase theneed for medical andpharmaceutical products

0

# companies

Health Care Sector Climate Risk Disclosure


RiskMetrics Group42

TimeframeFew companies attach a time frame totheir expectation of physical or regulatoryrisk impacts. Some firms simply indicatedthat they did not anticipate risks “in thenear term.” Only Baxter Internationalwas more precise, defining “near-term” as2007-2010; it does not elaborate onlonger-term physical risk. Aetna expectsthat climate change will be a majorcampaign issue in the 2008 U.S.presidential elections, but it did notventure a guess as to when climatelegislation might be enacted.

MaterialityNo company indicated in its CDPresponse that it anticipates materialcommercial impacts from climate changerisks.


No companies in the Health Care sectoridentified climate change risks in theirForm 10-K securities filings. Even the sixfirms that indicated in their CDP responsethat they had facilities subject to the EUETS did not address this regulation intheir Form 10-K filings, apparentlybecause they did not consider the risk tobe material.

INDUSTRIALS

Most firms in this sector are notcurrently subject to climate relatedregulation and therefore 10-Kdisclosure is virtually non-existent.CDP responses indicate that, whilepotentially significant, firms do notexpect regulatory and physical risks tobe material.

CDP5 Disclosure

Regulatory RiskThe Industrials sector includes firms insuch diverse businesses as packagedelivery, military contracting andconsumer and industrial productmanufacturers. Although many firms arerelatively large direct or indirect GHGemitters, only 3M discloses that itcurrently faces regulation in the EuropeanUnion. The company notes “… existingGHG regulations have not had asignificant financial or regulatory impacton 3M.”

Many firms indicate that they expectfuture regulation and are closely followingthe policy process, but most refer togeneric regulation only. Caterpillar states,“As a global company, the potential foradoption of country-specific or otherregional approaches to climate changepolicy creates uncertainty for Caterpillar.”Cummins, notably, evaluates an array ofpolicy options “from an economy-widecap-and-trade program to fuel economystandards” to determine potential impactson the company.

Seven firms specified the type of policythat posed the most risk, namely productenergy efficiency standards, policies thattarget aviation and policies that targetwaste management. Eaton, Ingersoll-Rand, Tyco International and a fourthunnamed firm all say they are at risk fromproduct standards regulation. Ingersoll-Rand notes that product standards,especially for engines, could lead to theneed for product design adjustments andincreased product development time.United Parcel Services anticipatesEuropean aviation regulation.

Eight firms indicate that regulation willindirectly increase energy costs.

Physical RiskThe physical risks that were identified arenot unique to the Industrials sector. Firmsacknowledged the chance of supply chain

# companies

Industrials Sector Climate Risk Disclosure


43


or general business interruptions due tosevere weather events. Companiesexplained that their business continuityplanning helped insulate them fromphysical risks from climate change. Ninefirms mentioned company widecontingency planning, and a tenth,Northrop Grumman, indicated it wasincorporating lessons learned fromHurricane Katrina. One firm, Cummins,has a Chief Risk Officer. Rockwell Collinshad the most comprehensive physical riskanalysis, discussing the impact of wind,drought, heavy rain, extreme heat and sealevel rise on its supply chain andoperations.

Six firms failed to answer the question orstated that they were not subject tophysical risks from climate change.

TimeframeFew firms indicate the timeframe used intheir risk analysis. General Electricexpects that many jurisdictions will moveforward with climate change legislation “inthe near term” and Northrop Grummananticipates federal regulation “in the nextfew years.” Tyco Internationalanticipates energy cost increases in thenext five to ten years.

MaterialityIt is not uncommon for companies in thissector to cite apparently significantimpacts from regulation and severeweather events that could lead to highercompliance costs, loss of inventory ortemporary shutdowns, but no firmexplicitly states that the risk is material.One unnamed firm estimates that costs ofcarbon dioxide emissions could reach$15 per ton.


Only one firm in this sector, whichdeclined to make its CDP responsepublic, had a reference to greenhouse gasemissions in its Form 10-K. The firmhighlighted vehicle, aircraft and facilityimprovements that have resulted in areduced GHG emissions footprint, but itdid not address climate change relatedcommercial risks.

INFORMATION TECHNOLOGY

Information Technology firms identifiedbusiness-specific regulatory risks suchas perfluorocarbon (PFC) rules andenergy efficiency product standardsand general physical risks in theirCDP5 responses; 10-K responses were

few and lacked climate-related riskassessments.

CDP5 Disclosure

Regulatory RiskThe Information Technology sector is notdirectly targeted by current climate-related regulation, except for companiesin the semiconductor business potentiallysubject to perfluorocarbon use andemissions regulations; PFCs are one ofthe six classes of greenhouse gasesregulated under the Kyoto Protocol. SixInformation Technology firms mentionedPFC regulation: Advanced MicroDevices, Intel, IBM, NationalSemiconductor and two others thatdeclined to make their response public.Advanced Micro Devices distinguishedbetween PFC emissions caps, which itdetermines is not a risk, and a PFCsubstance ban, to which it would bevulnerable. Intel also notes that the risk isa substance ban. One of the unnamedfirms recently sold its semiconductorproducts business and thereby nearlyeliminated its risk from putative PFCregulation.

CDP responses indicate that the sectorexpects that other direct regulatory riskmay come from energy efficiency productand equipment standards. Twelve firmsanticipate such standards, although not allof the firms presented it as a risk factor.Several, like Microsoft and Motorolasimply make a statement about theirefforts to improve product efficiency. Otherfirms are more forthcoming. CiscoSystems states, “Emerging product energy

# companies

Information Technology Sector Climate Risk Disclosure

CDP responses indicate that theInformation Technology sectorexpects that direct regulatory risk may come from energyefficiency product and equipment standards


RiskMetrics Group44

efficiency regulations impacting Ciscoproducts may increase compliance costs.”

Indirect regulatory impacts, primarilyincreased energy costs, were mentionedby 13 companies, and for many of thesefirms, it was the only regulatory riskmentioned.

Physical RiskExtreme weather events that causeinfrastructure or facility damage or poweroutages were the most frequently citedphysical risks. Most companiesmentioned these risks briefly, orimmediately noted that they havebusiness continuity plans that mitigate therisk. Three firms were less dismissive andused language suggesting that the risk isreal. Sun Microsystems noted that it hadfacilities that could be harmed by sealevel rise, as did Juniper Networks. Theywere among the few firms to providefacility-specific risk assessments.

At least two firms stated that they had notspecifically evaluated the impact ofphysical risks from climate change on theirbusinesses. Approximately 11 firms do notperceive risks from physical climatechange impacts and others noted that therisk was not unique to their business.

TimeframeNVIDIA expects energy costs willincrease over the next five to 10 years. Noother firm provides a specific timeframefor anticipated regulatory or physicalrisks. Juniper Networks states thatemissions caps may be implemented “inthe near term.”

MaterialityWhile some companies acknowledgedthat significant harm could result fromclimate change regulation or physicalevents, no company used the term“material” to describe these risks. Twenty-three firms either stated or implied thatphysical risk was not material. Similarly,24 firms dismissed the possibility of amaterial impact from regulatory risk.


Intel and Sun Microsystems were thetwo firms that referred to climate changein their Form 10-K filings. Intel mentionedclimate change as part of a broaderdiscussion of environmental initiatives.Sun Microsystems’ discussion focused onenergy efficient computing technologyand was slightly more climate specific.The company noted that its technology

would encourage climate friendly industryshifts. Neither firm named climate changeas a commercial risk.

MATERIALS

The energy intensive Materials sectorfaces some risk from future directregulation, and companies highlightedupward pressure on energy prices astheir major concern. Few firmsconsidered either risk of sufficientmagnitude to disclose in 10-K filings,which typically contained minimal or noclimate risk evaluations despite thehigh disclosure rate.

CDP5 Disclosure

Regulatory RiskThe Materials sector, which includesforest products, chemicals, metals andother diversified product manufacturers, is largely unregulated by existing climatepolicies despite being a significant energyconsumer. The majority of its CDPrespondents state that increased energyprices pose the greatest commercial riskto their business. Higher energy prices asa result of the EU ETS have had negativerepercussions for Alcoa, which closedone of its European smelters in response.

DuPont, International Paper and PPGIndustries are all regulated under the EUETS, but none mentioned a negativeimpact. Both International Paper andPPG Industries have sold excessallowances. DuPont anticipates thatadditional facilities will fall under the nextphase of the EU ETS, resulting in higheradministrative and compliance expenses.

International Paper and other forestproducts firms are uniquely exposed torisk — and opportunity — of policies thatpromote wood fiber as a source of fuel oras an alternative to more carbon-intensivebuilding materials. International Paper isconcerned that distortions in the woodmarket could appear if utility RenewablePortfolio Standards do not adequatelyaddress possible supply constraints.MeadWestVaco already sees additionalfiber demand in Europe due to biomassenergy policy incentives.

At least four firms anticipate potential fordirect regulation including Ashland,DuPont, Newmont Mining and a fourthfirm that declined to publicly disclose itsresponse.

The majority of CDP respondentsin the Materials sector state thatincreased energy prices pose thegreatest commercial risk to theirbusiness

45


Physical RiskOnly mining companies and firms with abusiness line dependent on agriculture ortimber commodities say they face unique,business-specific risks from physicaleffects of climate change. Phelps Dodge(now part of Freeport McMoRan Copper& Gold) noted that high water flows coulddamage equipment and result in mineshutdowns, while conversely droughtconditions might require increased use ofwater for mineral processing and dustsuppression. Phelps Dodge’s new parent,Freeport McMoRan, is concerned thatclimate change, which is predicted todisproportionately hurt developingcountries like Indonesia where it hasoperations, could destabilize thesegovernments and social structures. Newmont Mining was much less specificin its risk evaluation.

DuPont, International Paper,MeadWestVaco, Monsanto andWeyerhaeuser noted potential risks dueto climate changes that affect agricultureand standing timber, but their disclosurewas generally brief and none of thesefirms attempted to quantify the risk.

Other firms in this sector face the samerisks that other sectors have cited suchas property damage and extreme weatherrelated business interruptions. Many ofthese companies, including Bemis,DuPont and Eastman Chemical, notedthat they had emergency preparednessplans to handle potential risks.

TimeframeMaterials firms generally did not attemptto determine a timeframe for potentialrisks. Air Products & Chemicals stated,“the magnitude and timing of potentialregulatory risks posed by climate changeis difficult to quantify.” Ecolab believes itis prepared for medium-term physicalrisks since “climate change is predictedto occur gradually.” International Paperstated that physical impacts to standingforests are a long-term prospect.Newmont Mining is the most specific. Itexpects to see both Australian and U.S.regulation enacted in 2009-2010 with aninitial compliance period starting in 2012-2015.

MaterialityFirms in the Materials sector avoidedspeculating on the magnitude ofprospective regulatory or physical climatechange risks. Only one unnamed firm

noted that the price of raw materials“could be materially increased due toclimate regulation.”


The Materials sector has one of thehighest rates of Form 10-K disclosureamong CDP5 respondents, with nine of22 firms providing some mention ofclimate change. However the quality ofthe risk disclosure was fairly low, with fewproviding an actual risk assessment.Alcoa, Dow Chemical andWeyerhaeuser did not discuss climatechange in terms of physical or regulatoryrisk. Other firms elaborated more. DuPontmentions its emissions reductionsinitiatives, but goes on to say that “thecompany faces the possibility of country-specific restrictions [on CO2, HFCs andPFCs] in several countries where majorreductions have not yet been achieved.”Phelps Dodge stated that it is evaluatingpotential climate change impacts andeven considered the possibility thatfederal legislation could be enacted in theUnited States in 2007, leading to higherenergy costs. One unnamed chemicalcompany noted that it is regulated underthe Kyoto Protocol and that future U.S.legislation could affect the growth of itsbusiness. United States Steel alsoacknowledged the possibility of U.S.climate legislation but declined toestimate the impact.

The Materials sector has one ofthe highest rates of Form 10-Kdisclosure among CDP5respondents, with nine of 22 firmsproviding some mention ofclimate change

# companies

Materials Sector Climate Risk Disclosure


RiskMetrics Group46

TELECOMMUNICATIONSERVICES

The Telecommunication Servicessector provided no 10-K climatedisclosure. Brief CDP responses mostlyhighlight physical risks to infrastructurethat are not expected to be material.

CDP5 Disclosure

Regulatory RiskThe Telecommunication Services sector isnot directly regulated by current climatepolicies. Citizens Communications andVerizon Communications do not expectto face future regulation, either, althoughthey did not altogether exclude thepossibility of generic future regulations.Two more companies, QwestCommunications and an unnamed firm,specified that regulatory risk exists fromGHG emissions inventory requirements orrenewable energy directives that mayrequire equipment updates orreplacement.

Physical RiskAll but one firm acknowledged the risk ofphysical impacts to operations orcommunications infrastructure, but mostindicated that emergency preparednessplans are already in place. CitizensCommunications also noted that it couldreroute service through unaffected partsof its network. Verizon Communicationsprovided the most detailed response,explaining that its use of copper isespecially vulnerable to the elements. Thecompany also noted that central officeequipment operates most efficiently withina certain temperature range, which may

become more difficult to maintain due torising temperatures.

TimeframeNo company provided a timeframe forpossible impacts from regulatory orphysical risks.

MaterialityNo company indicated that eitherregulatory or physical risk is expected tobe material. With regard to physical risk,Citizens Communications states, “Thetypes of resources and materials we usein our operations are unlikely to bematerially affected by climate changes.”


The six firms in this sector are not subjectto current climate change regulation andgenerally do not expect to be in thefuture. Telecommunication services firmsalso do not consider physical risk fromclimate change to be material. None ofthe respondents included a discussion ofclimate change in their Form 10-K filings.

