Climate Change: Seizing the OpportunitiesThe challenges and risks that climate change presents are enormous, but where there is challenge, there is the potential for growth. Companies are already finding space for new products and services within an increasingly "green" economy, and the momentum of this trend will only increase as the US and other countries embrace a low-carbon future. With the financial and competitive risks that climate change brings, forward-looking companies are finding the potential for enormous business opportunities as well. Clean technology, renewable energy sources, carbon emissions trading markets and energy efficiency efforts are the most vivid examples of these opportunities: the growth of global markets for renewable energy, for example, hit $50 billion in 2005, and the market is projected to eclipse $150 billion by 2015. Companies are seizing on opportunities for creating new low-carbon energy-efficient products — GE's "ecomagination" program, for example, is expected to have sales of $20 billion by 2010. But companies in other sectors are reaping the benefits, too—banks, insurers, and others in the financial industry are also finding innovative ways of proving that for business, "green is green." Climate change, like any momentous challenge, provides opportunities for growth for companies willing to be leaders. Hand in hand with the financial and competitive risks of climate change come opportunities to increase shareholder value, increase brand value and enhance competitiveness and profitability. The Electric Power IndustryConsider the electric power industry. The electric power industry is arguably the most susceptible to the financial risks associated with carbon emission controls. With federal legislation on carbon dioxide likely in the very near future, coal-fired power plants and other high CO2-emitting power sources could face costly compliance costs. And given the increasingly visible presence of renewable energy — in the U.S., 20 states have adopted Renewable Portfolio Standards (RPS), policies mandating that an increasing percentage of a state's energy come from renewable sources by a certain date, and there has been discussion of a federal RPS as well — the electric power industry is facing significant pressure from climate change and the shift to a low-carbon economy. However, forward-looking companies have recognized that if they act early to diversify their investments into renewable energy, they stand to have a competitive advantage over their competitors due to the growing demand for low carbon products and services such as wind, solar energy and biofuels. American Electric Power, the largest emitter of carbon dioxide in the United States, committed to install the first commercial scale Carbon Capture and Sequestration (CCS) system on two existing coal power plants in anticipation of emerging carbon regulations. (According to a recent MIT study, CCS technology will be vital to ensure the economic viability of coal should carbon emission controls be adopted.) And PG&E, by investing billions in energy efficiency programs, has helped California avoid building more than 12,000 megawatts of new generating capacity over the past quarter century, at a net benefit to California citizens of more than $5 billion in the last decade alone. Oil & Gas The oil and gas industry, too, faces risks from climate change: by virtue of its carbon-intensive products and the long horizons of its capital investments, it stands to be especially exposed to financial risks arising from climate change. Petroleum and natural gas are the largest sources of carbon dioxide emissions in America, and so the threat of mandatory federal carbon legislation is a real risk for the industry, as is the consequent recent upsurge in ethanol and renewable fuels. Some companies are choosing to see these trends not as threats but as sources of new business opportunity. U.S. demand for ethanol and other biofuels is expected to double in the next four years, a $28 billion opportunity, and the giants of the oil industry are taking notice: BP now invests nearly $1 billion per year in renewable energy development and has committed $8 billion, while Chevron and ConocoPhillips have committed to invest over $100 million annually in clean energy technologies and alternative fuels. No one can know for certain the way the future energy economy will unfold, but having positioned themselves to take advantage of new opportunities, these companies stand to benefit from the coming changes instead of simply reacting retroactively to the impacts of climate change risk. The Insurance IndustryThe risks and opportunities of climate change are not unique to energy intensive industries, however. Climate change also impacts the financial service sector. The increasing incidence of extreme weather events, for example, poses significant challenges to the insurance industry. Record insured losses, rating downgrades, coverage pullbacks and class-action lawsuits are just some of the impacts the insurance industry has suffered due to hurricanes and other extreme weather. But while some insurers have responded to rising catastrophic losses by withdrawing from at-risk areas and raising insurance rates, some forward-looking insurers have begun developing new products and services that are generating profits by preventing losses, while maintaining insurability and protecting their customers from extreme weather-related losses — and also reducing greenhouse gas emissions. Examples of such insurer activities include: - Insurer-initiated hurricane loss prevention methods employed at nearly 500 locations by insurer FM Global, which avoided an estimated $500 million in property losses from Hurricane Katrina in 2005, after customer investments of only $2.5 million. According to FM Global, its customers sustained eight times less property damage than those choosing not to implement the hurricane loss prevention recommendations, and the $500 million savings helped make the company profitable in a year when few insurers were.
- Fireman's Fund Insurance launching first-of-its-kind 'green' coverage, which includes premium credits for owners of loss-resistant green buildings, as well as options for building upgrades to the popular LEED (Leadership in Energy and Environmental Design) standards following a loss.
- Carbon emission credit guarantees and other new renewable energy-related insurance products from Marsh, the world's largest insurance broker, and AIG, the world's largest insurer, and other insurers, which are allowing more companies and investors to participate in carbon-offset projects and burgeoning carbon emission trading markets.
These programs, intended to minimize losses from future catastrophic events, are more than symbolic "greenwashing" or charitable activities; they are, as the FM Global example above makes clear, new profit centers for insurers. The Banking Industry The banking industry, like the insurance industry, is finding itself challenged by climate change. The viability of financing projects in high-emitting sectors, such as new coal-fired power plants, is growing increasingly questionable, and funding such projects exposes banks to potential long-term financial and reputational risks. Anticipated mandatory federal carbon regulations will create a cost for carbon dioxide emissions, reducing the profitability of high-emitting projects, and threatening returns on financial investments. However, banks are finding that in taking advantage of potential market-based, environmentally-beneficial business opportunities arising from carbon regulation, they can limit risk and gain a competitive advantage in emerging markets. Banks are beginning to maximize investment return through energy and resource efficiency and capitalize on increasing demand for renewable energy sources by financing such projects. In 2007, for example, Bank of America and Citigroup announced $20 billion and $50 billion programs, respectively, to support the growth of environmentally sustainable business activity to address global climate change. Both decade-long initiatives include a major focus on lending, investing and other activities to support 'green' economic growth, whether in building design, carbon emissions trading or low-carbon technologies. As a result, Bank of America and Citigroup have positioned themselves well for emerging regulations on carbon. ConclusionThe magnitude of global climate change is overwhelming, and the risks it poses to business are vast. However, forward-looking companies are finding that there are also enormous business opportunities inherent in this change, precisely because of the enormity of the challenge. New markets, new products and new services are already appearing, and the opportunities for cross-pollination across sectors and industries are increasing as the economy begins to react. Thus, for businesses prepared to be leaders in this new economy, reacting to climate change becomes an offensive, not a defensive, strategy, and an opportunity for rich new growth. Further Reading:
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