CARBON DISCLOSURE PROJECT. Carbon Disclosure Project Report 2007 Germany On behalf of 315 investors with assets of 41 trillion US Dollar

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1 CARBON DISCLOSURE PROJECT Carbon Disclosure Project Report 2007 Germany On behalf of 315 investors with assets of 41 trillion US Dollar

2 Report written by: Professor Dr. Alexander Bassen, University of Hamburg October 2007 The information included herein this report is based on that provided in respondent submissions, which the authors and publishers believe to be reliable, but the authors and publishers do not guarantee its accuracy or completeness. The authors and publishers make no assurance, representation or warranty express or implied, concerning the fairness, accuracy, or completeness of the information and opinions contained herein. All opinions expressed herein are based on the authors and publishers judgment at the time of publishing this report and are subject to change without notice due to economic, political, industry and firm-specific factors. The report makes all attempts to adhere to the disclosure permission requests of the individual company respondents. Comprehensive and unedited information from the original submissions is available at The authors and publishers and their affiliated companies, or their respective shareholders, directors, officers and/or employees, may have a position in the securities discussed herein. The securities mentioned in this document may not be eligible for sale in some states or countries nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates. The contents of this report may be used by anyone providing acknowledgment is given.

3 CDP5 Signatories 2007 Carbon Disclosure Project Members 2007 This report is based on the submissions from German corporations in response to the information request sent by the Carbon Disclosure Project (CDP5) on 1st February The report and all responses from corporations are available without charge from In 2007, CDP launched a Membership option for signatories. CDP Membership allows signatories to have a leading role in the development of CDP and to perform improved comparative analysis of company responses through the new online database. The following investors are CDP Members in 2007: ABN AMRO Bank N.V. Netherlands ABP Investments Netherlands AIG Investments USA ASN Bank Netherlands AXA Group France BlackRock USA BNP Paribas Asset Management (BNP PAM) France BP Investment Management Limited Caisse de Dépôts et Placements du Québec Canada Caisse des Dépôts France California Public Employees Retirement System USA California State Teachers Retirement System USA Calvert Group USA Canada Pension Plan Investment Board Canada Catholic Super Australia Ethos Foundation Switzerland Folksam Sweden Generation Investment Management Hermes Investment Management HSBC Holdings plc KLP Insurance Norway London Pensions Fund Authority Merrill Lynch USA Morgan Stanley USA Morley Fund Management Neuberger Berman USA Newton Investment Management Limited Pictet Asset Management Switzerland Rabobank Netherlands Robeco Netherlands SAM Group Switzerland Schroders Signet Capital Management Ltd Sompo Japan Insurance Inc. Japan Swiss Reinsurance Company Switzerland The Ethical Funds Company Canada The RBS Group Zurich Cantonal Bank Switzerland CDP Signatories investors (including the 35 german based corporations as shown below in red) are signatories to the CDP5 information request dated 1st February 2007 including: Aachener Grundvermögen Kapitalanlagegesellschaft mbh Germany Aberdeen Asset Managers ABN AMRO Bank N.V. Netherlands ABP Investments Netherlands ABRAPP Associação Brasileira das Entidades Fechadas de Previdência Complementar Brazil Acuity Investment Management Inc. Canada Aegon N.V. Netherlands Aeneas Capital Advisors USA AIG Investments USA Alcyone Finance France Allianz Group Germany AMP Capital Investors Australia AmpegaGerling Investment GmbH Germany ANBID National Association of Brazilian Investment Banks Brazil ASN Bank Netherlands Astra Investimentos Ltda Brazil Australia and New Zealand Banking Group Limited Australia Australian Ethical Investment Limited Australia Australian Reward Investment Alliance (ARIA) Australia Aviva plc AXA Group France Baillie Gifford & Co. Banco Bradesco S.A. Brazil Banco do Brazil Brazil Banco Fonder Sweden Banco Pine S.A. Brazil Bank Sarasin & Co, Ltd Switzerland Barclays Global Investors (Deutschland) AG Germany Barclays Group BayernInvest Kapitalanlagegesellschaft mbh Germany BBC Pension Trust Ltd Beutel Goodman and Co. Ltd Canada Carbon Disclosure Project