UTILITIES

The utility sector had the highestclimate change disclosure rate in Form10-K filings. Electric utilities generallyprovide more detailed information thannatural gas utilities. For all utilities,regulatory risk is seen as the morepertinent risk. While nine utilitiesdisclosed in their Form 10-K filings thatthe risk could be material, only one ofthese firms made a similar statement inits CDP response.

CDP5 Disclosure

Regulatory RiskMost utilities are not yet regulated byclimate change policies, although somehave facilities that shortly will be subjectto regional greenhouse gas controls, suchas the Regional Greenhouse Gas Initiative(RGGI) in the Northeast. Most firms in thissector believe that GHG regulation isimminent, but most firms decline topredict the regulatory impact, saying it will depend heavily on the structure ofregulation, on their ability to get costrecovery on emissions reductioninvestments, on the availability ofemissions abatement or carbonsequestration technology, and on many other factors.

Two utilities said they are heavy GHGemitters relative to their peers, with a fuel# companies

Telecommunication Services Sector Climate Risk Disclosure

Most firms in the Utilities sectorbelieve that GHG regulation isimminent, but most decline topredict the regulatory impact,saying it will depend heavily onthe structure of regulation

47


mix that is weighted towards coal. DukeEnergy says it is one of the nation’slargest GHG emitters; Xcel Energy says itis the sector’s fifth largest emitter.

Conversely, eight utilities said theirregulatory risk exposure is low relative totheir industry peers, typically because oflarge shares of nuclear, natural gas, orhydroelectric generation, or because ofemissions reduction actions they havealready taken. Exelon, FirstEnergy, FPLGroup, Keyspan (now part of NationalGrid), Nisource, PG&E, PPL and PublicService Enterprise Group all believe theyare well positioned to comply with futureclimate regulations.

FPL Group states that a carbon riskassessment has partly driven its growthstrategy toward efficient and low carbon-emitting technologies. Southern and XcelEnergy incorporate carbon pricing intotheir planning processes.

Six utilities will be regulated under theRegional Greenhouse Gas Initiative(RGGI) starting in 2009. ConsolidatedEdison said that the impact of RGGIwould vary by state but that it anticipatesa 1 – 2.5% electricity price increase. Theother firms did not predict the impact ofcarbon caps under RGGI.

Physical RiskMany firms note that severe storms andextreme temperatures can damage orstress transmission and distributioninfrastructure, but did not estimate thefinancial implications of these supplydisruptions.

Ten utilities acknowledge that temperaturefluctuations would likely alter electricitydemand and consumption patterns.American Electric Power, DTE Energy,Exelon, Nicor, Nisource, ProgressEnergy, Public Service EnterpriseGroup, Questar, and Xcel Energy allexpress this concern. Xcel Energy says“the odds favor increased [electricity]use.” Xcel further noted that it might beable to sell electricity to other providers inthe event of abnormal weather outside ofits service territory.

At least five companies with coastalfacilities, Centerpoint Energy, Entergy,Exelon, FPL Group, and Keyspan (nowpart of National Grid) raise the specter ofmore hurricane activity and sea level risein their CDP5 disclosures. Utilitiesoperating in dry climates, includingPG&E, Pinnacle West Capital and

Sempra Energy, say they are morethreatened by drought and lack of coolingwater for thermal power plants. Utilitieswith hydroelectric generation like XcelEnergy also could suffer in the event ofprolonged drought. Similarly, companiesthat rely on barge delivery of coal likeCMS Energy and DTE Energy say theycould be vulnerable to drought or floodsthat affect river traffic.

A small number of firms do not expectcommercial risks to materialize from thephysical effects of climate change.SouthernÕs disclosure expressed someskepticism about the link between climatechange and extreme weather, statingamong other things, “It is interesting tonote that not a single hurricane struck theUnited States or the Gulf Coast regionduring the 2006 season.”

TimeframeUtilities were hesitant to include atimeframe in their risk analysis. Oneunnamed firm indicated that thetimeframe for regulatory risk impactsdepends in part on the availability ofemissions reducing or carbon capturingtechnology. Constellation Energy Groupexpects minimal near-term physical risks,but has not made a prediction on longer-term physical risks.

MaterialityOnly Pinnacle West Capital says in itsCDP response that regulation could havea material impact on its operations. Mostother firms refer to adverse or significantimpacts, without stating that the the resultcould be material. With respect tophysical risks, Progress Energy says

there could be a material impact if costsrelated to severe weather events are notsufficiently recovered.

Exelon states in its Form 10-K and CDPresponse that the cost of voluntary GHGemission reduction efforts “will not have amaterial affect on its future results ofoperations, financial condition or cashflows.” FirstEnergy states that over thenext half decade it plans to spend US$50million on GHG emissions reductioninitiatives and invest an additional US$50million in nuclear power. PG&E plans tospend US$1 billion on energy efficiencyinitiatives during 2006-2008.


More than any other sector, utilities haveacknowledged a potential material riskfrom climate change regulation in theirForm 10-K filings. Nine firms made suchdisclosures in their latest filings: AES,American Electric Power, ConsolidatedEdison, Constellation Energy, EdisonInternational, FPL Group, PG&E,Pinnacle West Capital and PublicService Enterprise Group.

Legal ActionThree firms, Edison International, XcelEnergy and a third unnamed utility notethat climate-related lawsuits pending inU.S. courts pose an unspecifiedcommercial risk. One such lawsuit draws aconnection between GHG emissions,climate change and Hurricane Katrina, andseeks damages from large carbon-emittingelectric utilities. Another suit does not seekdamages, but alleges that GHG emissionsconstitute a public nuisance and asks thecourts to mandate emissions caps.

# companies

Utilities Sector Climate Risk Disclosure


RiskMetrics Group48

by Hon. Eileen Claussen

The evolution of climate change policy in the UnitedStates has followed a long and sometimes bumpy road.Along this road, we’ve made significant progress afterpersevering through rough patches, uphill stretches,and time-wasting detours. So are we there yet? No, butwe’re a lot closer, largely because the business world isnow in the driver’s seat leading us toward legislationthat places mandatory constraints on greenhouse gas (GHG) emissions.

The signal event of the year was the formation of theU.S. Climate Action Partnership (USCAP), a coalition ofnow 25 major corporations and six leadingnongovernmental organizations (NGOs), including thePew Center, that has called on Congress for rapidenactment of legislation to establish binding, nationallimits on greenhouse gases to slow, stop and reversethe growth of emissions. Through lengthy negotiations,USCAP has been able to achieve an unprecedentedlevel of detail on consensus policy recommendationsthat represent a workable compromise between diversebusiness interests and NGOs.

USCAP believes that Congress should pass legislationthat sets firm short and medium-term binding emissionstargets in the U.S., on a trajectory to reduce emissionsby 60-80% by 2050, with the aim of stabilizing globalGHG levels over the long-term at a CO2 equivalent ofbetween 450 – 550 parts per million. A cap-and-tradesystem should be the cornerstone of U.S. climatepolicy, with additional policies necessary for thosesectors, including coal-based energy, buildings andefficiency, and transportation, in which the initial pricesignal from cap-and-trade will not sufficiently reduceemissions and advance new technologies. USCAP alsocalls for the development of a robust federal technologyprogram with stable, long-term financing for low-GHG

technologies. And given the need for a global solutioninvolving all major emitting nations, the coalition calls forrenewed U.S. leadership in international negotiations.

The emergence of USCAP has had a discernible effecton Congressional efforts to pass mandatory climatelegislation. Beginning with Feb. 13, 2007, testimonybefore both the Senate Environment and Public WorksCommittee and House Energy and CommerceCommittee, CEOs from the coalition have addressed arange of influential committees in both houses ofCongress. USCAP members have briefed dozens ofCongressional offices and committee staff, includingseveral actively drafting climate policy.

As of August 2007, there have been over 110 climate-related hearings, and 150 climate-related billsintroduced, eclipsing the previous record of 105introduced during the two-year span of the previousCongress. Ten of these bills would establish GHG gascap-and-trade programs, either for the economy as awhole or for the utility sector.

Importantly, key moderates are getting involved in thedebate. This summer, for example, two groups ofSenate moderates — most of whom have never beforevoted for a cap-and-trade measure — offered languageto address a key concern: cost containment. Onegroup’s proposal would allow the GHG cap to beexceeded if allowance prices rose above a certain level— the so-called ‘safety valve’ approach. The PewCenter remains concerned, however, that if the safetyvalve price is set too low, it could both render theemission levels set in the bill meaningless andundermine investment in the next-generation of climate-friendly technologies.

The other proposal for limiting costs would establish anappointed board that could authorize the borrowing ofallowances from future years’ caps if the program’scosts started to hurt the economy. This approachappears more promising because it would notundermine the program’s environmental objectives andthe economic efficiency of a market-based system.


2007 is a milestone year when the business

world has stepped forward to help lead the drive

toward national GHG legislation

As of August 2007, there were over 110 climate-

related hearings and 150 climate-related bills

introduced, setting a record for Congressional

activity

Business in the DriverÕs Seat: A New Standard for Corporate Engagement in Climate Policy

49

Guest Commentary

Senators Lieberman (ID-CT) and Warner (R-VA) haveannounced their intention to move through theirsubcommittee of the Senate Environment and PublicWorks Committee a cap-and-trade bill that embracesthis borrowing approach, as well as other provisionssuggested by key Senate moderates. The Lieberman-Warner bill is likely to be the vehicle for Senate actionon cap-and-trade.

While establishing a domestic policy that reduces GHGemissions is critical, meeting the challenge of climatechange will require an equitable and effectiveinternational policy framework for the period after 2012,when the Kyoto targets expire.

To help develop workable options for a post-2012agreement, three years ago the Pew Center broughttogether 25 senior policymakers and stakeholders from15 countries, including major corporations from theCenter’s Business Environmental Leadership Council inthe Climate Dialogue at Pocantico. The group’s reportcalls for engaging all major economies through a flexibleframework that allows them to take on differentcommitments to fit their national circumstances. To setthe stage for such an agreement, the Pocantico groupurged an informal, high-level dialogue among majoreconomies to reach a broad political consensus on thegeneral nature and scope of future multilateral efforts.

Key to achieving this consensus is cooperation.Concerns about rapidly growing emissions from Chinaand India are valid, and clearly all major emittersincluding developing countries will need to take oncommitments to reduce their emissions. However,Congress should be wary of legislative proposals thatinclude punitive trade measures intended to prod thedeveloping world into action. Threats of retaliatoryaction could have the perverse effect of alienating Chinaand others, and actually delay the time when they takeon meaningful commitments.

One of the most important ways of smoothing theeconomic impact of mandatory GHG limits on the U.S.is to stimulate domestic industry to catch up with therapidly growing clean technology marketplace. With awell-designed climate policy that puts a clear price oncarbon, U.S. businesses are more than capable ofleading the world in producing climate-friendlytechnologies. Many of the USCAP companies arecombining their public policy efforts with businessstrategies that seek to maximize the financialopportunities inherent for first movers in a carbon-constrained economy.

These and other forward-thinking companies are in theprocess of setting a new standard for what counts asleadership on the climate issue. Several years ago, themere acknowledgement of the threat of climate changewas enough to place a company out in front on theissue. Today, the companies truly ahead of the curveare those that publicly support market-based federalclimate policies that include meaningful mandatoryGHG limits.

Investors and the public ought to know whethercompanies are working to advance sound solutions tothe climate challenge, or working to undermine themthrough lobbying against mandatory policy. Taking aconstructive stance is a reasonable expectation fromthe standpoint of corporate social responsibility, but italso is an indication of whether a company fullyunderstands how markets will change under climateregulations — a key to building future shareholder value.CDP can help by calling on companies to disclose theirclimate policy positions. With this information widelyavailable, the public can press companies to worktoward sensible climate change solutions, and investorscan better allocate capital to the likely winners in acarbon-constrained world.

— Eileen Claussen is the President of the Pew Centeron Global Climate Change and Strategies for theGlobal Environment. She is the former AssistantSecretary of State for Oceans and InternationalEnvironmental and Scientific Affairs, and wasresponsible for U.S. policy development on majorinternational issues, including climate change.

H o n . E i l e e n C l a u s s e n

Companies that are ahead of the curve support

market-based policies to limit GHG emissions.

CDP can help by calling on companies to

disclose their policy positions on climate change.

7S&P500 respondents to the CDP5 surveyshowed strong interest in implementing

energy efficiency programs to abate theirgreenhouse gas (GHG) emissions.

S&P500 respondents to the CDP5 surveyshowed strong interest in implementingenergy efficiency programs to abate theirgreenhouse gas (GHG) emissions. Lessthan half of the respondents said they wereinvolved in renewable energy projects orgreen power purchases. While 78% of therespondents made reference to energyefficiency initiatives, only 37% discussedrenewable energy projects or targets.Other major findings with respect to GHGemissions management include:

• 29% of respondents had set GHGreduction targets for their Scope 1emissions

• Of those setting targets, 54% had setabsolute targets (rather than intensitytargets)

• 36% of respondents have consideredemissions trading, but only 17% ofthose have actively traded GHGemission credits

• Most emissions trading (71%) is takingplace through the European Union’sEmissions Trading Scheme, which isimplementing regional regulatoryrequirements under the Kyoto Protocol.

ENERGY EFFICIENCY

Respondents have widely embracedenergy efficiency programs to abate GHG emissions and achieve cost savings at their firms. Among CDP5respondents, consumer-oriented andTelecommunications firms were the mostlikely to promote these initiatives, withEnergy and Health Care firms citing theleast activity. However, among Energy andHealth Care firms with energy efficiencyinitiatives, 31% of respondents had settargets to achieve actual reductions inenergy use. Only the ConsumerDiscretionary sector had a greaterpercentage of respondents (59%) withenergy initiatives involving efficiencytargets. With the exception of Energyfirms, most companies with energy

efficiency targets have set them for thecompany as a whole, rather than forspecific facilities or regions of operation.


