June 08, 2009
S&P 500 Companies Face Financial Risks Under Cap-and-Trade Legislation
by Robert Kropp
Report by the Investor Responsibility Research Center Institute and Trucost finds the utilities
sector to be especially vulnerable, and advises investors to incorporate climate change risks into
their investment strategies.
Direct emissions in carbon dioxide equivalents (CO2e) by companies in the S&P 500 were greater than
the emissions caused by all cars, buses, trucks, and aircraft in the US in 2007. If emissions from
companies that are direct suppliers to S&P 500 companies are included, the total doubles, to 4,307
million tons of CO2e. 59% of greenhouse gases (GHG) from companies in the S&P 500 were emitted by
the utilities sector.
A recent report, commissioned by the Investor Responsibility Research Center
Institute (IRRCi) and prepared by Trucost, analyzes the effects of a cap-and trade program
requiring the purchase of carbon emission credits on the earnings of companies in the S&P 500.
The report, entitled Carbon Risks and Opportunities in the
S&P 500, finds that carbon costs for companies in the S&P 500 will total over $92.8 billion in
2012, if Trucost's estimate of a carbon market price of $28.24 is accurate. If the 34 companies in
the utilities sector had to pay a market price of $28.24 for their GHG emissions, their earnings
would be almost halved.
According to the report, a market price of $28.24 would lead to
average costs to companies of between 1% and 117% of earnings, and over 5.5% of combined earnings
before interest, taxes, depreciation, and amortization (EBITDA). The combined earnings of companies
in the utilities sector could fall by an average of 45%. The report finds that five companies in
the utilities sector—Exxon Mobil, American Electric Power, Southern Company, Duke Energy, and
AES—account for more than 30% of direct GHG emissions from operations of the S&P 500.
three companies—Allegheny Energy, American Electric Power and Ameren—the report finds that carbon
costs could wipe out all earnings.
Because there is currently no charge to companies for
GHG emissions, carbon costs are not reflected in their financial statements. However, cap-and-trade
legislation would require that companies make carbon costs explicit. Incorporating the costs of
emissions would increase the urgency for investors to assess the material risks of climate change
in their investments, incorporate carbon disclosure and performance into active ownership
practices, and evaluate carbon exposure in their investment strategies.
program director of IRRCi, said, "Two-thirds of S&P 500 companies have inadequate greenhouse gas
emissions disclosures. Investors would be wise to watch closely as the Congress continues its
consideration of the American Clean Energy and Security Act of 2009. The legislation is considered
highly complex, and could have profound, long-lasting impacts on company balance sheets."
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