4 CDP5 Signatories 2007 BlackRock USA BMO Financial Group Canada BNP Paribas Asset Management (BNP PAM) France Boston Common Asset Management, LLC USA BP Investment Management Limited Brasilprev Seguros e Previdência S.A. Brazil British Coal Staff Superannuation Scheme British Columbia Investment Management Corporation (bcimc) Canada BT Financial Group Australia BVI Bundesverband Investment und Asset Management e.v. Germany CAAT Pension Plan Canada Caisse de Dépôts et Placements du Québec Canada Caisse des Dépôts France Caixa Econômica Federal Brazil California Public Employees Retirement System USA California State Teachers Retirement System USA California State Treasurer USA Calvert Group USA Canada Pension Plan Investment Board Canada Canadian Friends Service Committee Canada Carlson Investment Management Sweden Carmignac Gestion France Catholic Superannuation Fund (CSF) Australia CCLA Investment Management Ltd Central Finance Board of the Methodist Church Ceres USA CERES-Fundação de Seguridade Social Brazil Cheyne Capital Management (UK) LLP Christian Super Australia CI Mutual Funds Signature Funds Group Canada CIBC Canada Citizens Advisers Inc. USA ClearBridge Advisers Social Awareness Investment USA Close Brothers Group plc Comité syndical national de retraite Bâtirente Canada Commerzbank AG Germany Connecticut Retirement Plans and Trust Funds USA Co-operative Insurance Society Credit Agricole Asset Management France Credit Suisse Switzerland Daegu Bank South Korea Daiwa Securities Group Inc. Japan Deka FundMaster Investmentgesellschaft mbh Germany Deka Investment GmbH Germany DekaBank Deutsche Girozentrale Germany Delta Lloyd Investment Managers GmbH Germany Deutsche Bank Germany Deutsche Postbank Privat Investment Kapitalanlagegesellschaft mbh Germany Development Bank of Japan Japan Development Bank of the Philippines (DBP) Philippines Dexia Asset Management France DnB NOR Norway Domini Social Investments LLC USA DPG Deutsche Performancemessungs- Gesellschaft für Wertpapierportfolio mbh Germany DWS Investment GmbH Germany Environment Agency Active Pension Fund Epworth Investment Management Erste Bank der Oesterreichischen Sparkassen AG Austria Ethos Foundation Switzerland Eureko B.V. Netherlands Eurizon Capital SGR Italy Evli Asset Management Finland F&C Asset Management FAELCE Fundação Coelce de Seguridade Social Brazil FAPES Fundação de Assistencia e Previdencia Social do BNDES Brazil Fédéris Gestion d Actifs France FIPECq Fundação de Previdência Complementar dos Empregados e Servidores Brazil First Affirmative Financial Network, LLC USA First Swedish National Pension Fund (AP1) Sweden FirstRand Ltd South Africa Five Oceans Asset Management Pty Limited Australia Folksam Sweden Fondaction Canada Fonds de Réserve pour les Retraites FRR France Fortis Investments Belgium Fourth Swedish National Pension Fund, AP4 Sweden Frankfurt Trust Investment-Gesellschaft mbh Germany Frankfurter Service Kapitalanlage- Gesellschaft mbh Germany Franklin Templeton Investment Services GmbH Germany Frater Asset Management South Africa FUNCEF Brazil Fundação Assistencial e Previdenciária da Extensão Rural no Rio Grande do Sul- FAPERS Brazil Fundação Atlântico de Seguridade Social Brazil Fundação Banrisul de Seguridade Social Brazil Fundação CESP Brazil Fundação Codesc de Seguridade Social Brazil Fundação Copel de Previdência e Assistência Social Brazil Fundação Corsan dos Funcionários da Companhia Riograndense de Saneamento Brazil Fundação Real Grandeza Brazil Fundação Rede Ferroviaria de Seguridade Social Refer Brazil Fundação São Francisco de Seguridade Social Brazil Fundação Vale do Rio Doce de Seguridade Social VALIA Brazil Gartmore Investment Management plc Generation Investment Management Genus Capital Management Canada Gjensidige Forsikring Norway 4 Carbon Disclosure Project 2007

5 CDP5 Signatories 2007 Goldman Sachs & Co. USA Green Century Capital Management USA Green Kay Asset Management Groupe Investissement Responsable Inc. Canada Guardians of New Zealand Superannuation New Zealand Hastings Funds Management Limited Australia Helaba Invest Kapitalanlageggesellschaft mbh Germany Henderson Global Investors Hermes Investment Management HESTA Super Australia Hospitals of Ontario Pension Plan (HOOPP) Canada HSBC Holdings plc I.DE.A.M Integral Dévelopment Asset Management France Ilmarinen Mutual Pension Insurance Company Finland Industry Funds Management Australia ING Investment Management Europe Netherlands Inhance Investment Management Inc. Canada Insight Investment Management (Global) Ltd Instituto Infraero de Seguridade Social INFRAPREV Brazil Instituto Sebrae De Seguridade Social SEBRAEPREV Brazil Interfaith Center on Corporate Responsibility USA Internationale Kapitalanlagegesellschaft mbh Germany Jarislowsky Fraser Limited Canada Jupiter Asset Management KBC Asset Management NV Belgium KLP Insurance Norway KPA AB Sweden La Banque Postale AM France LBBW Landesbank Baden-Württemberg Germany Legal & General Group plc Libra Fund USA Light Green Advisors, LLC USA Local Authority Pension Fund Forum Local Government Superannuation Scheme Australia Lombard Odier Darier Hentsch & Cie Switzerland London Pensions Fund Authority Macif Gestion France Maine State Treasurer USA Man Group plc Maryland State Treasurer USA Meag Munich Ergo Kapitalanlagegesellschaft mbh Germany Meeschaert Asset Management France Meiji Yasuda Life Insurance Company Japan Meritas Mutual Funds Canada Merrill Lynch USA Metzler Investment GmbH Germany Midas International Asset Management South Korea South Korea Mitsubishi UFJ Financial Group (MUFG) Japan Mitsui Sumitomo Insurance Co Ltd Japan Mizuho Financial Group, Inc. Japan Monte Paschi Asset Management S.G.R. S.p.A Italy Morgan Stanley Investment Management USA Morley Fund Management Münchner Kapitalanlage AG Germany Munich Re Group Germany National Australia Bank Limited Australia National Bank of Kuwait Kuwait National Pensions Reserve Fund of Ireland Ireland Natixis France Nedbank Group South Africa Needmor Fund USA Neuberger Berman USA New York City Employees Retirement System USA New York City Teachers Retirement System USA New York State Common Retirement Fund USA Newton Investment Management Limited NFU Mutual Insurance Society Nikko Asset Management Co., Ltd Japan Norinchukin Zenkyouren Asset Management Co., Ltd Japan Northern Trust USA Old Mutual plc Ontario Municipal Employees Retirement System (OMERS) Canada Ontario Teachers Pension Plan Canada Opplysningsvesenets fond (The Norwegian Church Endowment) Norway Oregon State Treasurer USA Orion Energy Systems, Ltd USA Pax World Funds USA Pension Plan for Clergy and Lay Workers of the Evangelical Lutheran Church in Canada Canada PETROS The Fundação Petrobras de Seguridade Social Brazil PGGM Netherlands Phillips, Hager & North Investment Management Ltd Canada PhiTrust Active Investors France Pictet Asset Management Switzerland Pioneer Investments Kapitalanlagegesellschaft mbh Germany Portfolio 21 and Progressive Investment Management USA Portfolio Partners Australia Prado Epargne France PREVI Caixa de Previdência dos Funcionários do Banco do Brasil Brazil Prudential Plc PSP Investments Canada Rabobank Netherlands Railpen Investments Rathbone Investment Management / Rathbone Greenbank Investments Reynders McVeigh Capital Management USA RLAM Robeco Netherlands Rock Crest Capital LLC USA Royal Bank of Canada Canada SAM Group Switzerland Samsung Investment Trust Management Co., Ltd South Korea Sanlam Investment Management South Africa Sauren Finanzdienstleistungen GmbH & Co. KG Germany Carbon Disclosure Project

