The global mean temperature has increased by around one degree Fahrenheit since the late nineteenth century. Of the 10 hottest years on record, seven occurred within the last decade, and the International Panel on Climate Change (IPCC)–which represents the views of hundreds of scientists in 120 countries–blames the elevated temperatures on the dramatic increase in concentrations of carbon dioxide and other so-called "greenhouse gases" (GHG) generated by the burning of fossil fuel. These gases–which stay in the upper atmosphere for decades–are trapping the sun's heat, essentially baking the planet. Even in the U.S., among the countries most reluctant to acknowledge the warming trend, a panel from the National Academy of Sciences in 2001 reviewed and endorsed this finding.

In other words, whether you call it global warming, climate change or the greenhouse effect, experts are in almost unanimous agreement that the phenomenon is real and, many believe, accelerating. The only questions left to be answered: How rapidly will temperatures continue to climb? What can humans do to stop and reverse the trend? And probably the most problematic, will we do anything at all?

While scientists started taking climate change seriously in the 1970s, the business community spent most of that and the next decades railing against the imposition of rigorous greenhouse gas emissions limits. In recent years, however, companies are coming to recognize that climate change could end up being even more destructive to their business than tough standards, and some unlikely corporate champions are switching sides.

The most recent corporate defection could prove to be among the most important. General Electric Co., one of the planet's largest manufacturers, issued a very public endorsement of the need for emissions controls. In May, in a speech only blocks from the White House at George Washington University, CEO Jeffrey Immelt unveiled GE's Ecomagination initiative, in which the company pledges to double to $1.5 billion its spending on so-called green technology and by 2012, cut its GHG emissions by 1% off current levels. While the reduction sounds minimal, Immelt points out that GE's emissions, without aggressive action by the company, would be 40% higher by that year.

PLANNING FOR THE WORST

Immelt called upon the U.S. government to provide "policy certainty"–realistic emissions standards looking ahead decades, around which his company and others could design strategies. "It was fascinating to see a CEO like Immelt make that call, because what he's suggesting is that current policy is not tenable in the long term," notes Andrew Aulisi, a senior associate with the World Resources Institute (WRI), which advised GE on its latest initiative.

The conversion of GE on the climate change issue has to be regarded as a turning point in the battle for corporate acceptance of emissions regulation, given the company's influential voice on management best practices during the past two decades. "We're seeing what I'd call a global megatrend towards clean energy," Aulisi says. "I think GE recognizes that trend–and well-managed companies want to be at the forefront of a new trend, not reacting to it."

Even so, GE is a bit late to the game. Take Ford Motor Co., a leading manufacturer of trucks and sports utility vehicles. Prior to 1999, Ford was a member of a group called the Global Climate Coalition–an organization "that was put together to lobby against the science of climate change and against the view that there was such a thing as global warming," says Niel Golightly, Ford's Dearborn, Mich.–based director of sustainable business strategies. At the end of the twentieth century, the auto company made a dramatic U-turn, deserting the group and acknowledging the climatic impact of GHG emissions. In 2001, Ford emphasized its change of heart by running full-page newspaper advertisements under the banner, "Global Warming. There. We Said It."

Today, says Golightly, climate change is "one of the top strategic priorities within the company"–a message that was hammered home by CEO Bill Ford at the most recent annual conference that Ford runs for its top executives. To skeptics, this may still sound like a public relations stunt, but Golightly says that 66% of Ford's annual research and development budget is being spent on "green" technologies.

The belief at Ford is that climate change will radically alter the markets within which the company operates, "and we have to invest in new product lines in order to meet that shift," says Golightly. One fruit of this investment is the hybrid version of the Ford Escape–the first SUV to use gasoline-electric technology to lower fuel consumption.

TAKING THE INITIATIVE

Another leader in the U.S. on climate change has been chemical manufacturing giant E.I. du Pont de Nemours and Co. DuPont has years of experience in emissions control, dating back to another environmental flashpoint–the depletion of the ozone layer because of chlorofluorocarbons (CFCs). "Working on the CFC issue gave us an early introduction to the science around climate change," says Edwin Mongan, director of energy and environment at the company's Wilmington, Del.–based headquarters. Today, DuPont sees that science as "compelling enough" to launch an initiative to cut potent GHG hydrofluorocarbon emissions from 25 million metric tons annually to just 5 million metric tons.

If it seems surprising that an auto company and a chemical maker would lead the charge on global warming, it's positively groundbreaking for an electric utility to be in the forefront of the movement. There is probably no industry more adversely affected than utilities by stricter emissions regulations, but instead of fighting against the possibility of new limits, Cinergy has accepted that climate change is real and regulation, inescapable and necessary. Last year it became one of a handful of utilities asking policymakers to provide guidance on the timing of emissions rules that Cinergy and the others see as inevitable anyway over the next decade. "Pollution control equipment takes many years to fit, so we need a longer lead time," says Stowell. "What we want is some certainty as far into the future as Congress is willing to take us."

