"The Climate Economy"-CEOs and Investors Take Notice
Friday, October 30, 2009SUSIE GHARIB: With sweeping legislation moving forward in Congress and negotiations on a new global treaty underway, climate change is very much in the news and it is becoming a top concern for CEOs and investors. Tonight as we continue our series, "The Climate Economy," Darren Gersh reports on what climate change could mean for the bottom line.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's hard to imagine one ton of an invisible gas like carbon dioxide floating in the air. But the price of sending CO2 into the atmosphere is becoming much easier to understand. A reasonable estimate is somewhere around $20 a ton. Now, multiply that by the roughly four billion tons of greenhouse gases the companies in the S&P 500 emit every year.
ANANT SUNDARAM, FINANCE PROF., TUCK SCHOOL OF BUSINESS: Think of that as the collective check that the CFO of the S&P 500 has to fork over to society, somewhere between $60 and $80 billion annually.
GERSH: Finance professor Anant Sundaram teaches what may be the nation's first MBA course on climate change, which is why he is translating carbon costs into numbers future CEOs can relate to. If you do the financial math, the nation's largest companies together are facing a liability of roughly $1 trillion.
SUNDARAM: This is a massive sum. To put that number into perspective, on the upper end, that is close to one tenth of the entire market cap of the Standard & Poor's 500 group of companies.
GERSH: Which is why some corporations and investors are beginning to track carbon emissions as an indicator of financial risk. And for 40 percent of the S&P 500 companies, the risks are low, affecting 1 percent or less of their earning. But for utilities, especially those relying on coal, carbon costs could cut the sector's profitability almost in half. Heavy energy users like mining companies and steel makers could also be hit hard, followed by food makers and chemical companies. That's the bottom line of a study commissioned by the Investors Responsibility Research Center Institute. Its program director, Jon Lukomnik, says the potential profit hit from climate change means investors will pay more attention to what's known as carbon intensity.
JON LUKOMNIK, PROGRAM DIRECTOR, IRRC INSTITUTE: It costs different companies different amounts of carbon to produce a dollar of revenue. And once you have to pay for that as an input, much like you have to pay for electricity or steel or brain power, it is going to affect the cost structure and therefore the profitability of companies and it's going to affect them differently.
GERSH: Many companies understand that and they are already looking at ways to reduce their carbon emissions. And that's already affecting decisions about new investments in plants and equipment. Jim Connaughton headed up climate policy under President George W. Bush. He says climate change may not have a dramatic impact on the overall amount of new investments companies make, but it will shift where those investments are made.
JIM CONNAUGHTON, EXEC. VICE PRES., CONSTELLATION ENERGY: Well, we have to replace the old coal-fired power plants with something and so, if we are going to spend money on new power plants, the question is what kind of power plant. It will be a lot of money, but we are going to have to spend it anyway.
GERSH: Most of the plans addressing climate change propose a gradual ratcheting up of carbon costs and most economists agree that will produce a manageable hit to the corporate bottom line. The challenge corporate America faces is becoming as creative at controlling carbon as it's been at burning it. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