6 CDP5 Signatories 2007 Savings & Loans Credit Union (S.A.) Limited. Australia Schroders Scotiabank Canada Scottish Widows Investment Partnership SEB Asset Management AG Germany Second Swedish National Pension Fund (AP2) Sweden Seligson & Co Fund Management Plc Finland Service Employees International Union USA Seventh Swedish National Pension Fund (AP7) Sweden Shinhan Bank South Korea Shinkin Asset Management Co., Ltd Japan Shinsei Bank Japan Siemens Kapitalanlagegesellschaft mbh Germany Sierra Club Mutual Funds USA Signal Iduna Gruppe Germany Signet Capital Management Ltd SNS Asset Management Netherlands Société Générale France Société Générale Asset Management UK Sompo Japan Insurance Inc. Japan Standard Chartered PLC Standard Life Investments State Street Corporation USA State Treasurer of North Carolina USA Storebrand Investments Norway Stratus Banco de Negócios Brazil Sumitomo Mitsui Financial Group Japan Sumitomo Trust & Banking Japan Superfund Asset Management GmbH Germany Swedbank Sweden Swiss Reinsurance Company Switzerland Swisscanto Switzerland TD Asset Management Inc. and TD Asset Management USA Inc. Canada Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) USA Terra Kapitalforvaltning ASA Norway TfL Pension Fund The Bullitt Foundation USA The Central Church Fund of Finland Finland The Collins Foundation USA The Co-operative Bank The Co-operators Group Ltd Canada The Daly Foundation Canada The Dreyfus Corporation USA The Ethical Funds Company Canada The Local Government Pensions Institution (LGPI) (keva) Finland The RBS Group The Russell Family Foundation USA The Shiga Bank, Ltd (Japan) Japan The Standard Bank Group Limited South Africa The Travelers Companies, Inc. USA The United Church of Canada General Council Canada The Wellcome Trust Third Swedish National Pension Fund (AP3) Sweden Threadneedle Asset Management Tokio Marine & Nichido Fire Insurance Co., Ltd Japan Trillium Asset Management Corporation USA Triodos Bank Netherlands Tri-State Coalition for Responsible Investing USA UBS AG Switzerland Unibanco Asset Management Brazil UniCredit Group Italy Union Asset Management Holding Germany Unitarian Universalist Association USA United Methodist Church General Board of Pension and Health Benefits USA Universal-Investment-Gesellschaft mbh Germany Universities Superannuation Scheme (USS) Vancity Group of Companies Canada Vermont State Treasurer USA VicSuper Proprietary Limited Australia Vital Forsikring ASA Norway Wachovia Corporation USA Walden Asset Management, a division of Boston Trust and Investment Management Company USA Warburg-Henderson Kapitalanlagegesellschaft mbh Germany West Yorkshire Pension Fund WestLB Mellon Asset Management (WMAM) Germany Winslow Management Company USA YES BANK Limited India India York University Pension Fund Canada Zurich Cantonal Bank Switzerland 6 Carbon Disclosure Project 2007

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9 Foreword of the Federal Minister of Economy and Technology, Michael Glos (Member of the Lower House of the German Parliament) for the Second German Report of the Carbon Disclosure Project (CDP) In the past year, the effects of global climate change on society and economy have become the centre of public discussion. The international community must act immediately to prevent the worst consequences of climate change. We need an effective international climate regime which includes all relevant countries and sets clear incentives to reduce global emissions. The Federal Government is a pioneer in the field of climate protection, with its ambitious aims and measures in Europe as well as the rest of the world. We hope that our function as role model will motivate others to act with similar determination. The key measures for an integrated energy and climate programme which have recently been agreed on in Meseberg are an important contribution to reach this aim. Global climate change, as well as international and national efforts to contain its effects, are changing not only the regulatory environment but also the rules of competition for companies. The issues of the costs and risks of climate change and the prospects for climate protection is becoming more and more also a topic for the economy and the financial markets. In 2006, the largest German companies were therefore interviewed for the first time within the scope of the Carbon Disclosure Project as to the importance of climate change and its effects on their business. The aim was to create, as a first step, more transparency in the market concerning the challenges, changes and risks from the companies viewpoint. I welcome this approach. Compared to last year, the number of returns of the CDP interview has increased considerably. It is an encouraging sign that German companies choose to support this initiative, and I wish the CDP and its German partners BVI and WWF much success. Success, however, depends on the active participation of even more companies, as well as a further improvement of the answer quality and information about CO 2 emissions. I would like to expressly encourage all involved to assist this project. Yours truly, Michael Glos Federal Minister of Economy and Technology Carbon Disclosure Project