Carnival is one of the largest GHGemitters among respondents in thissector, owing to the large volume of fuelconsumed in its cruise ships. (Airlines arealso large fuel consumers in this sector,but none responded to the CDP5 survey.)Carnival is working on several initiativesto improve the energy efficiency of itsoperations. For example, it uses twoshore power installations, in Juneau,Alaska, and in Seattle, Wash., that permitships mooring in these ports to shutdown their engines. These land-basedpower plants use non-carbon fuels, suchas hydropower, which reduces the ships’air emissions. Carnival has also signed anagreement to use shore electrical powerfor ships docking at the Port of LosAngeles. In addition, the company isevaluating the use of a plasma incineratorfor disposal of shipboard wastes. Plasmatechnology burns waste very efficientlyand significantly lessens air emissionsand ash byproducts.

Consumer Staples

Wal-Mart has committed $500 millionannually to invest in sustainabletechnologies and innovations to achieve a20% reduction in GHG emissions fromexisting stores over the next six years. Ithas also pledged to design and open aviable prototype store within three yearsthat is 25 – 30% more energy efficientand will produce up to 30% fewer GHGemissions. It plans to improve its logisticalefficiency through a combination of betterfuel economy and aerodynamics in itstrucking fleet, using less packaging inconsumer items and other technologicalimprovements. Wal-Mart will also showpreference to suppliers that set their ownenergy efficiency goals and aggressivelyreduce their GHG emissions.

S&P500 respondents to CDP5showed strong interest inimplementing energy efficiencyprograms to abate their GHG emissions

GHG EmissionsManagement

GHG Emissions Management

51

Respondents with Energy Efficiency Programs

78%

Respondents Setting Energy Efficiency Targets

21%

YES

NO

YES

NO


RiskMetrics Group52

Kimberly Clark has also focused onmaking energy efficiency improvements.From 1990 through 2005, it reduced itscarbon emissions per sales dollar byapproximately 40%.

Avon Products has a target to reduce itstotal energy consumption per unit ofproduction by 10% at its manufacturinglocations by 2008.

Sara Lee and several other companies inthis sector are researching strategies toachieve GHG reductions mainly throughenergy efficiency improvements.

Energy

Energy firms highlighting energy efficiencyinitiatives typically are expanding the use of cogeneration, which produceselectricity and thermal steamsimultaneously. Companies involved in oiland gas production are also working toreduce the venting and flaring ofmethane, a potent greenhouse gas.

ExxonMobil has committed to improvingthe energy efficiency of its U.S. refiningoperations by 10% between 2002 and2012, as part of its participation in theAmerican Petroleum Institute’s voluntaryClimate Challenge Program. It has alsoinvested more than $1 billion incogeneration projects, and now hasinterests in 100 such facilities with acombined capacity of 4,300 megawatts(MW)1 of power. This cogenerationcapacity is estimated to reduce carbondioxide emissions by more than 10.5million metric tonnes annually. Thecompany plans to increase itscogeneration capacity to more than 5,000 MW by 2010.

ConocoPhillipsÕ U.S. refining unit hasalso set a goal of improving its energyefficiency by 10% through 2012. Thecompany’s upstream operations continueto pursue GHG abatement by reducingflaring and fugitive emissions of methane.

Occidental has an ongoing commitmentto enhance the energy efficiency of itsoperations and has achieved a 39%improvement in the intensity of its energyuse since 1996. To achieve thisimprovement, Occidental has investedheavily in energy conservation andcogeneration projects. Like ExxonMobiland ConocoPhillips, the company is alsoinvolved in methane flaring reductionprograms for its upstream operations.

Financials

Citigroup is planning to set energyefficiency targets for all of its facilities thisyear.

JPMorganChase and many otherfinancial services firms also are focusingon energy efficiency improvements in theircorporate and branch offices to achieveemission reduction targets.

Industrials

Eaton owns a business that focuses onimplementing energy efficiency programsfor other companies, so putting its staff towork at its own company has been anatural fit. Eaton reports that from 2003 to2006, this business unit conducted 14audits and recommended 120 energyreduction projects that yielded a reductionof 9,000 tons2 of carbon dioxide. Thisgroup will continue to conduct energyaudits and trainings in 2007 andrecommend other areas where Eaton canmake progress.

United Parcel Service is working onincreasing the fuel efficiency of itsvehicles and aircraft, while supporting andmaintaining a fleet of support vehiclesthat run on alternative fuels. UPS istesting and deploying new technologiesfor its air and ground fleet and facilities,including solar, wind and distributedpower technologies.


Dell plans to conserve energy byimplementing capital improvements todouble its average Leadership in Energyand Environmental Design (LEED) buildingscore.

Hewlett Packard plans to reduce thecombined energy consumption of itsoperations and products by 20% below2005 levels by 2010.

IBM has reduced or avoided CO2

emissions by an amount equivalent to40% of its 1990 emissions through 2005as part of its global energy conservationprogram.

Energy firms highlighting energyefficiency initiatives typically are expanding the use ofcogeneration, which produceselectricity and thermal steamsimultaneously

1A 1 MW power plant can power 650 to 1,000homes when running at full capacity.2One short or English ton is equivalent to .91metric tonnes.

53


Microsoft has reduced energyconsumption by 72,000 kilowatts annuallyat its headquarters by reducing heating,ventilation, air conditioning and lightingduring workdays, replacing high-energylighting with more energy-efficient lightingand maintaining heating and coolingsystems to operate at maximumefficiency. It has similar efforts underwayat its other offices.

Materials

DuPont has a goal to keep total energyuse flat between 1990 and 2010.

Dow has pledged to reduce the intensityof its energy use by 25% by 2015, using2005 as a baseline.

Others in the industry also cited energyefficiency as the cornerstone of theiremissions reduction programs.

Utilities

Many electric utilities also are heavilyinvolved in energy efficiency programs,both for their customers and their ownoperations.

NiSource, for example, committed in2005 to improve the efficiency of itsenergy delivery by 7% between 2001 and2012, as part of the EPA’s ClimateLeaders program. Total benefits ofNiSource’s efforts are expected to reduceprojected GHG emissions for 2012 byapproximately 1.9 million tons.

Climate Leaders is an EPAindustry-government partnershipthat works with companies to develop long-termcomprehensive climate change strategies. Partners set a corporate-wide greenhouse gas (GHG) reductiongoal and inventory theiremissions to measure progress

Respondents with Energy Efficiency Programs

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Companies Setting Energy Efficiency Targets

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Energy


RiskMetrics Group54

by Jason Grumet

The case for legislation to limit U.S. greenhouse gas(GHG) emissions has become more compelling thanever. According to the federal Energy InformationAdministration, our nation’s energy-related CO2

emissions are likely to grow another 34% by 2030 ifcurrent trends continue. At the same time, we knowfrom the latest assessment of the IntergovernmentalPanel on Climate Change that the risks of climatechange are real and growing. Meanwhile, there ismounting evidence that the costs of further delay ininitiating reductions are likely to be substantial. Thefaster we get started, the smaller the burden of futuremitigation and adaptation efforts and the smaller thehuman suffering and long-term environmental damage.

As the science grows stronger, so does consensus thatwe need a Federal legislative solution. New players arecoming to the table, including labor unions, evangelicalChristians, farmers, sportsmen, national security hawksand coal-based utilities. Members of Congress haveresponded with a variety of bills with different emissionstargets and other features. One proposal by Sens. JeffBingaman (D-NM) and Arlen Specter (R-PA) is based ona mandatory climate program put forward by myorganization. More bills are in the works that will likelycombine many elements of existing proposals.

So the question is not whether there will be legislation,but rather what features will best meet the multiplegoals of a comprehensive climate policy for the UnitedStates. The National Commission on Energy Policy hastaken the position that six key components should beincluded in any mandatory GHG program.

First, the immediate goal should be to put in place a policy framework that can last many years and be adjusted over time in response to evolving scientific, economic, technological and internationaldevelopments. We must get started with a clear signal to investors, consumers and other nations.

Second, a climate change program should be market-based and economy-wide. Market-based approaches,like the landmark Acid Rain Program, have yielded theleast cost emissions-reduction options and created

powerful technology incentives. Moreover, because CO2 emissions arise throughout the economy, only aneconomy-wide program can deliver maximumreductions at the lowest cost.

Third, cost certainty is critical to forging the politicalconsensus needed to move forward without furtherdelay. Cost debates usually bog down in fruitlessarguments over who is making the right assumptionsabout technology, fuel prices and other factors. Differentassumptions can produce wildly different estimates ofeconomic impact. The safety valve feature in ourproposal — which would make additional emissionsallowances available for purchase from the governmentat a predetermined, but steadily escalating price —helps to cut through these debates by assuring that theper-ton cost of emissions reductions required under theprogram cannot rise above a known level. At the sametime, the Commission recognizes that the need forenvironmental certainty is likely to outweigh the need forcost certainty such that it would be appropriate —especially if significant progress has occurred at theinternational level — to transition away from the safetyvalve toward firm emission caps over time. Meanwhile,a healthy debate has begun about the best approachfor managing cost uncertainty and economic risk. OneSenate proposal has a cost-containment mechanismthat involves permit borrowing governed by a ‘CarbonMarket Efficiency Board’ akin to the Federal Reserve.

Fourth, allowance allocation is vitally importantpolitically because it determines who bears the costsand benefits of a climate program. The Commissionbelieves that allocation decisions should be guided byequity considerations and seek to maximize benefits tostakeholders and society as a whole. Based oneconomic modeling to assess the rough distribution ofcost burdens associated with GHG regulation acrossdifferent industry sectors, the Commission hasrecommended that no more than 50% of all emissionspermits or allowances available in an economy-widecap-and-trade program should be allocated for free,with the remainder devoted to finance other policygoals. Over time, the share of allowances allocated atno cost to industry should decline gradually as theeconomy adjusts to carbon constraints. This approachwould provide adequate resources to compensate firmsthat confront significant un-recovered costs under thepolicy, would avoid conferring large windfall profits, andwould generate major resources to speed the


Any legislation should contain six elements to

send proper signals to investors, consumers and

other nations

Climate Change Legislation: The Time Is Now

55

Guest Commentary

development of low-carbon technologies, assistvulnerable areas with adaptation, and ease the burdenof higher energy prices on low-income households.

Fifth, any successful national policy must placeconsiderable emphasis on promoting wider internationalcooperation. By some accounts, China is now addingnew coal capacity at the rate of one large power plantevery week to ten days, and it has just surpassed theUnited States in total carbon emissions. In this context,it is clear that the U.S. must lead, but also that ourmajor trade partners and other large emitters follow suit.The Commission has therefore proposed a domesticpolicy that (a) provides for periodic review (every fiveyears) to assess international and scientificdevelopments, (b) explicitly links continued tightening ofprogram targets to progress in other countries, and (c)signals the United States’ intent to work with othercountries to forcefully address trade andcompetitiveness concerns if other major emittingnations fail to act within a reasonable timeframe.

Sixth, market-based efforts to limit GHG emissionsmust be paired with a major technology push todevelop and deploy the low-carbon alternatives that willallow us to meet critical environmental objectives whilemaintaining secure, reliable and affordable means ofmeeting our energy needs. We believe that a combinedstrategy of market signals and robust technologyincentives is the most effective and least costly way toachieve a meaningful shift from business-as-usualtrends, while equitably sharing the burden of emissionsmitigation among shareholders and taxpayers. Ourapproach therefore calls for a combined package ofpolicies and public incentives to accelerate thedevelopment and early deployment of promisingenergy-efficiency and low-carbon-supply technologies.

Finally, solutions to climate change must be pursued inconcert with other critical energy policy goals such asimproving America’s energy security, reducing oildependence, and ensuring that our energy systems areadequate and reliable to meet future needs. Thus, theCommission has also called for efforts to improvevehicle fuel economy; promote cost-effective energyefficiency investments; develop promising renewableenergy resources, including biofuels; diversify availablesupplies of fossil fuels, especially natural gas, in anenvironmentally responsible manner; address obstaclesto nuclear power; develop the technologies needed topreserve a major role for coal, especially technologiesfor carbon capture and storage; and invest in criticalenergy infrastructure.

Of course, the devil is in the details when it comes totranslating these principles into specific legislativelanguage. But the urgent imperative to act — and actsoon — must not get lost as the Congressional debateover U.S. climate policy intensifies in the days to come.Getting it right is essential. But so is getting started.

— Jason Grumet is the Executive Director of theNational Commission on Energy Policy, a bipartisangroup of energy experts from industry, labor,environmental and consumer groups and academia(www.energycommission.org). The Commission issued acomprehensive set of consensus recommendations forU.S. energy policy in December 2004 and updatedthese recommendations in April 2007. The Commissionis a project of the Bipartisan Policy Centerwww.bipartisanpolicy.org.

J a s o n G r u m e t

Eventually, a ‘safety valve’ on carbon prices

might give way to a firm emissions cap to provide

environmental certainty in addressing global

warming


RiskMetrics Group56

RENEWABLE ENERGY

Among S&P500 respondents to the CDP5survey, 37% referenced involvement inrenewable energy projects. Utilities lead inthis category (70%), followed bycompanies in the Consumer Discretionary(48%) and Consumer Staples (41%)sectors. Despite a proliferation of “greenpower” purchase programs andRenewable Portfolio Standards at thestate level, relatively few respondentshave set targets for their own renewableenergy use. The sectors with the most respondents setting targets areConsumer Staples (23%) and ConsumerDiscretionary (13%), followed byInformation Technology (11%) and Utilities (11%). No respondents in theTelecommunications sector have setrenewable energy goals.