Companies like Ford, DuPont, Cinergy and GE may classify climate change as a strategic risk, but few other companies–particularly in the U.S.–are thinking along similar lines at present, even though the issue is expected to radically alter energy costs, investor behavior and consumer demand over the next 20 years. One piece of hard evidence: this year's record number of shareholder resolutions regarding climate change. (See sidebar.) To date, most are aimed at the utilities and oil companies, but the sheer scale of the climate change issue means that few sectors are safe from scrutiny. "Scientifically, the tipping point has been reached," says Truman Semans, director of markets and business development with the Pew Center on Global Climate Change. "Beyond this point, any sensible director of any company in the U.S. ought to recognize that the science of climate change is advanced enough to start explicitly considering the risks that the company faces as a result."

And no industry will be spared. "We can't reverse these changes. The carbon will be up there for a century," says Geoff Lye, vice chairman of U.K.-based consulting firm SustainAbility. "We're looking at long-term risks that will produce short-term impacts and virtually no business will be unaffected."

Besides the sizable problems that an everyday warmer, wetter climate will cause for agriculture, real estate development, tourism, transportation and a host of other industries, climate change is also expected to produce more frequent bouts of extreme weather–heat waves, cold spells, sustained downpours, hailstorms and windstorms. The sea level is expected to rise as the planet's glaciers and ice sheets melt. (The IPCC says that sea levels have already risen by between 10 and 25 centimeters during the last 100 years.)

This could dramatically alter flood risk. Sebastian Catovsky, a policy adviser with the Association of British Insurers, says that the risk of a severe flood in London is set to increase from the current level of one every 1,000 years to one every 50 years by mid-century. The cost of a severe flood in the U.K.'s capital has been estimated at around $72 billion, so city officials, insurers and businesses are already facing up to the need for action, says Catovsky–but swallowing the $7 billion to $11 billion bill for necessary improvements won't be pleasant.

There will be other adjustments as well. AXA's Guye says town planners in France are already anticipating a need for improved mass transit as car use is either restricted or discouraged. Guye also notes that French telecoms expect to allow more staff to work from home and are developing super high-speed Internet services to enable business to function efficiently. "The infrastructure is going to change. The way that companies work is going to change," he says.

Munich Re has been studying its own trends: Since 1990, annual industry-wide losses from severe weather have topped $20 billion on four separate occasions. While acknowledging that the growing number of coastal metropolitan areas has boosted losses, Munich Re is frantically trying to get out the message about climate change as a root cause of the increase in catastrophic events, Faust says. The most important thing "is to raise awareness of climate change in order to mitigate losses and strengthen the whole industry to cope with these challenges," he says. Faust claims the reinsurer gives around 50 external presentations annually on climate risk.

CHOKING OFF CARBON

To some managers, these issues–hotter summers, flood risk, changing work patterns–may seem remote, but climate risk has more immediate dimensions–with arguably the most likely being emissions regulation. SustainAbility's Lye says that new rules will create a "carbon-constrained" world. Rather than being free to pump carbon dioxide into the atmosphere, governments will force polluters to pay. "Carbon will be a commodity [and] change whole markets," he says.

If you want to know what that means in practice, look across the Atlantic. Large swathes of the industrialized world are already carbon-constrained as a result of the Kyoto Protocol, which came into force in February. The U.S. and Australia are the only major developed countries to have snubbed the treaty, arguing that ratifying it would have done severe harm to their economies.

Kyoto signatories are legally bound to reduce emissions. The European Union (EU) has jointly agreed to cut 8% below 1990 levels–the baseline against which all Kyoto reductions will be measured–and is employing a "cap-and-trade" mechanism to achieve that goal. Under this scheme, companies are allowed to emit a certain volume of carbon and offset overages by purchasing emissions credits from a company that has managed to stay below its allowance.

The effect is that carbon emissions carry a price tag. The market for emissions credits in Europe currently prices a ton of carbon at over $20, says David Hone, group climate change adviser with Royal Dutch/Shell Group in London. That works out to an additional $9 per barrel of crude oil, he says.

Shell has been preparing for the arrival of a carbon-constrained business environment since the Kyoto agreement started to take its final shape in 1998, says Hone. For the last five years, Shell has incorporated anticipated carbon costs into its project evaluations. Those can range from "fitting a new heat exchanger in a refinery, right through to very large projects like the gas-to-liquids plant we're building in Qatar." While this approach has not resulted in any projects being scrapped, says Hone, it has provided additional impetus for projects to be redesigned along more energy-efficient lines.