10 Table of Contents

11 Table of Contents Table of Contents CDP5 Signatories Foreword of the Federal Minister of Economy and Technology, Michael Glos 9 for the Second German Report of the Carbon Disclosure Project (CDP) 1 The Cabon Disclosure Project (CDP) 12 Background to the CDP 13 Partners of the CDP German Report 15 2 Climate change a capital market perspective 16 A greener world a threat to credit profiles? The perspective of Fitch Ratings 17 Climate change and its effects on credit quality The perspective of Standard & Poor s 19 Interview of fund managers on climate change 21 3 Analysis of the answers of german companies in the CDP 26 Introduction: Developments around climate change from 2006 to Responses 34 Transparency 35 Methodology 35 Company-specific risks and opportunities of climate change 36 Strategy 39 Targets for reducing emissions 40 GHG emissions reporting 40 Emissions reporting in the CDP 43 Scope and distribution of emissions 44 Further information on the most affected companies 45 Emissions a value driver 46 4 Appendix 50 CDP5 Questionnaire 51 German 200 Response Status 54 Key trends from CDP geographic and sector expansions 58 Carbon Disclosure Project

12 1 CDP provides a coordinating secretariat and innovative forum for investor and corporate collaboration on climate change. Based on answers to its questionnaire, CDP provides the investment community with information about corporations greenhouse gas emissions and climate change management strategies. Through CDP s database, this information is available in a comparable format that adds value for investors and a wide range of stakeholders.

13 The Carbon Disclosure Project (CDP) The Carbon Disclosure Project (CDP) Background to the CDP CDP s mission is to facilitate a dialogue between investors and corporations, supported by high quality information from which a rational response to climate change will emerge. The Carbon Disclosure Project (CDP) In February 2007, CDP issued its fifth information request on behalf of 315 institutional investors with assets of 41 trillion US Dollar under management. The request was sent to 2,400 of the largest quoted companies in the world by market capitalization for disclosure of investmentrelevant information concerning the risks and opportunities facing these companies due to climate change. These companies included the largest listed companies in Asia, Australia, Brazil, Canada, France, Germany, India, Italy, Japan, New Zea - land, Scandinavia, South Africa, Switzerland, UK, US, and the Electric Utilities and Transport sectors. As in previous years the request focused upon the issues CDP has identified in conjunction with many signatory investors, corporations and other experts as being most pertinent to the effect of climate change on company value. Those issues include regulatory risk/opportunity (e. g. limits on emissions); physical risk/opportunity (e. g. changes in weather patterns impacting operations); consumer sentiment risk/opportunity (e. g. reputation); total company wide global greenhouse gas emissions and steps taken to manage and reduce emissions. 41 trillion US Dollar of assets under management represents more than one third of total global invested assets and is a marked increase from the 4.5 trillion US Dollar that participated in the first CDP request in percent of FT500 companies and a total of 1,300 corporations answered the fifth CDP request in 2007, evidencing a significant increase in support for CDP s work from the 45 percent of FT500 com- panies and 235 corporations that answered the first request in Having launched at No. 10 Downing Street in 2000, CDP has become the global standard mechanism by which companies report their greenhouse gas emissions to investors. Its process has been applauded by Al Gore (Former US Vice President), Sir John Bond (then Chairman HSBC), Jeff Immelt (CEO, General Electric), Angela Merkel (German Chancellor) and Tony Blair (former UK Prime Minister) among others. CDP is proud to have assisted the pioneering efforts of global investors in creating this comprehensive and international system of disclosure. CDP data has also enabled stakeholders such as policymakers, service providers, and NGO s to accelerate their own initiatives. Last year CDP reports were produced in English, French, German, Japanese and Portuguese and launched at a series of high profile events in the main capital markets in the world. CDP now hosts the largest registry of corporate greenhouse gas data in the world, and this information along with reports analyzing it can be downloaded free of charge at The CDP Secretariat extends sincere thanks to the signatory investors, responding corporations and regional partners for their participation in CDP5. New CDP Initiatives in 2007 In addition to the expansion of its existing activity in 2007, CDP is delighted to have evolved its service offering in a number of exciting directions: Improved database. CDP is launching a user-friendly interface to its comprehensive database of responses. This will enable users to easily and quickly perform comparative analysis by sorting company information by sector, geography, emissions and the CDP questions. The aim of CDP is to gradually improve information on CO 2 emissions and climate strategies as well as to initiate long-term plans for the future. I wish the Carbon Disclosure Project success with its further efforts both in Germany and worldwide. Dr. Angela Merkel German Chancellor on the occasion of the First German CDP Report Carbon Disclosure Project