Carnival is involved in a project that istesting bio-diesel fuels as a replacementfor petroleum-based fuels in some shipengines.

Consumer Staples

Molson Coors has a Virginia facility thatruns on biogas from anaerobic treatmentof wastewater. In addition, it isinvestigating installing a small-scale solarphotovoltaic system to supply electricityat the facility.

Respondents with Renewable Energy Products

37%

Respondents Setting Renewable Energy Targets

9%

Companies with Renewable Energy Projects

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Citigroup, JPMorganChase, WellsFargo and other banks plan to achieveGHG reductions in part through greenpower purchase prgrams.

Health Care

Pfizer has pledged to meet 35% of itselectricity needs through the use ofrenewable and cogeneration technologiesby 2010.

Industrials

United Parcel Service is using solarpower to meet approximately 70% of thepower needs at its Palm Springs, Calif.,sorting facility. In addition, UPS hasseveral facilities in California usingbiomass sources as part of theirelectricity supply. UPS says that itcontinues to evaluate additionalrenewable energy projects in the area ofsolar, wind, hydrogen fuel cells and greenpower purchasing.

YES

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57



Google is committed to creating 50 MWof new renewable generating capacity by2012. Earlier this year, it completed thefirst major phase of a 1.6-megawattphotovoltaic solar panel installation at itsMountain View, Calif., headquarters. Thecompany says that the installation is thelargest one by a corporation in the UnitedStates to date.

Microsoft installed a solar electric systemat its Silicon Valley Campus in NorthernCalifornia in 2006. It generates 480kilowatts at peak capacity, enough energyto meet approximately 15% of thefacility’s total energy needs. The systemwill reduce the campus’ CO2 emissions by4,000 tons annually over the next 30 years.

Motorola plans to increase its purchasesof renewable energy from 5.2% in 2006 toapproximately 10% by 2008.

Dell is also considering direct purchasesof renewable energy and purchases ofrenewable energy credits.

Materials

DuPont has a goal to increase renewableenergy use to 10% by 2010 and isdeveloping a pilot-scale ‘bio-refinery.’

Dow is also committed to increasinggreen power purchases and makes a lineof high-performance plastics from corn.

Utilities

Many electric utilities also are involved inrenewable energy development, oftenthrough unregulated subsidiaries or understate mandates.

FPL Group is the largest wind energydeveloper in the United States; it ownsmore than 4,015 MW of wind generationin 16 states. In addition, the company’sSunshine Energy program in Floridainstalls 150 kilowatts of solar capacity forevery 10,000 customers that sign up forthis program.

Duke Energy plans to expand itsrenewable energy generating capacity to2,100 MW by 2012.

Entergy owns 80 MW of wind capacity.

Public Service Enterprise Group (PSEG)has proposed to invest $100 million toinstall solar photovoltaic panelsthroughout its local service territory inNew Jersey. This initiative would providefunding for 30 MW of solar energycapacity, which is half of the New JerseyBoard of Public Utilities’ target for solarenergy installations in PSEG’s serviceterritory in the state for 2010.

Sempra EnergyÕs San Diego Gas &Electric subsidiary plans to meetCalifornia’s 20% Renewable PortfolioStandard by 2010.

Despite a proliferation of "greenpower" purchase programs andRenewable Portfolio Standards at the state level, relatively fewS&P500 respondents have settargets for their own renewableenergy use


RiskMetrics Group58

by Angus McCrone

In a film about Pearl Harbor, a Japanese admiral musesthat his country’s attack in 1941 had merely awakeneda ‘sleeping giant.’ The same might be said of thecurrent United States position on climate change. Tooutsiders, especially in Europe, the U.S. response torising international concerns has appeared as ‘sleepy,’ ifnot ‘sleeping.’ Yet with formidable natural resources inwind, solar, geothermal and several other renewableenergies, plus the money to invest in a shift away fromfossil fuels, the U.S. giant might finally be awakening.

Led by policy makers at the state level, heavyweightcorporations, blue chip financial institutions and publicopinion, America has thrown its muscle into cleanenergy. Data from New Energy Finance show that in2006, the United States accounted for $22.5 billion ofthe $70.9bn invested in clean energy worldwide. Thiswas up very sharply from $12.6bn in the U.S. in 2005and $5.7bn in 2004.

The 2006 data showed the level of investment in theU.S. is closing the gap fast on the European Union’s$27.1bn. The capital has come from all directions —

private equity funds, hedge funds, public markets, largecorporates and asset financing of projects via equityand debt.

America’s advance has so far been led by policymakersbelow the federal level, by financiers and investors, andby entrepreneurs. The big corporations in the S&P500have been swinging into line in 2006 – 07, but most ofthem have yet to adopt spearhead roles. It may well bea case of ‘watch this space.’

So what is awakening America from its slumber? Freakweather events such as Hurricane Katrina in 2005, themild start of winter in 2006 – 07 and a rash of heatwaves and floods this summer have raised awarenessof the possible impacts of climate change and stolenthunder from climate change skeptics. At the sametime, oil prices surging towards $80 a barrel haverenewed concerns about the security of supply.

Policy moves also have had a profound impact, albeitwith a lower profile. One change has been the partialderegulation of the power sector, giving electricitysuppliers a freer hand to build their own generatingcapacity. Another was the introduction of the FederalRenewable Fuels Standard in 2006, encouraging theuse of ethanol and biodiesel blends in motor fuels.

In addition, individual U.S. states have adoptedaggressive measures to encourage the use of clean

energy in their localities. Fully half haveadopted Renewable PortfolioStandards obliging local utilities toderive a portion of their electricity fromrenewable generation. The mostambitious of these, in Minnesota, hasset a figure of 25% by 2020. Others arejust behind. Oregon has decreed 25%from renewables by 2025. Other stateshave stressed the greenhouse gasreduction side. Florida GovernorCharlie Crist (R) in July 2007 issued anexecutive order for a reduction inemissions to 1990 levels by 2017.

The response from U.S. companies hasbeen varied. One group of largecorporations has spotted opportunitiesto become providers of generatingequipment, or capacity — for instance


U.S. investment in clean energy has quadrupled

in three years and is quickly catching up to

Europe

Renewable Energy Finance: Big Steps for US Investors, SmallerOnes for Industry

Worldwide Investment in Clean Energy (US$ billions)

2004

2005

2006

2004

2005

2006

UnitedStates

EU 27 OtherOECD

China India Africa LatinAmerica

OtherDeve-loping

Source: New Energy Finance

59

Guest Commentary

General Electric in wind turbines and FPL Energy inwind farm development.

A second group has identified the use of renewablygenerated power as a good way of locking in a fixedprice for electricity over the long term, possibly earningcarbon credits in the future, or merely generating goodpublic relations. MacyÕs announced in June 2007 that itplans to install solar power systems in 26 stores inCalifornia, while Wal-Mart has unveiled a number ofschemes, including cuts in packaging, efficiency inelectronic goods and the use of solar panels.

A third group, the investment banks, has identifiedrenewable energy investment and carbon trading as newprofit centers. Goldman Sachs has made numerouslarge venture capital commitments, including taking a$210m stake in Brazilian biofuels firm Vale Santelisaand leading a $25m financing of efficient air cooling firmIce Energy. Morgan Stanley has committed to put $3bninto carbon markets over five years.

A fourth group, including chemical firms DuPont andDow and oil majors Chevron and ConocoPhillips, hasdipped toes in the water by backing research into cleanenergy technologies or by investing in young cleanenergy firms.

Does this mean the big battalions of the S&P500 haveembraced clean energy? Yes and no: intriguingly, evenas of the third quarter of 2007, there is no pure-playU.S.-listed wind turbine manufacturer. The nearest,Clipper Windpower, is U.S. based but listed onLondon’s AIM. Equally, the solar energy manufacturingindustry remained largelyEuropean and Chinesebased, and while therewere a number of Chinesefirms listed on U.S.exchanges, there has beenno significant takeover of asolar firm by a U.S.corporation.

Even in biofuels, whereU.S. owned businesseshave proliferated in the lasttwo years, the significantplayers — with theexception of integratedagribusiness giant ArcherDaniels Midland — were generally mid-sizedfirms such as Aventine,

VeraSun and Imperium Renewables. One reason forthis may be that U.S. corporations remained somewhatleery of the valuations put on clean energy companiesin 2007. This also extended to projects, with U.S.players often not paying top dollar for large wind farmportfolios — instead letting Energias de Portugal takeHorizon Wind for an enterprise value of $2.7bn in thespring of 2007, and U.K.-based International Powertaking the Trinergy portfolio for $2.5bn in August.

Nevertheless, U.S. investors have been in a bullishmood. In the year ending in the second quarter of 2007,Nasdaq saw a total of $2.6bn clean energy equityfinancings, more than any other exchange worldwide.The New York Stock Exchange weighed in with afurther $1.6bn. Between the two, they accounted fornearly a third of the $14bn invested in clean energycompanies by public market investors over the 12-month period.

— Angus McCrone is chief editor for New EnergyFinance. Based in London, England, New EnergyFinance is a specialist provider of information andresearch to investors in renewable energy, low-carbontechnology and the carbon markets.

A n g u s M c C r o n e

Major U.S. corporations have not yet made major

investments in renewables. It may be a case of

‘watch this space.’

Clean Energy Equity Offerings 7/1/2006 — 6/30/2007

Source: New Energy Finance


RiskMetrics Group60

GHG REDUCTION TARGETS

For some companies, energy efficiencyand renewable energy programs aremeans toward the larger end of reducinggreenhouse gas emissions. AmongS&P500 respondents to the CDP5 survey,relatively few have declared formal GHGreduction goals. Altogether, 29% ofrespondents have set GHG targets; theseinclude emission intensity targets as wellas targets to reduce levels of absoluteemissions.

Among survey respondents, Utilities lead in setting GHG reduction goals (59%),followed by Materials (45%) and Industrials (37%) firms. No respondents in theTelecommunications sector have set GHGreduction goals, and only 13% of Energysector respondents and 19% of FinancialServices respondents have set such goals.

A majority of Utilities setting GHGreduction targets have opted for intensitytargets. Energy, Materials and Industrialscompanies are more evenly split betweenabsolute and intensity targets. Amongother sectors where respondents have setreduction goals, the vast majority of theFinancial Services firms have set absolutetargets (89%), followed by Health Care(71%), Consumer Staples and ConsumerDiscretionary firms (62%).

Most respondents with GHG reductiontargets have chosen relatively short-termgoals; 88% have set a target within sixyears, with only 12% setting longer-termgoals. All of the Energy companies with

such targets look out no further than twoyears. A majority of the companies in theFinancial Services, Industrials, Utilities,Information Technology, ConsumerStaples, Health Care and Materials sectorswith targets have opted for a three to sixyear window. Materials, ConsumerDiscretionary and Consumer Staples firms,as well as Utilities, are the most likely tohave goals more than six years out.


American automobile manufacturerscontinue to focus on reducing their facility(Scope 1) emissions, while not directlyaddressing GHG emissions from theirproducts (which are a far greater source ofemissions).

Ford has a target to improve globalmanufacturing energy efficiency by 1%annually, following an improvement of morethan 12% in 2000-2004 (normalized forchanges in production). It has cut its NorthAmerican facility GHG emissions by 10%by 2006, relative to a 1998-2001 baseline.

General Motors has set a global goal toreduce energy use at its facilities by 25%,and CO2 by 21% by 2010, using a 2000baseline.

Johnson Controls and several othercompanies in the Consumer Discretionarysector reference their participation in theBusiness Roundtable’s Climate Resolveprogram. This industry initiative mirrors agoal set by the Bush administration in 2002to achieve an 18% reduction in the GHGemissions intensity of the U.S. economy by2012 (specific targets vary by industry). Forits part, Johnson Controls says that it islooking beyond its Climate Resolve pledgeand is working with the EPA’s ClimateLeaders program to set a more aggressiveGHG reduction target. Johnson Controlsalso says that it is aiming to achieve carbonneutrality within the next 10 years. To getthere, the company says it will rely oninternal process and energy efficiencyimprovements, as well as on emissionscredits obtained for delivering energyefficiency improvements to its customers.

Two others companies in the ConsumerDiscretionary sector have made referenceto achieving ‘carbon neutrality’ in theiroperations.

Nike says it plans to have its facilities andbusiness travel activities become carbonneutral by 2015.

Respondents Setting GHG Reduction Targets

29%

Respondents Setting GHG Reduction Targets

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61


News Corp. intends to reduce its use ofnon-renewable energy sources to decreaseits total carbon footprint by 10% in 2012,compared with 2006, and says it is on itsway to reaching net zero carbon emissions.

Consumer Staples

Colgate-Palmolive has set a goal toreduce its CO2 emissions by 5% by 2010,using 2002 as a baseline.

As noted earlier, Wal-Mart has committedto investing approximately $500 millionannually to achieve a 20% reduction inGHG emissions from its existing storesover the next six years, and a 30%reduction from a new prototype store over the next three years.

Energy

While all of the respondents from theenergy sector are managing GHGemissions to some degree, none have settargets to cut absolute emissions.

Chevron is managing the growth of itsGHG emissions, using 2004 as a baseline.In 2005, it met its goal of having no netincrease in GHG emissions from itsoperations, even though it addedproduction capacity and explored forenergy in more complex, remote andenergy-intensive environments. Chevron’soverall emissions grew in 2005 and 2006,although it met its goals for controllingemissions growth in both years. In 2007,Chevron aims to reduce its GHGemissions below 2006 levels (but stillabove 2005 levels).

Hess fell short of its goal to achieve a 5%reduction target in normalized emissionsbetween 2001 and 2005; as of 2006, itsnormalized emissions were 4% below2001 levels. Consulting firm DNV willcomplete a review of Hess’s operationsbefore it decides on any future targets.

