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GOVERNANCE - Of Ebitda and Emissions

Public companies recognize that climate change can have a big effect on their market values, but they're not disclosing enough of what they know to investors.

N SEPTEMBER A GROUP CALLED THE CARbon Disclosure Project released the results of a survey that said 81 percent of companies listed in the Standard & Poor's 500 index believe that climate change poses commercial risks for their businesses. Just 29 percent, however, have implemented greenhouse-gas-reduction programs with specific targets and time lines. And just a handful bothered in annual and quarterly shareholder reports to address the impact of environmental factors on operations.

"While most S&P 500 respondents can identify regulatory and physical risks associated with climate change, few have attempted to quantify these risks in dollar terms or have discussed them in securities filings," reads a summary of the survey in the CDP's annual report. The CDP represents 315 institutions with some $41 trillion under management and aims to improve corporate environmental disclosure.

The CDP isn't the only group concerned about giving investors more information on how climate change will affect corporate profits. In late September the activist organization Environmental Defense joined 22 institutional investors in the U.S. and Europe that collectively manage $1.5 trillion in assets, including the California Public Employees' Retirement System and London-based F&C Asset Management, in petitioning the Securities and Exchange Commission, urging it to issue environmental-disclosure guidance to public companies.

Investors are pushing for more disclosure because environmental issues affect profits. Corporate market values can be hurt by litigation and regulation related to carbon emissions. And the effects of climate change can be many for companies whose profits are sensitive to weather and energy prices, such as utilities, transportation concerns and manufacturers.

Recent events have emboldened shareholders. In February a working group of the Intergovernmental Panel on Climate Change, a United Nations­sponsored entity that last month shared the Nobel Peace Prize with former U.S. vice president Albert Gore, reported that "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." Two months later the U.S. Supreme Court ruled that greenhouse gases are a pollutant that may be regulated by the Environmental Protection Agency, countering Bush administration policy. And in September, President Bush asserted that the U.S. "must lead the world to produce fewer greenhouse gas emissions."

Bush's address showed that even the toughest skeptics of climate change had begun to come around. "You know the middle road has moved," says Paul Dickinson, CEO of the CDP.

Corporations are slowly beginning to improve disclosure. Non-U.S. companies take the issue far more seriously. Seventy-nine percent of companies listed in the FT500 index of the biggest publicly traded global enterprises disclosed their levels of greenhouse gas emissions to the CDP, compared with 65 percent of S&P 500 companies. In the U.S., Wal-Mart Stores is leading the charge for improved disclosure, through a planned partnership with the CDP through which it will urge suppliers to report emissions levels, along with emissions reduction targets and climate change strategies.

Few other companies are taking the initiative, prompting investors to press the SEC for action. "The SEC in general has repeatedly emphasized the importance of full disclosure," says Sean Donahue, a lawyer representing Environmental Defense. "They haven't said anything about climate risk. It's a relatively new issue. We are looking for a statement from the SEC that everyone must disclose."

But the commission is in no hurry to address the issue. "A response will be out in due course," says an SEC spokesman, adding that it hasn't set a timetable for acting on the investor group's petition.