14 The Carbon Disclosure Project (CDP) The first step towards managing carbon emissions is to measure them. Because in business what gets measured gets managed. The Carbon Disclosure Project has played a crucial role in encouraging companies to take the first steps in that measurement and management path. If more businesses progress further down that measurement and management path, within the context of public policy which spurs on the business leaders and drags up the business laggards, then we will be able and at surprisingly small economic cost to offset the dangers which climate change poses to our world. Lord Adair Turner Standard Chartered plc It s not surprising that investors are worried and that they are supporting the Carbon Disclosure Project. In BT we share their concern and we have good business reasons for doing so. We have a huge investment in the UK telecommunications infrastructure and that will be increasingly at risk ( ) the Carbon Disclosure Project does us all a great service in bringing these matters to the attention of the investment and business communities. It is an important catalyst for change the change without which the world will be a very dangerous place. Sir Christopher Bland, Chairman BT Group CDP Membership. CDP is now providing a premium service for those signatory investors who have become CDP members. This service provides members with enhanced recognition and access to the entire functionality of the database. Supply Chain Initiative. In 2007, CDP was delighted to enter into partnership with Wal-Mart Stores to send the CDP information request to a subset of their suppliers. This contract represents the start of an exciting development for CDP as it begins to mirror its activity with shareholders and corporations via corporations and suppliers. The Wal-Mart work is now being developed for broader reach and impact with the launch of the Supply Chain Leadership Collaboration project (SCLC project) aimed at working with key sector leaders including: Retail, Brands, Aviation, Automotive and Government among others. This work will help identify and reduce emissions within their supply chains. The CDP Secretariat expresses sincere thanks to Wal-Mart for their leadership in developing this new system for corporate disclosure of emissions from supply chains Climate Disclosure Standards Board (CDSB). CDP became a member of the CDSB consortium convened by the World Economic Forum in January 2007 and has been funded by the UK Department for Environment to provide the Secretariat to CDSB, supporting its activities focused upon climate change reporting standards. Going Forward CDP s primary goal is to continue to improve the quality and quantity of responses for its core disclosure activity and in doing so better inform the decisionmaking of investors and corporations regarding the implications of climate change. CDP will also continue to respond to stakeholder requests to expand and in addition to the new initiatives for 2007 is developing further projects including: Expansion of the CDP process into further geographies and sectors. Expansion of the CDP process into private equity and private companies. Workshops for corporations and investors. Further development of the CDP database Assisting Pension Funds to develop mandates incorporating climate change criteria CDP would be delighted to hear from parties interested in participating or partnering with CDP and invites them to approach the Project through info@cdproject.net 14 Carbon Disclosure Project 2007

15 The Carbon Disclosure Project (CDP) ( ) the members of the Carbon Disclosure Project have recognised that the cost benefit analysis points to it being in the interest of business to take action. The growth of the Carbon Disclosure Project itself shows that investors are increasingly aware of the impact climate change will have on shareholder value ( ) this is a project that has considerable momentum and that in itself is significant. Rt Hon Margaret Beckett MP then Secretary of State for Environment, Food & Rural Affairs It has been a really interesting experience to watch the development of the Carbon Disclosure Project and I congratulate those who have worked so hard. It s extremely significant because there is a major shift in awareness of the climate crisis and the need to integrate the behavior of companies public and private towards the climate crisis, both it s risks and it s opportunities in the investment market place and in the business market place generally. Al Gore speaking at the CDP 2006 launch in New York CDP s reporting mechanism offers a trusted solution for consistent and transparent reporting of our energy and carbon numbers, as well as a way to share our reduction strategies with our shareholders and other companies. News Corp. is still at the very beginning of our energy and climate change work and we re delighted to have access to the wealth of information that CDP provides for us to learn from. News Corporation CDP works to improve the information flow, seeks to improve City engagement, to improve understanding and ultimately to improve economic performance and it tackles it at the highest level with a cross border span, with force and with directness ( ) CDP represents a very positive aspect of shareholder engagement and if there are more shareholders ready to sign up that can only be, from my perspective, a very good thing. Derek Higgs author Higgs Report on Corporate Governance Initiatives such as the Carbon Disclosure Project (CDP) can play a meaningful role in our shared endeavours to reduce greenhouse gas emissions. The project shows that both companies and investors have key roles to play. It is very positive and inspiring that the capital markets are considering climate related aspects more and more in their investment decisions. It proves that the climate challenge is not only a matter of technology it is also an important economic issue. As Deputy Prime Minister and Minister of Enterprise and Energy it is especially encouraging to see that companies go ahead without state intervention. Maud Olofsson Deputy Prime Minister Sweden Partners of the CDP5 Report 2007 Germany The partners of the CDP5 report for Germany are the BVI Bundesverband Investment und Asset Management e. V. and the World Wide Fund For Nature (WWF). The author of the report is Professor Dr. Alexander Bassen. The BVI represents the interests of 86 companies which are active in asset management. Its members are managing over 1.6 trillion Euro in investment funds and assets outside investment funds for over 15 million private and institutional investors. 40 BVI-members are supporting the CDP directly as Signatory Investors. The WWF, one of the biggest organisations for the protection of nature worldwide, has been supporting the global work of the CDP since 2001 for improved transparency of the man-made climate change and its effects on the capital market and on corporations; since 2006, the WWF has been a partner within Germany. The BVI and the WWF support the CDP in order to strengthen the consideration of the effects of the climate change on the economic situation of the listed joint stock companies and the German economy in the area of investment research. The holistic analysis of the chances and risks of the climate change must include companies of all sectors and must not limit itself to the obvious producers of greenhouse gases. The improved transparency will accelerate the necessary systematic integration of climatic risks when it comes to decisions by investors. Professor Dr. Alexander Bassen, University Hamburg, chair of investment/financing, is the author of the CDP5 report for Germany. Professor Bassen researches, teaches and consults interested parties about the effects of corporate governance, corporate responsibility, climate change and investor relations in the capital market. Carbon Disclosure Project