As noted earlier, ConocoPhillips,ExxonMobil and Occidental have alsoset GHG emissions intensity targets forsome of their operating units.

Financials

With minimal direct emissions, mostfinancial services firms have focused onGHG reductions related to their energypurchases and business travel.

Citigroup has committed to reducing itsGHG emissions from facility-related energyuse by 10% between 2005 and 2011.

JPMorganChase plans to achieve anabsolute reduction of 7% below its 1990emissions by 2012.

Merrill Lynch has acquired credits tooffset its GHG emissions related toelectricity consumption, heat usage andbusiness travel for the next three years. Itis also striving to reduce its overall GHGemissions footprint by 2% a year.

Wachovia has pledged to reduce itsabsolute CO2 emissions by 10% from2005 levels by 2010.

Health Care

Most pharmaceutical companies areahead of other companies in themanufacturing sector in terms of settingGHG reduction targets.

Johnson & Johnson, in partnership withthe World Wildlife Fund, announced agoal in 1999 to reduce carbon dioxideemissions by 7% in absolute terms below1990 levels by 2010. This goal includes allScope 1 and Scope 2 emissionsassociated with its owned and controlledfacilities worldwide.

Schering-Plough has established anabsolute GHG emission reduction goal of5% below 2002 levels by 2012, with thefocus on stationary source emissions.

29% of respondents have setGHG targets; these includeemission intensity targets as wellas targets to reduce levels ofabsolute emissions

Most respondents with GHGreduction targets have chosenrelatively short-term goals

Greenhouse Gas Target Types (for those setting targets)

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RiskMetrics Group62

Several other pharmaceutical companieshave set targets to reduce their GHGemissions intensity.

Baxter International set a goal to reduceits energy use and associated GHGemissions by 30% per unit of productvalue between 1996 and 2005, andachieved a 27% reduction over that timeframe. In 2006, Baxter set a new goal thatcommits it to reduce its GHG emissionsintensity by 20% between 2005 and 2010,indexed to sales.

Bristol Myers Squibb has established anenterprise-wide goal to reduce GHGemissions by 10% from 2001 to 2010,normalized to sales.

Eli Lilly has set a sales-related intensitygoal to reduce its energy intensity andGHG emissions by one-third between2003 and 2010. To date, it says, it hasreduced its energy intensity by 13% andthe intensity of its GHG emissions by 11%.

Pfizer aims to reduce the GHG emissionsintensity by 35% between 2000 and 2007,relative to sales, as part of its participationin the EPA’s Climate Leaders Program.

Merck also is working with the EPA’sClimate Leaders Program to develop aGHG emissions reduction target.

Industrials

Several large industrial firms have setgoals to reduce their absolute GHGemissions.

United Technologies has pledged a 12%absolute reduction in GHG emissionsfrom 2007 to 2010.

General Electric, on the heels of theannouncement of its ‘ecomagination’campaign, pledged to reduce its totalGHG emissions by 1% from a baseline of2004 through 2012. It also pledged to cutthe intensity of its emissions, relative tosales, by 30% by 2008.

Waste Management, as a foundingmember of the Chicago ClimateExchange, has committed to reduce itsGHG emissions by 6% from 1998-2001baseline emissions by 2010, including a1% annual reduction from 2003 to 2006,and a 0.5% reduction from 2007 to 2010.


IBM has set a number of second-generation goals, including reducing CO2

emissions associated with its energy useby 12% between 2005 and 2012, as partof its membership in the EPA’s ClimateLeaders Program. IBM has also agreed toreduce emissions of perfluorocarbons to10% below 1995 levels by 2010, in linewith the World Semiconductor Council’sprogram to reduce emissions of thispotent greenhouse gas. IBM also plans tocut CO2 and PFC emissions in NorthAmerica by 6% by 2010, as measuredagainst annual average direct and indirectemissions over the period 1998 – 2001.This pledge comes under the ChicagoClimate Exchange Phase II program.

Motorola has committed to achieve anabsolute 6% reduction in its GHGemissions in 2000 – 2010, as part of itsmembership in the Chicago ClimateExchange. It has also pledged todecrease its normalized carbon footprint— including direct GHG emissions andindirect emissions from electricity use —by 15% between 2005 and 2010.

Intel plans to reduce its GHG emissionsby 30% per unit of production between2004 and 2010. It also is a member of theEPA’s Climate Leaders Program and is asignatory to the World SemiconductorCouncil agreement to reduce emissions of PFCs.

Advanced Micro Devices (AMD) haspledged to reduce its energy intensity andGHG emissions intensity by 30% and40%, respectively in 2002 – 2007, relativeto production. AMD also plans to reducePFC emissions by 50% between 1995and 2010.

Greenhouse Gas Target Horizons (for those setting targets)

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63


Dell has committed to reduce its GHGemissions intensity by 15% between 2006and 2012 as part of its participation in theEPA’s Climate Leaders Program.

Materials

Weyerhaeuser has set a long-term targetto reduce its GHG emissions by 40%between 2000 and 2020. This is the mostaggressive target in the forest productssector.

International Paper has set a goal ofcommitting to reduce its GHG emissionsby 15% in 2000 – 2010 as part of itsparticipation in the Climate LeadersProgram.

MeadWestvaco has set a target to cut itsabsolute emissions by 6% below 2002levels by 2010 at its principal U.S.manufacturing facilities, as part of itsparticipation in the Chicago ClimateExchange.

Alcoa has set a particularly ambitioustarget to reduce its direct GHG emissionsto 25% below its 1990 baseline by 2010. Itis working on several voluntary programswith regulatory authorities in the UnitedStates and Canada to reduce emissionsfrom its smelters.

Dow has committed to a 2.5% per yearreduction in the intensity of its GHGemissions per pound of produced productfrom 2005 to 2015. By 2025, Dow plans tohalt the absolute growth of its GHGemissions and reduce them below its 1990 levels.

DuPont has set one of the mostaggressive GHG reduction targets of any firm. In 1999, it established a GHGreduction goal of 65% from a 1990baseline. By the end of 2003, it hadreduced its GHG emissions by 72%.Taking divestitures into account, it says itstotal reductions were 56%. The companyhas further pledged that by 2015, it willreduce its GHG emissions by at least 15%from a base year of 2004.

Utilities

Several electric utilities, includingConstellation Energy and DTE Energy,highlight their participation in a voluntaryindustry agreement to reduce sector-wideGHG emission intensity of electricityproduction by 3 – 5% by 2012, comparedto average levels during 2000 to 2002.

Public Service Enterprise Group hasgone a step further, committing to reduceits GHG emissions intensity by 18%between 2000 and 2008.

Entergy in 2006 made its second five-year voluntary GHG stabilizationcommitment in partnership withEnvironmental Defense and ClimateLeaders. It says it will stabilize CO2

emissions from its power plants and fromits controllable purchases of energy at20% below 2000 levels from 2006through 2010.

EMISSIONS TRADING

One other means that companies have tomanage their GHG emissions is to entermarkets where carbon credits can bebought and sold. Among S&P500respondents to CDP5, this option has beenused sparingly thus far. Only 36% ofrespondents say they have consideredengaging in emissions trading, and just17% have actually participated in anytrades.

Utilities (78%), Materials firms (68%) andEnergy firms (56%) are the most likely tohave considered trading; half of therespondents in the Materials sector havetraded already. Conversely, fewer than20% of the respondents in the ConsumerDiscretionary, Information Technology andTelecommunications sectors report anyconsideration of emissions trading.

Most respondents’ involvement inemissions trading has come as a result ofthe European Union’s Emissions Trading

Scheme. This is a mandatory program forU.S. companies with facilities in Europethat are subject to GHG regulations underthe Kyoto Protocol. A smaller percentagehas participated in the voluntary ChicagoClimate Exchange; credits bought and soldon this exchange do not count towardcompliance with the Kyoto Protocol.

Only a handful of respondents have soughtcredits through the Clean DevelopmentMechanism and Joint Implementationprograms set up under the Kyoto Protocol.

Respondents Trading Emissions

17%

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by Dr. William R. Moomaw

Now that a consensus has emerged in government,business and among the public that climate change ishappening, the debate has shifted to what can be done,and how much will it cost. The Kyoto Protocol expiresin 2012, and requires only a miniscule 5% reduction inemissions below 1990 levels by the world’s industrialnations. The United States, the world’s leading annualand cumulative emitter of heat trapping gases, optedout of the Protocol’s requirements and is now strugglingto figure out how it can reenter the process, and meetthe spirit of its commitments under the U.N. FrameworkConvention on Climate Change.

The cost of coastal damage from intense hurricanes isincreasing, storm surges are becoming more intenseand frequent as sea level rises; coastal infrastructureand trillions of dollars in beachfront property is injeopardy as beaches erode; droughts and fires stalk thewestern United States and other countries; torrentialdownpours inundate communities and the free storageof fresh water in snowfields and glaciers is silentlyvanishing. We are learning that not paying for mitigationto slow climate change, and failing to adapt, leave uswith major damage costs and much human suffering.

Europe and Japan are trying to meet their obligationsunder the Kyoto Protocol. In the United States, thevoluntary and incremental actions taken to date byindividuals, corporations, communities and states haveprovided some useful learning, but are scarcely enoughto make the kind of difference that is required to avoidthe worst climate impacts. To limit global warming to aslittle as 4˚ F in this century requires that all economiesparticipate, but also that Americans and other industrialnations reduce their emissions 80% by the 2050s. This is equivalent to reductions of 3% per year(compounded) over the next half century. This soundslike a massive task to transform our economy and theenergy sources that fuel it in such a short time.

But we have done it before just a century ago. In 1905,only 3% of American homes had electric lights, andHenry Ford had just introduced his first assembly linefor the Model T car. Despite the fact that electricity cost

10 times more than gaslights did, and an automobileand the fuel to run it cost more than a horse and buggy,Americans made the change. Who could have imaginedthat 50 years later, electricity would be in most homes,and the automobile would profoundly transform mobilityand lifestyles and create the suburbs?

Fast-forward to 2005, and we see that just under 3% ofU.S. electricity was produced by non-hydro renewabletechnology, and highly efficient hybrid cars were still acuriosity. In the past 20 years, Denmark and someGerman states have shifted more than 20% of theirelectricity production to wind power. Is it so impossibleto achieve such a radical technological and societalshift to low emitting homes, power plants, vehicles andindustries by mid-century?

It is estimated that 80% of emissions come from cities, with half of that from our buildings and theelectricity to power them. Given the large amount ofunderperforming buildings already in existence, amassive effort to upgrade their performance andstandards for new construction can reduce energyrequirements by half to two-thirds. Doubling and triplingthe efficiency of electrical appliances is well withineconomic and technological capabilities. Over the nexthalf-century most existing electrical power plants willhave to be replaced, and the need for new ones can bedramatically reduced through improved efficiency inlighting and appliances.

Shifting to zero emitting renewable energy, anddistributed combined heat and power systems canlower emissions and greatly reduce the cost oftransmission and distribution, which accounts for morethan half of our electrical power system investment. Ifcoal is to continue to be used in existing or new powerplants, the carbon dioxide emitted will need to becaptured and stored for millennia in geologicalformations, depleted gas and oil fields, or else capturedby algae or other photosynthesizing organisms toproduce biofuels. Perhaps a new generation of nuclearpower may make a contribution to future reductions in


A massive transformation of our economy and

energy sources will be needed in the next 50

years — but we have done it before

Long-term reduction goals with intermediate

benchmarks are needed to assure investors and

companies that there is an enduring market for

low-carbon energy supplies and energy-efficient

equipment

Catching Up to Climate Change: Prospects for the Kyoto Protocol after 2012

65

Guest Commentary

emissions if the problems of waste storage, weaponsproliferation and vulnerability can be solved.

Finally, transportation emissions must be addressedthrough a combination of more efficient vehicles, andaircraft, through the use of low emission fuels, and byreducing the distance traveled through improved landuse and transportation patterns. It is important to setlong-term performance and adoption incentives ratherthan to dictate specific technologies.

So what is needed to induce such a massivetransformation? The post-Kyoto agreement needs to set a framework, allocate responsibilities and then eachnation must develop an appropriate system forimplementation.

• First, there need to be long-term global emissionreduction goals for the next 50-100 years withintermediate benchmarks to assure investors andcompanies that there is an enduring market for lowemission energy supply systems and highly efficientappliances, lighting, vehicles and equipment.

• Second, there needs to be a set of policies thatreward the most efficient and cleanest options whilepenalizing or restricting high emitting options.

• Third, all nations must participate in the process oflowering their emissions of heat trapping gases. Indoing so, the development needs of developingcountries must be recognized and technologicalinnovations and financial instruments will need to beimplemented that will allow them to develop withoutoverburdening the atmosphere with heat trappinggases.

• Fourth, any agreement must address adaptation aswell as mitigation and also the damages that willoccur from the inevitable climate change that isalready imbedded in our atmosphere and oceans.

• Fifth, to avoid the worst effects of climate change willrequire the mobilization of all policy tools available:international trade; the creation of new, climatededicated international financing systems includingpossible tariffs on internationally traded fossil fuelsand international travel; a Tobin type tax on currencyexchanges to dampen speculation and raise revenue;an expanded Clean Development Mechanism withlower transaction costs and a reorientation of theWorld Bank and other regional Banks to finance onlyclimate compatible projects.

The most critical change that is required is for bothdeveloped and developing countries to address climatechange as the central challenge to sustainabledevelopment rather than treating it merely as anotherpollution problem. Structuring the rules to promote amore energy efficient economy that utilizes a muchhigher percentage of locally produced clean energy willalso reduce air and water pollution, require less landdegradation, increase energy and economic securityand remove a source of resource based conflict.

— William R. Moomaw is Professor of InternationalEnvironmental Policy and Director of the Center forInternational Environment and Resource Policy at theFletcher School, Tufts University. He is the lead authorof several reports by the Intergovernmental Panel onClimate Change addressing energy and energyefficiency issues.