TransAlta Corp., Canada's largest investor-owned power generator, also saw the writing on the wall some time ago, says Don Wharton, director of sustainable development in Calgary. He explains that the company has been actively building up a portfolio of emissions credits–from other carbon emitters like German utility Hamburgische Electricit??ts-Werke and also from the agricultural sector. Most recently, the company bought credits to emit 1.75 million tons of carbon from a Chilean food producer. The idea is that if TransAlta wants to build a new coal-fired plant, says Wharton, "I can tell the CEO that we're in a position to do that without needing to go out and buy large amounts of credits up front. Our portfolio gives us the flexibility to manage the business the way we want."

As things stand, energy producers are expected to absorb carbon costs, but it would be best for energy-intensive companies in other industries not to rely on the status quo, says SustainAbility's Lye. He warns that most companies are assuming that climate change will follow a gradual, progressive path, with temperatures steadily increasing and governments steadily cutting emissions. In this scenario, there's good reason to expect that improvements in technology could allow energy producers to reduce their carbon footprint without passing costs along to energy users. But Lye sees a real possibility of a "discontinuous shift" in which some catastrophic event forces a more dramatic reaction from governments, resulting in a sharp change in the cost of carbon and compelling energy producers to pass those costs along. "If you look at companies' carbon exposure, any significant shift in the cost of carbon dioxide will affect business," Lye says. "It's not rocket science to say if you're a business leader in a carbon-intensive company, you've got to get your house in order."

The U.S. may not have ratified Kyoto, but some U.S. companies have decided to reduce their emissions regardless. A voluntary initiative called the Chicago Climate Exchange (CCX) has been operating since 2003. Its 26 corporate members have all committed to emissions reductions and can buy and sell credits in much the same way that companies are doing in Europe. DuPont and Amtrak, for example, have both completed transactions through the exchange. "We believe that the climate issue is a valid concern and that it is appropriate for companies to take responsible and reasonable actions to reduce emissions of greenhouse gases," says Richard Guimond, vice president for environment, health and safety at Schaumburg, Ill.–based Motorola Inc., which is a member of the exchange but has not yet bought or sold credits. Instead, it has been successfully cutting emissions–in part by spinning off its semiconductor business last year, which Guimond says was the most carbon-intensive part of the company.

And for those who decide to keep their heads in the sand, better beef up your budgets for legal expenses. Insurance companies are worried that the growing acceptance of the science of climate change could result in a wave of legal claims against industries that use large amounts of fossil fuel. Already in the U.S., a group of seven state attorneys general have filed suit against a group of five electric power generators, alleging that the utilities' carbon dioxide emissions have harmed the environment. The suit may not succeed, says SustainAbility's Lye, but failure the first time out is unlikely to deter plaintiff lawyers. "Litigation lawyers are one of the best-funded industries in the U.S. in terms of finding new revenue streams, and they are now throwing resources at the climate change issue," he says. "It is quite reasonable to think that companies can and will be held accountable."

Successful lawsuits could result in huge damages, and insurers would be on the hook through directors and officers (D&O) policies. The insurance industry has responded by trying to get a feel for the extent of its exposure. Chris Walker, the New York-based managing director of Swiss Re's greenhouse gas risk solutions group, admits that the reinsurer is "concerned that we have potential large exposures here." As a result, when renewing D&O policies or writing new business, Swiss Re now checks to see whether the customer has responded to an initiative called the Carbon Disclosure Project (CDP), which annually asks each of the world's 500 largest companies to reveal the scale of their carbon emissions. In total, over 300 companies responded to the CDP last year. "If they have filed with the CDP, our underwriters take that into account when calculating the risk," says Walker. "If they have not responded, or have responded inadequately, we send them an additional questionnaire that asks questions as to what their strategy is, whether they have emissions reduction plans, and so on."

YOU'RE GOING TO NEED SOME ANSWERS

Like Swiss Re, AXA has started to ask customers about carbon dioxide and emissions-reduction strategies when writing new D&O business. Ultimately, says Guye, insurers may be forced to develop new coverage for climate-change-related legal liabilities and exclude it from normal third-party liability policies. So far, insurers "haven't been extremely aggressive," says TransAlta's Wharton, "but in the past couple of years they have identified this as a concern and have queried us about our practices. We expect to see more of it."

Developments like this mean it's time for more companies to take climate change seriously, says SustainAbility's Lye. "I would encourage them to ask the first question: Do they accept that the evidence points towards more carbon dioxide-related climate change? If they say yes–and I think any diligent review would arrive at that answer–then they have to ask what the risks are for them."

Assessing all the potential risks is easier said than done, but crossing your fingers and hoping isn't an option any more, says Debbie Reed, director of legislative affairs with the National Environmental Trust in Washington. "A couple of years ago, it wasn't possible to say with any certainty that mankind was changing the climate in a way that would prove harmful to society. Now, we can say that–and everyone's going to have to come to terms with it."