16 2 Climate change a capital market perspective

17 Climate change a capital market perspective Climate change a capital market perspective A greener world a threat to credit profiles? The perspective of Fitch, by Monica Klingberg-Insoll 1 As economic and population growth has accelerated in recent centuries postindustrialisation, it has become clear that we have to adjust our use of the world s resources in the interest of the survival of our species. Environmental disasters, including increasingly extreme weather patterns causing floods and other destruction, have direct negative economic impact. Concerns are no longer voiced only by environmental scientists and specialist campaigners but have become shared by the general public. Hence, solutions for environmental challenges have entered the political agenda. There is now a number environmental legislative initiatives (see Fact box), many of which focus on producers of goods. How will industrial companies cope with the extra burden of compliance? The negative impact from environmental legislation is expected to derive mainly from the following areas: reduction in revenues, increased operating costs and increased capex. Revenue reduction: this may occur if a ban on a dangerous chemical results in the termination of business segment of a chemicals manufacturer. Alternatively, interruption in supplies due to either ban or delays in production due to non-compliance can affect downstream endusers if a substitute cannot be identified in a timely manner. Increased product price to recover higher manufacturing costs may be rejected by customers who may switch suppliers or substitute product entirely. Increased operating costs: labour costs associated with compliance, such as testing, measuring, administrating and reporting. Purchase of more expensive substitutes. Fines for non-compliance. Increased capex: new substances or ban of existing ones may require refurbishment of plants and production equipment. Investment in R&D may be necessary to produce substitute products. In addition, the risk of material impact from litigation will be increased. The introduction of REACH for instance changes dramatically the standing of polluters. Previously, the onus of demonstrating damage lay with the plaintiff, with the difficulty of demonstrating a connection between harm and the chemical substance. With REACH, however, a polluter s liability can be established by demonstrating that regulation has not been followed, rather than having to establish that harm has resulted from exposure to a chemical. The case of asbestos with the litigation and financial losses to industrial companies in the US is a pertinent example of how financially damaging litigation can be. However, Fitch believes some of the increased cost pressure will be mitigated by increased efficiency of new production methods as well as lower energy costs, where processes have focused on such improvements. In addition, increasingly environmentally-aware consumers may be open to the offer of greener premium price products. Further, there are important business opportunities for companies providing the services and goods which target environmental improvements. New legislation financial impact As REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals),, WEEE (Directive imposes responsibility on manufacturers and importers of electrical and electronic equipment) and RoHS (Restriction of the Use of Certain Hazardous Sub- stances in Electrical and Electronic Equipment Regulations 2006) are ambitious pieces of legislation, and as such, have been the object of public consultations during which industry is invited to voice its concerns, it is unlikely that their imple- mentation would lead to material deterioration of an industry s viability. Nevertheless, Fitch expects that some sub-sectors and individual credits can potentially see their per- formance impaired under the weight of these new environmental rules. Small to medium sized chemical and capital goods manufacturers are two categories which could potentially see their credit profiles affected. 1 Managing Director, Head of Emerging Markets, Europe & Asia, Industrials, Fitch Ratings, London. Carbon Disclosure Project

18 Climate change a capital market perspective A key issue regarding potential credit impact of increased environmental legislation is the ability of a company to pass increased costs on to its customers. The ability to pass on costs is largely dependent on the structure of the industry and the balance of pricing power between customers and suppliers. Provisions In an effort to quantify the financial impact of environmental legislation, Fitch surveyed a sample of 52 EU industrial companies. The agency calculated that the average environmental provision amounted to approximately 15 percent of EBITDAR (Earnings before Interest, Taxes, Depreciation, Amortization and Rent) with little change observed in this level between the financial reporting years of 2004 and In practice, the cash outflows related to provisions are spread over a number of years, thus limiting the cash impact of a provision. Some sectors showed little or no provisioning at all, such as the construction, auto manufacturing and aerospace sectors. Diversified manufacturing had an average level of provisioning and the highest provisioning was seen for chemical, capital goods and unsurprisingly for the natural resources sectors. Of those who reported specific reasons for provisioning, site and water rehabilitation and asbestos were the most commonly stated. Among capital goods companies, Electrolux ( BBB /Stable) stood out as the only company to have announced and provided for the expected financial cost of complying with the WEEE directive, estimated that it could cost the equivalent of 11 percent of its EBITDAR annually. Among the 52 industrials companies examined, only nine actually referred to WEEE, RoHS and REACH in their annual reports of the year However, the approach to provisioning is not homogenous and Fitch is aware that the automotive industry in particular is conscious of the new legislation. The combination of CO 2 reduction, voluntary commitments and more stringent EU regulations to curb exhaust emissions will continue to weigh on manufacturers' credit profiles and will have consequences on their product mix. The financial impact of complying with these regulations is substantial. For example, in 2006 only, Renault SA ('BBB+'/Stable Outlook) and Peugeot SA (PSA, 'A-' (A minus)/f2/neg - ative Outlook) reported charges linked to EU4 regulations of 360m Euro and 188m Euro respectively. In a context of fierce competition and extreme pricing pressure, Fitch believes that manufacturers will have difficulties to pass on to customers the extra cost of environmental regulations. The European Automobile Manufacturers Association (ACEA) estimated that the cost of meeting lower CO 2 emissions limits may reach 4,000 Euro per car on average although this figure is deemed overestimated in other analyses. In addition, extra costs to comply with Euro 5 and Euro 6 norms may reach 590 Euro to 900 Euro per vehicle according to various industry estimates. Figure 1: Provisioning for environmental costs by industrial sector as % of EBITDAR (financial year 2005) % ,3% 58,0% 63,1% Max. Min. Median 40 37,4% 30 30,3% 20 15,1% 13,9% 18,3% 11,9% ,1% 3,7% 0% 1,3% Capital goods Auto & related Chemicals 2,1% 3,5% Natural ressources 5,5% Aerospace & defense 0,3% 6,0% Building materials & construction 18 Carbon Disclosure Project 2007