D r . W i l l i a m R . M o o m a w

Both developed and developing countries must

address climate change as the central challenge

to sustainable development rather than treating it

merely as another pollution problem

8Results of the CDP5 survey of S&P500companies show that American industry is

making progress in confronting the challengesposed by global warming, but hard work liesahead.

More than half of S&P500 firmsresponded to the CDP5 survey. Theincrease in respondents to 56%represents a jump of almost 10percentage points compared to the CDP4 survey results.

The highest-emitting sectors areproviding the most disclosure. Electricutilities and Materials companies had thehighest response rates and generated thebest Climate Governance Index scores.Only the Consumer Discretionary sectorhad a response rate below 50%.

Management and directors are payingmore attention to climate issues. Half ofthe S&P500 respondents have assignedboard and/or upper-level managementresponsibility for overseeing climate-related issues. Two-thirds of respondentsare tracking and have reportedgreenhouse gas emissions data. Four-fifths of respondents recognizecommercial risks posed by climatechange.

Results of the CDP5 surveyare not uniformly positive,however. American industry still lags behind itsinternational competitors insome key respects.

S&P500 firms lag the FT500 inresponding to CDP. Three-quarters ofthe world’s largest publicly tradedcompanies (in the FT500) responded toCDP5, compared to 56% of the S&P500.However, the large increase in theS&P500 response rate this year is in linewith historical trends for the FT500survey.

Action to reduce emissions lags wellbehind climate awareness. Only 29% ofS&P500 respondents have implementedGHG control programs with specifictargets and timelines. Many of the targetsset do not limit absolute emissions. Thelack of federal GHG controls is clearly afactor in this low percentage.

Material effects of climate changeremain largely undetermined andundisclosed. While most S&P500respondents can identify regulatory andphysical risks associated with climatechange, few have attempted to quantifythese risks in dollar terms or havediscussed them in securities filings. Inaddition, carbon pricing is rarely factoredinto their capital investment decisions,even though such decisions typicallyrequire a multi-year planning process andhave long payback periods.

Looking forward, three trendsare clear.

Energy efficiency and renewables willbe drivers of GHG emission reductions.The U.S. now rivals Europe in total annualinvestment in clean energy. More thanone-third of S&P500 respondents areinvolved in renewable energy projects orpurchases, and three-quarters areengaged in energy efficiency initiatives.

Much more investment will be requiredto achieve major cuts in GHGemissions over the next half-century.This will require a massive transformationof the global economy and a sustainedcommitment to low-carbon energysupplies and energy-efficient equipment.

Companies that are ahead of the curvesupport mandatory, market-basedpolicies to achieve emissionreductions. In embracing greenhouse gascontrols, these companies know they willhave greater certainty in their investmentplanning decisions and new businessopportunities to exploit, giving them anedge over companies that hang on tobusiness-as-usual strategies.

Four-fifths of respondentsrecognize commercial risksposed by climate change andtwo-thirds are tracking and have reported greenhouse gas emissions data. But less than a third have set GHGreduction targets

Conclusion

Conclusion

67

9Appendices

Appendix I

Scores andEmissions

Appendix I

69

Emissions Disclosure

Scope 3

ClimateGovernance Total Scope Scope

Company Grade (%) Amount1 Rank2 Intensity3 1 2

3M 75 6,540 40 285 3 3

Abbott Laboratories 29 415 112 18 3 3

ACE Limited 13 -Adobe Systems 13 -Advanced Micro Devices 29 341 117 60 3 3

AES 32 -Aetna 25 90 147 4 3 3

Air Products & Chemicals 46 18,000 22 2,034 3 3

Alcoa 75 60,100 8 1,978 3 3

Allergan 36 92 146 30 3 3

Altria Group 38 513 107 7 3 3 3

American Electric Power 71 145,400 2 11,520 3

American Express 17 -American International Group 42 273 123 2 3 3 3

American Standard 46 932 84 83 3 3

Anadarko Petroleum 46 5,331 43 523 3 3

Anheuser-Busch 56 3,032 54 193 3 3

Applied Materials 58 124 140 14 3 3

Ashland 43 730 93 101 3 3

Avery Dennison 21 -Avon Products 54 116 142 13Bank of America 63 1,380 70 12 3 3

Baxter International 42 731 92 70 3 3 3 3 3

BB&T 13 -Becton Dickinson 29 465 108 80 3 3

Bed Bath & Beyond 17 -Bemis 25 681 96 187 3 3

Black & Decker 29 295 120 46 3 3

Boston Scientific 21 177 131 23 3 3

Bristol Myers Squibb 50 998 83 56 3 3 3

CA 25 47 155 12 3

Carnival 25 9,005 34 761 3

Caterpillar 43 2,343 62 56 3 3

CB Richard Ellis Group 50 -Centerpoint Energy 36 -Charles Schwab 0 -Chevron 61 65,850 5 321 3 3 3

Cisco Systems 42 339 118 12 3 3 3

Citigroup 75 1,387 69 9 3 3 3 3

Citizens Communications 17 -CMS Energy 39 -Coca Cola 44 4,868 46 202 3 3 3

Coca-Cola Enterprises 38 - 3 3

Colgate-Palmolive 46 672 97 55 3 3

Comcast 0 -Comerica 13 -Comverse Technology 13 -ConocoPhillips 54 62,289 6 372 3 3

Consolidated Edison 79 6,240 41 514 3

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Scope 3



Constellation Energy Group 50 20,800 19 1,079 3

Cooper Industries 17 -Corning 17 1,002 82 194 3 3

Cummins 36 614 101 54 3 3

Dell 33 384 114 7 3 3

Devon Energy 29 -Dow Chemical 50 37,700 14 767 3 3

Dow Jones 4 -DTE Energy 46 42,200 12 4,677 3 3

Duke Energy 43 98,400 4 6,481 3

E.I. du Pont de Nemours 93 12,100 29 427 3 3

Eastman Chemical 25 -Eastman Kodak 67 2,350 60 177 3 3

Eaton 29 835 87 67 3 3

Ebay 17 -Ecolab 32 295 119 60 3 3 3

Edison International 36 - 3 3

El Paso 32 -Electronic Data Systems 50 46 156 2 3 3 3

Eli Lilly 29 2,296 63 146 3 3

Embarq 17 -EMC 33 264 124 24 3 3

Emerson Electric 25 641 99 32 3

Entergy 79 29,124 16 2,664 3 3

Exelon 79 13,000 28 830 3 3

Exxon Mobil 57 158,800 1 474 3 3

Fidelity Nat’l Information Services 17 -Fifth Third BanCorp 13 778 90 96 3

First Horizon National 13 -FirstEnergy 46 46,761 11 4,066Ford Motor 75 6,800 38 42 3 3

FPL Group 54 4,914 44 313 3

Freddie Mac 29 41 159 1 3

Freeport-McMoRan Copper & Gold 39 3,032 53 524 3 3

General Dynamics 7 -General Electric 57 10,835 31 67 3 3

General Mills 33 1,083 81 93 3 3

General Motors 88 11,021 30 53 3 3

Gilead Sciences 8 -H&R Block 13 -H.J. Heinz 17 901 85 100 3

Halliburton 32 3,150 52 140 3

Hartford Financial Services Group 29 123 141 5 3 3 3

Health Management Associates 0 -Hess 57 5,357 42 191 3 3

Hewlett-Packard 73 1,599 67 17 3 3 3

Hospira 63 284 121 106 3 3

Humana 13 -Ingersoll-Rand 18 -Intel 29 3,870 49 109 3 3

International Business Machines 63 2,824 56 31 3 3

International Paper 61 14,766 26 671 3 3

JC Penney 29 1,144 78 57 3 3

Johnson & Johnson 54 810 88 15 3 3

Johnson Controls 64 2,498 58 77 3 3 3 3

JP Morgan Chase 46 -Juniper Networks 38 30 160 13 3 3 3

Kellogg 21 1,100 80 101 3

Keyspan 64 9,028 33 1,257 3

Kimberly-Clark 36 6,849 37 409 3 3

Kroger 4 -Lexmark International 38 204 129 40 3 3 3

Marathon Oil 43 19,590 21 327 3 3

Marsh & McLennan 29 165 133 14 3

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71

Appendix I


Scope 3



Masco 50 -Mattel 21 99 145 18MBIA 13 -McKesson 13 42 157 0 3

MeadWestVaco 61 3,467 51 531 3 3

Medco Health Solutions 21 61 152 1 3

Merck 39 1,146 77 51 3 3 3

Merrill Lynch 75 214 127 3 3 3

MGIC Investment 13 -Microsoft 42 153 136 3 3 3 3

Millipore 25 61 151 48 3 3

Molex 17 -Molson Coors Brewing 33 1,179 76 202 3 3

Monsanto 36 1,901 65 259 3 3 3

Morgan Stanley 75 212 128 3 3 3 3 3

Motorola 63 383 115 9 3 3

National Semiconductor 38 277 122 143 3 3

NCR 17 -Newmont Mining 29 3,875 48 777 3 3

News Corp. 79 582 103 23 3 3 3

Nicor 21 -Nike 54 78 148 5 3 3

Nisource 50 21,755 18 2,905 3 3 3

Northern Trust 33 66 150 15 3 3 3

Northrop Grumman 32 -NVIDIA 33 18 165 6 3 3 3

Occidental Petroleum 46 16,220 24 918 3 3

Office Depot 42 461 109 31 3 3 3

Parametric Technology 4 -Pepsi Bottling Group 25 -PepsiCo 25 -PerkinElmer 29 59 153 38 3 3

Pfizer 50 2,408 59 50 3 3 3

PG&E 54 4,144 47 330 3 3

Phelps Dodge4 39 1,257 73 106 3

Pinnacle West Capital 57 17,808 23 5,235 3 3

PMC-Sierra 21 - 3

PNC Financial Services Group 13 -PPG Industries 39 6,690 39 604 3 3

PPL 39 30,300 15 4,392 3

Praxair 50 13,107 27 1,575 3 3 3

Procter & Gamble 39 2,889 55 42Progress Energy 46 53,580 9 5,599 3

Progressive 13 -ProLogis 46 6 170 - 3 3 3

Public Service Enterprise Group 39 25,176 17 2,070 3

QUALCOMM 33 56 154 7 3 3

Questar 46 2,000 64 705Qwest Communications 17 -Raytheon 39 708 95 35 3 3

Rockwell Automation 33 169 132 30 3 3

Rockwell Collins 21 134 138 35 3 3

Safeco 17 -Sanmina-SCI 17 -Sara Lee 25 -Schering Plough 57 579 104 55 3 3

Sempra Energy 57 -Sherwin-Williams 21 616 100 79 3 3

Simon Property Group 29 575 105 167 3 3

Southern 43 145,000 3 10,100 3

Staples 60 381 116 21 3 3

Starbucks 19 -Starwood Hotels & Resorts 21 129 139 22 3

State Street 38 67 149 7 3 3 3

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Sun Microsystems 63 255 125 20 3 3

Symantec 29 42 158 8 3 3

Synovus Financial 13 -Target 33 2,634 57 44 3 3

Tektronix 29 29 161 26 3 3 3

Teradyne 25 19 163 14 3

Travelers 21 -Tyco International 14 -Unisys 33 163 134 28 3 3 3

United Parcel Services 46 7,373 35 155 3 3 3

United States Steel 39 48,500 10 3,086 3 3

United Technologies 75 2,345 61 49 3 3 3

Verizon Communications 29 7,171 36 81 3 3

Wachovia 42 -Wal-Mart Stores 71 20,389 20 59 3 3

Walt Disney 13 -Washington Mutual 17 -Wells Fargo 29 551 106 11 3

Weyerhaeuser 68 10,700 32 489 3 3

Williams Companies 25 -William Wrigley Jr. 17 220 126 47 3

Wyeth 32 1,107 79 54 3 3

Xcel Energy 64 62,209 7 6,322 3

Xerox 54 448 110 28 3 3

XTO Energy 29 3,719 50 812 3 3

Yahoo! 46 -Zimmer 13 -

Emissions are for latest period reported (usually 2006). Where no checkmark appears under Disclosure, the company did not break down emissions according toGHG Protocol Scopes 1, 2 and 3. Twenty-nine companies, listed below, provided emissions data but did not make their CDP5 responses public; their emissionsdata all included in aggregate rankings but not disclosed individually.

1Scopes 1 and 2, or total global emissions where companies reported only a total figure; units in thousand metric tonnes of CO2e.

2Rank in descending order of Scope 1 and 2 total emissions; Scope 3 reporting not included.

3Scope 1and 2 emissions totals divided by annual revenue.

4Now part of Freeport-McMoRan

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Agilent TechnologiesAllegheny Energy AmgenAT&T Ball Bank of New York Boeing Convergys CR BardDanaher FedEx Forest LaboratoriesGenzyme Goldman Sachs GroupITT

Lehman Brothers Holdings McDonaldsNavistar International Parker HannifinPrudential FinancialReynolds American Rohm and Haas Schlumberger Sealed Air SYSCO Transocean Waste ManagementWeatherford InternationalXilinx

CDP5 emissions reported but response not made public


RiskMetrics Group72

Appendix II

CDP5 Questionnaire

Carbon Disclosure Project (CDP5) Greenhouse Gas Emissions Questionnaire

We request a reply to the following questions by the 31st May 2007. Please answer the questions as comprehensivelyas possible or state the reasons why you are unable to supply the information requested. If at this stage you can onlyprovide indicative information we still welcome this, as a ‘best guess’ is more valuable to us than no response.

One of the main objectives this year is to improve the quality of the responses and standardize reporting to facilitatebetter comparison of data across and within sectors. We therefore request that answers to the following questions areprovided for your company as defined in your consolidated audited financial statements. If you are unable to respondon this basis, please explain why and detail the reporting boundaries you have used.

We recognize GHG emissions and climate change have varying impacts on sectors and companies. We havetherefore divided the questionnaire into two sections to reflect these differences. Companies are encouraged to answer both parts of the questionnaire where relevant.

Section A: For all companies to complete.

Section B: For the following companies to complete:

1. Companies with combustion installations with a rated thermal input exceeding 20 MW.

2. Companies involved in the following sectors:

• automobiles & components• aerospace & defense• chemicals• construction materials• electric utilities• energy equipment & services• oil, gas & consumable fuels• metals & mining• paper & forest products• transportation

3. Companies in any sector that may be significantly influenced by GHG emissions or climate change.

New procedures for CDP in 2007.Please use our website for direct data entry via www.cdproject.net/cdp5. If necessary, send your responseelectronically in English to the Project Coordinator at [email protected].

Your response will be made publicly available at www.cdproject.net in September 2007, unless you notify us to the contrary. If you inform us that you do not want your information disclosed, we will only use it in production of aggregate statistics.

For additional guidance and information please see the Further Information attached to this questionnaire, or refer tothe Reporting Guidance section at www.cdproject.net.

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Appendix II

Section A: For all companies to complete

1 Climate Change Risks, Opportunities and StrategyFor each question please state the time period and where possible the associated financial implications.

a Risks: What commercial risks does climate change present to your company including, but not limited to, those listed below?

i Regulatory risks associated with current and/or expected government policy on climate change e.g. emissionslimits or energy efficiency standards.

ii Physical risks to your business operations from scenarios identified by the Intergovernmental Panel on ClimateChange or other expert bodies, such as sea level rise, extreme weather events and resource shortages.

iii Other risks including shifts in consumer attitude and demand.

b Opportunities: What commercial opportunities does climate change present to your company for both existing and new products and services?

c Strategy: Please detail the objectives and targets of the strategies you have undertaken or are planning to take to manage these risks and opportunities. Please include adaptation to physical risks.

d Reduction targets: What are your emissions reduction targets and time frames to achieve them? What renewable energy and energy efficiency activities are you undertaking to manage your emissions? (This question not required if answering Section B.)

2 Greenhouse Gas Emissions Accounting1

a Methodology: Please provide the following information on your company’s emissions measurements:i The accounting year used to report GHG emissions.2ii The methodology by which emissions are calculated.iii Whether the information provided has been externally verified or audited.iv An explanation for any significant variations in emissions from year to year, e.g. due to major acquisitions,

divestments, introduction of new technologies, etc.

b Scope 1 and 2 of GHG Protocol: Direct and Indirect GHG emissions and electricity consumption.3Please complete the table below for tonnes CO2e emitted and electricity consumption:

Globally Annex B Countries

Scope 1 activity tonnes CO2e emitted

Scope 2 activity tonnes CO2e emitted

MWh of purchased electricity

Percentage of purchased MWh from renewables

c Scope 3 of GHG Protocol: Other Indirect GHG emissions. Where feasible please provide estimates for the following categories of emissions:

i Use/disposal of company’s products and services.ii Your supply chain.iii External distribution/logistics.iv Employee business travel.

1 The six main Greenhouse Gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). 2 If you are responding to CDP for the first time, please provide details where available, of emissions for the last three measurement cycles.3 For the purposes of responding to this section, please follow the World Resources Institute (WRI), World Business Council for Sustainable Development’s (WBCSD’s) Greenhouse Gas

Protocol (corporate standard revised version), details of which can be found at www.ghgprotocol.org


RiskMetrics Group74

Section B: To be completed by companies defined in the introduction to this questionnaire

3 Additional Greenhouse Gas Emissions AccountingUsing the methodology as set out in 2(a), please state your Scope 1 and 2 emissions as follows:

a Countries: For each country in which you have operations, where available.

b Facilities: For facilities covered by the EU Emissions Trading Scheme (EU ETS). Please also include the number of allowances you were issued under the applicable National Allocation Plans.

c EU ETS impact: What has been the impact on your profitability of the EU Emissions Trading Scheme?

4 Greenhouse Gas Emissions Management

a Reduction programmes: What emission reduction programs does your company have in place? Please include any reduction programs related to your operations, energy consumption, supply chain and product use/disposal.

i What is the baseline year for the emissions reduction program?ii What are the emissions reduction targets and over what period do those targets extend?iii What investment has been/will be required to achieve the targets and over what time period?iv What emissions reductions and associated costs or savings have been achieved to date as a result of the program?v What renewable energy and energy efficiency activities are you undertaking to manage your emissions?

b Emissions trading: What is your company’s strategy for trading in the EU Emissions Trading Scheme, CDM/JI projects and other trading systems (e.g. CCX, RGGI, etc), where relevant?

c Emissions intensity: Please state which measurement you believe best describes your company’s emissions intensityperformance? What are your historical and current emissions intensity measurements? What are your targets?

d Energy costs: What are the total costs of your energy consumption e.g. from fossil fuels and electric power? What percentage of your total operating costs does this represent?

e Planning: Do you estimate your company’s future emissions? If so please provide details of these estimates and summarize the methodology for this. How do you factor the cost of future emissions into capital expenditure planning? Have these considerations made an impact on your investment decisions?

5 Climate Change Governance

a Responsibility:i Which Board Committee or other executive body has overall responsibility for climate change?ii What is the mechanism by which the Board or other executive body reviews the company’s progress and status

regarding climate change?

b Individual performance: Do you provide incentive mechanisms for managers with reference to activities relating to climate change strategy, including attainment of GHG targets? If so, please provide details.

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Appendix II

3M AQ AQ*Abbott Laboratories AQ AQ*ACE NR AQ*ADC Telecommunications NR AQ* (NP)Adobe Systems AQ AQ*Advanced Micro Devices NR AQ*AES AQ AQ*Aetna AQ AQ*Aflac DP NRAgilent Technologies IN AQ* (NP)Air Products & Chemicals AQ AQ*Alcoa AQ AQ*Allegheny Energy DP AQ* (NP)Allegheny Technologies IN AQ* (NP)Allergan AQ AQ*Allied Waste Industries NR INAllstate NR DPAlltel AQ AQ* (NP)Altera DP AQAltria Group DP AQ*Amazon.com NR NRAmbac Financial Group NR NRAmeren IN DPAmerican Electric Power AQ AQ*American Express AQ AQ*American International Group AQ AQ*American Standard AQ AQ*Ameriprise Financial NR DPAmerisourcebergen NR NRAmgen AQ AQ* (NP)Anadarko Petroleum AQ AQ*Analog Devices AQ NRAnheuser-Busch IN AQ*Aon AQ AQApache AQ AQApartment Investment & Management NR DPApollo Group NR NRApple Computers AQ NRApplera AQ DPApplied Materials AQ AQ*Archer Daniels Midland DP DPArchstone-Smith Trust DP DPAshland AQ AQ*AT&T AQ AQ* (NP)Autodesk NR NRAutomatic Data Processing IN INAutoNation NR DP

Company CDP4 CDP5

Appendix III

S&P500 CompanyResponses to CDP4 & 5


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Key:

AQ Answered QuestionnaireIN Provided Information (but did not

answer questions) DP Declined to Participate NR No ResponseNI Not in SampleNP Response Not Public

AutoZone NR NRAvaya Communications AQ AQ* (NP)Avery Dennison AQ AQ*Avon Products AQ AQ*Baker Hughes AQ AQ* (NP)Ball NR AQ* (NP)Bank of America AQ AQ*Bank of New York AQ AQ* (NP)Barr Pharmaceuticals NI NRBausch & Lomb AQ DPBaxter International AQ AQ*BB&T AQ AQ*Bear Stearns NR NRBecton Dickinson AQ AQ*Bed Bath & Beyond IN AQ*Bemis NR AQ*Best Buy AQ AQ* (NP)Big Lots NR DPBiogen Idec NR NRBiomet NR DPBJ Services NR NRBlack & Decker DP AQ*BMC Software AQ AQ* (NP)Boeing AQ AQ* (NP)Boston Properties NI NRBoston Scientific IN AQ*Bristol Myers Squibb AQ AQ*Broadcom NR DPBrown-Forman NR NRBrunswick NR DPBurlington Northern Santa Fe AQ AQCA AQ AQ*Campbell Soup NR DPCapital One Financial DP INCardinal Health AQ DPCarnival AQ AQ*Caterpillar AQ AQ*CB Richard Ellis Group NI AQ*CBS NI DPCelgene NI NRCenterpoint Energy AQ AQ*Centex IN NRCenturyTel NR DPCharles Schwab IN AQ*Chesapeake Energy NI NRChevron AQ AQ*Chicago Mercantile Exchange Hldgs NI AQ* (NP)Chubb DP DPCIENA AQ AQ* (NP)CIGNA IN AQCincinnati Financial IN AQ* (NP)Cintas NR DPCircuit City Stores NR NRCisco Systems AQ AQ*CIT Group NR NRCitigroup AQ AQ*Citizens Communications NR AQ*Citrix Systems AQ NRClear Channel Communications AQ NRClorox NR DPCMS Energy DP AQ*Coach NR DPCoca Cola AQ AQ*

Company CDP4 CDP5

Coca-Cola Enterprises AQ AQ*Cognizant Technology Solutions NI NRColgate-Palmolive AQ AQ*Comcast AQ AQ*Comerica NR AQ*Commerce Bancorp NI NRCompass Bancshares NR NRComputer Sciences NR NRCompuware NR NRComverse Technology NR AQ*ConAgra Foods NR NRConocoPhillips AQ AQ*CONSOL Energy NI NRConsolidated Edison AQ AQ*Constellation Brands NR DPConstellation Energy Group AQ AQ*Convergys AQ AQ* (NP)Cooper Industries AQ AQ*Corning AQ AQ*Costco Wholesale NR DPCountrywide Financial DP DPCoventry Health Care NR NRCR Bard AQ AQ* (NP)CSX NR NRCummins AQ AQ*CVS Caremark NR AQ* (NP)Danaher AQ AQ* (NP)Darden Restaurants IN NRDean Foods NI NRDeere IN INDell AQ AQ*Devon Energy AQ AQ*Dillard’s NR NRDIRECTV Group DP DPDollar General NR DPDominion Resources IN INDover NR DPDow Chemical AQ AQ*Dow Jones NR AQ*DR Horton NR INDTE Energy AQ AQ*Duke Energy AQ AQ*Dynegy IN INE*TRADE Financial NR NRE. W. Scripps NI INE.I. du Pont de Nemours AQ AQ*Eastman Chemical AQ AQ*Eastman Kodak AQ AQ*Eaton AQ AQ*Ebay AQ AQ*Ecolab AQ AQ*Edison International IN AQ*El Paso DP AQ*Electronic Arts DP DPElectronic Data Systems NR AQ*Eli Lilly AQ AQ*Embarq NI AQ*EMC IN AQ*Emerson Electric AQ AQ*Entergy AQ AQ*EOG Resources DP AQEquifax NR DPEquity Residential NR NR

Company CDP4 CDP5

77

Appendix III

Estee Lauder NI NRExelon AQ AQ*Express Scripts NR NRExxon Mobil AQ AQ*Family Dollar Stores NR NRFannie Mae DP DPFederated Department Stores IN NRFederated Investors AQ AQFedEx AQ AQ* (NP)Fidelity National Information Svcs NI AQ*Fifth Third BanCorp NR AQ*First Data NR DPFirst Horizon National AQ AQ*FirstEnergy AQ AQ*Fiserv AQ AQ* (NP)Fluor NR AQFord Motor AQ AQ*Forest Laboratories AQ AQ* (NP)Fortune Brands IN DPFPL Group AQ AQ*Franklin Resources NR DPFreddie Mac IN AQ*Freeport-McMoRan Copper & Gold NR AQ*Gannett DP DPGap AQ AQGeneral Dynamics IN AQ*General Electric AQ AQ*General Mills AQ AQ*General Motors AQ AQ*Genuine Parts NR DPGenworth Financial NI AQ* (NP)Genzyme AQ AQ* (NP)Gilead Sciences AQ AQ*Goldman Sachs AQ AQ* (NP)Goodrich NR NRGoodyear Tire & Rubber AQ AQ* (NP)Google NR AQ* (NP)H&R Block AQ AQ*H.J. Heinz AQ AQ*Halliburton AQ AQ*Harley-Davidson NR DPHarman International Industries NI DPHarrah’s Entertainment NR NRHartford Financial Services Group IN AQ*Hasbro NR NRHealth Management Associates NR AQ*Hercules NR INHershey NR NRHess AQ AQ*Hewlett-Packard AQ AQ*Hilton Hotels NR NRHome Depot AQ AQ* (NP)Honeywell International IN INHospira AQ AQ*Humana AQ AQ*Huntington Bancshares AQ AQ* (NP)IAC/InterActiveCorp NI DPIllinois Tool Works AQ AQ* (NP)IMS Health NR NRIngersoll-Rand IN AQ*Intel AQ AQ*International Business Machines AQ AQ*International Flavors & Fragrances NR NRInternational Game Technology NR NRInternational Paper AQ AQ*Interpublic Group NR INIntuit NR NRITT AQ AQ* (NP)Jabil Circuit NR AQ* (NP)Janus Capital Group DP AQ* (NP)JC Penney AQ AQ*JDS Uniphase DP DPJohnson & Johnson AQ AQ*Johnson Controls AQ AQ*Jones Apparel Group NR NRJP Morgan Chase AQ AQ*Juniper Networks AQ AQ*KB Home IN INKellogg AQ AQ*