19 Climate change a capital market perspective Conclusion limited impact In conclusion, while Fitch recognizes that the impact on credit profiles of increased environmental legislation is on balance negative, the agency believes most sec- tors and companies will be able to absorb the additional costs without significant deterioration of credit profiles. To the extent that the new demands also drive more efficient, lower energy processes, they may even have positive effects. Climate change and its effects on credit quality The perspective of Standard & Poor s by Swaminathan Venkataraman and Peter Kernan In developed countries, there are many who accept the inevitability of carbon controls and industry is in many cases now seeking to influence their final form and negotiating the future participation of developing nations in a global carbon regime. Credit consequences may result as restrictions on greenhouse gas (GHG) emissions cause significant increases in capital costs and/or reductions in profitability. Standard & Poor s sees carbon controls impacting credit quality globally in four broad ways, which we summarize below and discuss with a specific focus on the energy industry. For a more detailed discussion, please refer to Standard & Poor s Europe-focused Climate Change Credit Survey published in November 2005 and a more recent Credit - Week special issue of May 23, 2007 titled The Credit Impact of Climate Change Sectoral Distribution of Emission Reductions and Costs The economy-wide target emissions level will clearly be the primary driver of the total costs of complying with emission controls. However, the sectoral distribution of emission reductions, and hence costs, will vary substantially depending upon the implementation mechanisms chosen. A cap-and-trade approach, taken in isolation, may result in a disproportionate allocation of emission reductions among different sectors. The power and automobile sectors provide a prime example of this. Some U.S. Senate bills propose that oil refiners be responsible not only for their own emissions, but also for auto tailpipe emissions. However, refiners control neither the fuel efficiency of cars nor the driving habits and model preferences of drivers. At best, refiners can indirectly affect such decisions by passing through to customers the cost of carbon allowances in the form of higher gasoline prices. But this is potentially a weak price signal. To take an extreme example, at a price of 100 US Dollar per ton for CO 2 credits, the price increase to consumers would only be about 1 US Dollar per gallon of gasoline (since 100 gallons of gasoline burn to produce one tonne of CO 2 ), which drivers have absorbed in the recent past without switching en-masse to lesspolluting vehicles. Auto emissions do not currently fall under the EU ETS, but it may do so in the US or other countries and perhaps in the EU as well in future. In any case, given any specific economy-wide emission cap, the use of legislation that mandates higher fuel economy for autos, or greater use of biofuels etc. would be a key determinant of how much reductions are achieved from autos and thus how much is demanded from other sectors. Power generation may end up with a disproportionately larger share of emission reductions and costs because, even at 100 US Dollar per ton for carbon credits, auto emission reductions will depend on the extent to which consumers see higher gas prices as permanent and change their behavior, and on the extent to which automakers respond with lesspolluting vehicles. By contrast, at a carbon emissions cost of 100 US Dollar per ton the power sector could become almost entirely emissions-free, as most if not all estimates of the cost to utilities of capturing and sequestering carbon are less than 100 US Dollar per ton. Impact on the existing assets Auctioning versus allocation of carbon credits in a cap-and-trade regime has the greatest impact on the value of existing assets, including power generation assets. The free allocation of CO 2 emission allowances in Phase I of the EU ETS allowed gas and coal-fired generators to be more profitable than in the absence of the ETS. This profitability will decline in Phase II and beyond as more credits are auctioned rather than assigned and the Carbon Disclosure Project