Company CDP4 CDP5

KeyCorp NR NRKeyspan AQ AQ*Kimberly-Clark AQ AQ*Kimco Realty NI NRKing Pharmaceuticals NR NRKLA-Tencor NR NRKohls NR NRKroger IN AQ*L-3 Communications Holdings NR NRLaboratory Corp. of America Holdings NR NRLegg Mason NI DPLeggett & Platt IN DPLehman Brothers Holdings DP AQ* (NP)Lennar NR NRLexmark International AQ AQ*Limited Brands NR NRLincoln National DP DPLinear Technology NR NRLiz Claiborne AQ AQ* (NP)Lockheed Martin IN INLoews NR NRLowe’s IN DPLSI Logic NR AQM&T Bank NR AQ* (NP)Manor Care NR NRMarathon Oil AQ AQ*Marriott International AQ NRMarsh & McLennan AQ AQ*Marshall & Ilsley AQ AQ* (NP)Masco AQ AQ*Mattel NR AQ*Maxim Integrated Products AQ NRMBIA AQ AQ*McCormick NR AQ* (NP)McDonalds AQ AQ* (NP)McGraw-Hill IN INMcKesson IN AQ*MeadWestVaco AQ AQ*Medco Health Solutions IN AQ*Medtronic AQ AQ* (NP)Mellon Financial AQ DPMerck AQ AQ*Meredith DP DPMerrill Lynch AQ AQ*Metlife DP NRMGIC Investment AQ AQ*Micron Technology NR NRMicrosoft AQ AQ*Millipore AQ AQ*Molex IN AQ*Molson Coors Brewing AQ AQ*Monsanto IN AQ*Monster Worldwide NR NRMoodyÕs IN AQ* (NP)Morgan Stanley AQ AQ*Motorola AQ AQ*Murphy Oil NR NRMylan Laboratories NR NRNabors Industries NR NRNational City AQ AQ* (NP)National Oilwell Varco NR NRNational Semiconductor NR AQ*Navistar International AQ AQ* (NP)NCR AQ AQ*Network Appliance NR NRNew York Times AQ NRNewell Rubbermaid NR AQ* (NP)Newmont Mining AQ AQ*News IN AQ*Nicor AQ AQ*Nike AQ AQ*Nisource AQ AQ*Noble AQ DPNordstrom NR NRNorfolk Southern IN DPNorthern Trust AQ AQ*Northrop Grumman AQ AQ*Novell NR NRNovellus Systems AQ NR

Company CDP4 CDP5

Appendices

RiskMetrics Group78

Starwood Hotels & Resorts Wldwide NR AQ*State Street AQ AQ*Stryker AQ NRSun Microsystems NR AQ*Sunoco NR NRSunTrust Banks IN DPSUPERVALU NR NRSymantec NR AQ*Synovus Financial AQ AQ*SYSCO IN AQ* (NP)T. Rowe Price Group AQ AQ* (NP)Target AQ AQ*Teco Energy AQ INTektronix AQ AQ*Tellabs NR NRTemple-Inland NR DPTenet Healthcare IN INTeradyne NR AQ*Texas Instruments AQ AQ* (NP)Textron NR NRThermo Fisher Scientific NI NRTiffany AQ AQ* (NP)Time Warner IN INTJX NR INTorchmark NR NRTransocean AQ AQ* (NP)Travelers AQ AQ*Tribune NR INTXU AQ NRTyco International IN AQ*Tyson Foods DP DPU.S. BanCorp AQ NRUnion Pacific IN NRUnisys AQ AQ*United Parcel Services AQ AQ*United States Steel AQ AQ*United Technologies AQ AQ*UnitedHealth Group AQ AQ* (NP)UnumProvident AQ NRUST NR NRValero Energy AQ NRVerisign NI NRVerizon Communications AQ AQ*VF NR NRViacom AQ AQ* (NP)Vornado Realty Trust NR NRVulcan Materials NR NRW.W. Grainger AQ INWachovia AQ AQ*Walgreens IN INWal-Mart Stores AQ AQ*Walt Disney AQ AQ*Washington Mutual AQ AQ*Waste Management AQ AQ* (NP)Waters NR DPWatson Pharmaceuticals NR NRWeatherford International NR AQ* (NP)WellPoint DP DPWells Fargo AQ AQ*Wendy’s International NR NRWestern Union NI DPWeyerhaeuser AQ AQ*Whirlpool NR NRWhole Foods Market NI INWilliam Wrigley Jr. AQ AQ*Williams Companies AQ AQ*Windstream NI DPWyeth AQ AQ*Wyndham Worldwide NI AQ* (NP)Xcel Energy AQ AQ*Xerox AQ AQ*Xilinx AQ AQ* (NP)XL Capital NR NRXTO Energy NR AQ*Yahoo! NR AQ*Yum! Brands NR NRZimmer AQ AQ*Zions Bancorporation AQ AQ* (NP)

Company CDP4 CDP5

1Now owned by Freeport McMoRan Copper & Gold

*Included in report analysis. A few companies alsosubmitted amended responses after the analysiscut-off date; these and other late responses, ifpublic, appear on the CDP website.

Nucor NR DPNVIDIA NR AQ*Occidental Petroleum AQ AQ*Office Depot AQ AQ*OfficeMax NR NROmnicom Group AQ AQ* (NP)Oracle AQ AQPACCAR NR NRPactiv NR DPPall NR DPParametric Technology NR AQ*Parker Hannifin AQ AQ* (NP)Patterson NR NRPaychex DP NRPeabody Energy NI INPepsi Bottling Group NR AQ*PepsiCo AQ AQ*PerkinElmer AQ AQ*Pfizer AQ AQ*PG&E AQ AQ*Phelps Dodge1 AQ AQ*Pinnacle West Capital AQ AQ*Pitney Bowes NR DPPlum Creek Timber NR NRPMC-Sierra NR AQ*PNC Financial Services Group AQ AQ*PPG Industries AQ AQ*PPL AQ AQ*Praxair AQ AQ*Principal Financial Group NR NRProcter & Gamble AQ AQ*Progress Energy AQ AQ*Progressive DP AQ*ProLogis AQ AQ*Prudential Financial DP AQ* (NP)Public Service Enterprise Group AQ AQ*Public Storage NR NRPulte Homes NR NRQLogic NR DPQUALCOMM AQ AQ*Quest Diagnostics NR NRQuestar NI AQ*Qwest Communications International AQ AQ*R.R. Donnelley & Sons NR NRRadioShack NR DPRaytheon AQ AQ*Regions Financial DP NRReynolds American NR AQ* (NP)Robert Half International IN INRockwell Automation NR AQ*Rockwell Collins AQ AQ*Rohm and Haas AQ AQ* (NP)Rowan NR NRRyder System IN DPSafeco AQ AQ*Safeway NR NRSanDisk NI DPSanmina-SCI AQ AQ*Sara Lee AQ AQ*Schering Plough AQ AQ*Schlumberger AQ AQ* (NP)Sealed Air IN AQ* (NP)Sears Holdings DP DPSempra Energy AQ AQ*Sherwin-Williams AQ AQ*Sigma-Aldrich AQ NRSimon Property Group AQ AQ*SLM DP DPSmith International NI NRSnap-on NR NRSolectron NR NRSouthern AQ AQ*Southwest Airlines IN DPSovereign Bancorp AQ NRSprint Nextel IN NRSt. Jude Medical DP DPStanley Works NR NRStaples AQ AQ*Starbucks AQ AQ*

Company CDP4 CDP5

In addition to the support of the signatories, CDP has been made possible through the generous funding of:

Esmée Fairbairn Foundation, Food and Rural Affairs, Martin Smith Foundation, OakFoundation, Polden Puckham Charitable Foundation, Rufus Leonard, The City BridgeTrust, The Department for Environment Food and Rural Affairs, The Nathan CummingsFoundation and WWF.

CDP would like to thank Merrill Lynch for sponsoring our expansion to the S&P500companies in 2007 and for contributing towards this report.

Acknowledgements

RiskMetrics is grateful to all the guest authors for the generous contributions of theirtime, and to CDP staff for their leadership and dedication to this important initiative.

Doug Cogan and Heidi Welsh are the lead authors of this study. Cogan led the study’sanalysis and devised the scoring methodology for the Climate Governance Index. Welshbuilt and managed the database used to analyze CDP responses and operationalizedthe scoring system. Peter DeSimone authored the section on greenhouse gas emissionsmanagement. Geri Kantor authored the section on climate risk disclosure. Alan Soteloand Hazel Lalas led Rainier Quilao, Joel Yamut and Niko Santos in collecting Form 10-Kclimate risk disclosure information. Meg Voorhes and Susan Williams analyzed CDP5responses; Voorhes also edited sections of the report.

RiskMetrics Group is a leading provider of risk management, corporate governance andfinancial research solutions. It offers a multi-dimensional view into the risk profile of acompany, enabling investors to more effectively manage multiple classes of interrelatedrisk. The company is headquartered in New York City with more than 1,000 employeesacross 23 offices worldwide. For more information on RiskMetrics Group, please visitwww.riskmetrics.com.

The Carbon Disclosure ProjectÕs sincere thanks are extended to the following:Brooklyn Bridge, www.tbli.org • California Climate Action Registry,www.climateregistry.org • CERES, www.ceres.org • Clifford Chance,www.cliffordchance.com • Enhanced Analytics Initiative, www.enhancedanalytics.com • GHG Protocol, www.ghgprotocol.org • Global Reporting Initiative,www.globalreporting.org • Institute for Sustainable Communication,www.www.sustaincom.org • Investor Network on Climate Risk, www.incr.com • Rockefeller Philanthropy Advisors, www.rockpa.org • The Climate Group,www.theclimategroup.org • United Nations Environment Programme Finance Initiative,www.unepfi.net • U.S. EPA Energy Star, www.energystar.gov • U.S. EPA ClimateLeaders, www.epa.gov/stateply/ • World Economic Forum GHG Register,www.weforum.org/ghg • World Resources Institute, www.wri.org

art270, Inc. is a full-service graphic design studio located outside of Philadelphia,Pennsylvania. With more than 20 years experience in the industry, art270 has risen to the top, working with billion-dollar clients and the smallest non-profits. art270 provides a variety of services from print to web to branding. Visit us at www.art270.com.

Stora Enso is an integrated paper, packaging, and forest products company thatproduces publication papers, graphic papers, packaging boards and wood products, all areas in which the company is a global market leader. Stora Enso kindly donated the paper for printed copies of this report.

This report is printed on Stora Enso’s Centura Silk Text and Cover which areFSC certified coated premium sheets containing 10% post consumer fiber. All of the pulp is bleached using an elemental chlorine free process (ECF).Portions of the pulp are bleached with an enhanced elemental chlorine freeprocess (E-ECF) utilizing oxygen delignification and or first stage ozonebleaching. The post consumer recycle content is bleached with a processchlorine free (PCF) method.

Using emissions factors provided by the USOffice of the Federal Environmental Executive,the Institute for Sustainable Communicationestimates that the production of the forestproducts used for this CDP Report generated 7.2 metric tonnes of carbon dioxide-equivalentgreenhouse gas emissions. Visitwww.sustaincom.org/CDP for more information.

James CameronChairman

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Jeremy [email protected]

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Brittany ChamberlinProject Officer – [email protected]

Contacts: Carbon Disclosure Project

Joanna [email protected]

James HowardSenior Project [email protected]

Alicia AyarsProject [email protected]

Nick SilverBusiness [email protected]

Vicky Grinnell-WrightSupply Chain [email protected]

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Take SueyoshiDirector – [email protected]

Carbon Disclosure Project —USA437 Madison Avenue37th FloorNew York [email protected]: +1 (646) 270 3675

Carbon Disclosure Project40 Bowling Green LaneLondon, EC1R 0NEUnited [email protected]: +44 (0) 207 970 5667Fax: +44 (0) 207 691 7316

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Doug CoganDirectorClimate Change Research+1 603 675 [email protected]

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RiskMetrics Group

Andrew DlugoleckiAndlug Consulting

Alan BrownCarbon Disclosure Project

Bob MonksLens

Caroline WilliamsNathan Cummings Foundation

Colin MaltbyCarbon Disclosure Project

CDP Advisory Board

Meg VoorhesDirectorSocial Issues Service+1 202 833 [email protected]

Susan WilliamsResearch Manager

Alan SoteloSenior Analyst

Hazel LalasSenior Analyst

Rainier QuilaoResearch Analyst

Joel YamutResearch Analyst

Niko SantosResearch Analyst

Head OfficeRiskMetrics GroupOne Chase Manhattan Plaza44th FloorNew York, NY 10015

Cheryl GustitusCommunications+1 301 556 [email protected]

Peter DeSimoneResearch ManagerSocial Issues Service+1 202 833 [email protected]

Geri KantorSenior Research AnalystESG Analytics+1 301 556 [email protected]

Doug BauerRockefeller Philanthropy Advisors

Eckart WintzenEx’tent

Martin WhittakerMission Point Capital Partners

Robert NapierCarbon Disclosure Project

Jane AmbachtsheerMercer

Chris SchroderCarbon Disclosure Project

Fiscal agent and sponsor liaisonRockefeller Philanthropy Advisors437 Madison AvenueNew York 10022United States

The contents of this report may be used by anyone providing acknowledgement is given to Carbon Disclosure Project/RiskMetrics Group. The information herein has beenobtained from sources, which the authors and publishers believe to be reliable, but the authors and publishers do not guarantee its accuracy or completeness. Theauthors and publishers make no representation or warranty, express or implied, concerning the fairness, accuracy, or completeness of the information and opinionscontained herein. All opinions expressed herein are based on the authors and publishers judgment at the time of this report and are subject to change without notice dueto economic, political, industry and firm-specific factors. The authors and publishers and their affiliated companies, or their respective shareholders, directors, officersand/or employees, may have a position in the securities discussed herein. The securities mentioned in this document may not be eligible for sale in some states orcountries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates. © 2007 Carbon Disclosure Project.

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