20 Climate change a capital market perspective absolute level of freely granted allowances to the power sector is likely to decline. Regional initiatives in the US are looking at auctioning a majority of the credits. Given any level of auctioning, two factors will have a key influence on the value of power generation assets in a carbon-constrained world. The characteristics of the power markets in which the company operates, chiefly the fuel that sets the marginal price at various times and how that changes over the years, and the nature of a company's generation portfolio, whether it is Fossilheavy, Carbon-light or Diversified between the two. Interestingly, it appears that well-diversified companies may be indifferent to whether carbon legislation is stringent or lenient. Of course, these factors determine only the total magnitude of compliance costs and the actual credit impact will be determined by the ability of any company to pass these costs on to consumers. Regulated utilities may be able to pass-through costs to customers while unregulated power generators and other sectors of the economy will depend upon market forces. Impact on future assets The nature of assets acquired in the future promises to be substantially different from that in the past, whether in power generation, autos or other polluting industries. If a global consensus develops around the need for post-kyoto legislation that achieves a long-term CO 2 concentration target anywhere close to the 500 +/ 50 ppm indicated by many scientific models, there is no technological silver bullet and a portfolio of strategies would be required to achieve the target. A paper that Stephen Pacala and Robert Socolow of Princeton University published in the journal Science in August 2004 estimated that emission reductions of about 7 Gigatonnes of Carbonequivalent (GtC) per year would be required by the middle of the century compared to a business-as-usual scenario to stabilize CO 2 levels at this target, although the number is perhaps higher now given that growth in Asia has generally be stronger than assumed in many of the models. They also calculate the magnitude of effort that will be required under 15 different GHG reduction options in power, autos, afforestation, agriculture etc. For instance, a doubling of currently installed global nuclear capacity, in itself extremely uncertain, will only provide about 1 GtC/yr of emission reduction requirements. 2 million 1 MW peak windmills (50 times the current capacity) will be required to achieve the same effect, indicating the magnitude of the emissions reduction task. Strategy selection would vary by country and, indeed, regionally within each country, depending upon the nature and cost of resources available, the kind of businesses present, public support for specific options, and the regulatory regime. The credit impact varies by the choice of strategy and a look at power production options is instructive. Energy efficiency, a popular choice, reduces utility revenue growth, and thus margins, in the absence of regulatory decoupling mechanisms that separate utility profits from sales. Coal gasification technology and carbon capture and sequestration (CCS) suffer from higher costs, lower reliability and a lack of commercial track record all of which are credit negatives. This is a major factor as the Intergovernmental Panel on Climate Change (IPCC) estimates that CCS could account for 15 percent to 55 percent of the cumulative GHG mitigation effort worldwide until CCS also suffers from substantial legal and regulatory risks if utilities will be responsible for the safety and monitoring of CO 2 storage sites over periods potentially lasting thousands of years. Wind energy, which currently has the largest potential among renewable sources, is an intermittent resource and requires additional investment in back-up generation, while nuclear power involves extremely large capital expenditures and suffers from waste disposal and terrorism risks. Finally, other green options such as solar, wave, and tidal power are still immature, expensive, and will be marginal. Corporate Governance With the emergence of climate change as a major social concern and a more important input to corporate decision making and national energy policies, corporate disclosure about climate change risks and exposures has acquired importance as investors clamour for better disclosure over the potential risks faced by their portfolios. Industry-wide standards of disclosure not only promote transparency and comparability across companies but, all else being equal, also result in greater market confidence and more secure access to capital markets for companies, an important credit factor. 20 Carbon Disclosure Project 2007

21 Climate change a capital market perspective Interview of fund managers on climate change Felix Adrian CFA, cominvest, head of securities fund management Question: Climate change can have direct as well as indirect effects on companies. What fundamental importance have chances and risks, as a consequence of climate change, for your investment strategies and asset allocation, and how has their importance changed recently? Dr. Thomas Deser Potential influences of climate change are principally very important as they can influence the economic success potential and, thus, especially affect the stakeholder value in the long run. The importance of these aspects has grown in the past few years. The main driver is the influence of these aspects on the cost situation of the companies as well as the higher regard of the investors for companies with a proactive business policy in this respect. Felix Adrian The effects of climate change have direct as well as indirect importance for the investment process. The direct chances are, among others, the accelerated technical progress of development, and the use of environmentally-friendly technologies in many areas, (which consume less resources), ranging from alternative energy generation, via the reduction of consumption or general environmental technology to consumer products. Indirectly, the increasing of investment volumes in such areas offers chances for growth for a great number of industries and, thus, an economic capital allocation which is more environmentally-friendly. As a consequence, we see opportunities for growth as well as investment chances, which we respond with specific product offers. Due to the many diversified aspects in a large number of companies, we also incorporate these chances into our existing product ranges. Some risks associated with climate change might be heavy losses due to bad weather (which could hit single industries such as mining or oil and gas extraction), increased variations in harvests (which then trigger large fluctuations in raw material prices), or added dangers during transportation. The monitoring of such phenomena and the necessary reactions influence the tactical level of asset allocation and stock selection. Felix Schnella In principal, we can say that the future legal, political and economic conditions for chances and risks which might be triggered by climate change cannot be fully evaluated neither for the global markets nor for the individual industries. Whereas in some areas the topic of environmental protection is much discussed and politicised (e. g. aviation and automotive industries), the topic has not yet reached the awareness of the public at large. For many years we see our role as asset managers as identifying all imaginable risks, using all qualified research sources for deducing medium- to long-term oriented investment strategies and effective decision processes for investment. For this purpose we developed a special research approach with Grassroots which exceeds the traditional methods of analysis by including multipliers such as market researchers, free journalists, physicians, manufacturers, managers, salespersons, consumers and other relevant groups of individuals in order to identify market trends and opportunities at an early stage. The importance of the chances and risks which could be caused by climate change have already determined our investment strategies and our asset allocation for several years. This forward-looking view has been widely accepted by private and also institutional investors; it has influenced the choice of products and of our asset management partner who will be entrusted with the management of the capital invested. The correct evaluation of these changes, and the possible re-orientation of those companies which are under consideration as investments for professional asset management, are pre-requisites for us to identify potential winners and losers, as well as to balance the effects on the individual industries and companies by changing the sectoral weighting. Dr. Thomas Deser CEFA, Union Investment, Equities, Senior Portfolio Manager Nicolas Huber DWS, responsible for the area of climatic change/renewable energies, Senior Portfolio Manager Felix Schnella CFA, Allianz Global Investors, Senior Portfolio Manager European Equities Michael Schneider fund manager of Deka-UmweltInvest Carbon Disclosure Project