The adaptation tipping point: are UK businesses climate-proof?

The adaptation tipping point: are UK businesses climate-proof? Most people who have taken climate risks into account have only considered half the picture acclimatise John Firth +44 1636 812868 j.firth@acclimatise.uk.com UK Climate Impacts Programme Chris West +44 1865 285717 enquiries@ukcip.org.uk Carbon Disclosure Project (CDP) Paul Dickinson +44 7958 772864 paul@cdproject.net

Acclimatise and UKCIP gratefully acknowledge the advice and contributions of Malcolm Dowden (Charles Russell, LLP). We would also like to thank Yara Chakhtoura, who undertook the analysis of FTSE 350 responses to the CDP4 request for information. Design by Stephanie Ferguson, UKCIP. This report should be referenced as: Firth, J, and Colley, M (2006) The Adaptation Tipping Point: Are UK Businesses Climate Proof? Acclimatise and UKCIP, Oxford. ISBN 0-9544830-9-X Further copies of this report can be downloaded from www.acclimatise.uk.com and www.ukcip.org.uk Hard copies of the report are available from: UK Climate Impacts Programme Oxford University Centre for the Environment Dyson Perrins Building South Parks Road Oxford OX1 3QY Tel: +44 (0)1865 285717 Fax: +44 (0)1865 285710 Email: enquiries@ukcip.org.uk Most people who have taken climate risks into account have only considered half the picture. Chris West, Director, UKCIP

Foreword Foreword The adaptation tipping-point : are UK businesses climate-proof? Our climate is changing, and we are faced with many years of continuing unavoidable change. Even if we make a significant reduction in greenhouse gas emissions tomorrow, the lag in the climate system means that we will need to cope with a changing climate for the next 40 plus years, due to emissions we have already put into the atmosphere. Businesses and the financial markets need to grasp the reality we face that we have to both reduce our emissions, and adapt to inevitable climate change. There is no choice between mitigation and adaptation we have to pursue complementary actions on both. The report explores why adaptation is and will become an increasingly important issue for businesses, investors and the financial markets, in addition to the already urgent mitigation agenda. This report provides a concise explanation of the scale of the adaptation agenda and the implications for business. It establishes a milestone against which future actions will be measured by investors, employees, customers and communities. All CEOs, Finance Directors, non-executive Directors and all those engaged in providing business, legal and financial advice will greatly benefit by reading this report and reflecting on the consequences for their companies and clients if they fail to take action now. Chris West Director, UK Climate Impacts Programme John Firth Managing Director, acclimatise 1

Executive summary Executive summary Our climate is changing. We are already faced with many years of continuing unavoidable change. Even if we make a significant reduction in greenhouse gas emissions tomorrow, we will need to cope with a changing climate for the next 40 plus years, due to emissions we have already put into the atmosphere. The future climate is already set over this time period and the consequences can not be ignored. Businesses and the financial markets need to grasp the reality we face that we have to both reduce our emissions and adapt to inevitable climate change. There is no choice between mitigation and adaptation we have to pursue complementary actions on both now. The implications for businesses, and to their investors, customers and workforce, through failure to assess and manage climate risks are significant. Value, return and growth will reach a tipping-point when an increasing awareness and understanding of the realities of climate change challenges previous expectations. Decisions taken by directors and professional advisers may be open to legal challenge. The tipping points on value, return and growth are likely to trigger credit rating revisions and increases in the costs of capital. Customer expectations, preferences and needs will change as the impacts of climate change become apparent. Governments are likely to resort to prescriptive regulation if businesses do not respond with adaptive action. This report has analysed the Carbon Disclosure Project responses of businesses in the UK FTSE 350 to explore their understanding of the need for adaptation. These are the key findings. Despite an increasing realisation of climate risks, this is not reflected in the risk management strategies of the majority of the FTSE 350. Only 10% of the FTSE 100 reported that they considered the impacts of climate change pose a high risk to their business operations. Adaptation is not as well understood as mitigation. The number of good responses, with a rich description of climate risks, is low. Within some sectors, there are a small number of companies that have demonstrated an understanding of climate risks. These companies are setting the pace and will become the benchmarks. 2 This contrasts markedly with other companies in the same sectors appearing not to recognise that they face any climate risks. Although the potential direct impacts of extreme events are recognised, there is less appreciation of the impacts, both direct and indirect, arising from changes in longer-term average conditions and seasonal variation in temperature, precipitation etc. In addition to analysing the adaptation results from the CDP4 survey, this report also provides a primer for directors, investors, fund managers and their professional advisers on the adaptation agenda and the need for action. Businesses can respond to build resilience and climate-proof their interests. Uncertainty about the future is not a reason for inaction. There is sufficient information to enable the impacts of a changing climate over the next 40 years to be embedded in decisionmaking at strategic and project levels. Adaptive management is feasible. Changing markets, customer needs and investor expectations will present significant opportunities for those companies that take action to climateproof their businesses. Taking adaptive action early may be costeffective when compared with the costs associated with remedial action at a later date. When analysing potential action, companies should consider their fiduciary responsibilities. Businesses should review their climate risk management strategies and check that they are responding to both the mitigation and the adaptation agendas. Action is required on both now.

Table of contents Table of contents Introduction 4 Why adaptation matters 5 to business A changing climate what is the 6 science telling us? Significant business risks 7 Value, return and growth at the 7 tipping point Litigation 8 Brand and reputation 9 Credit rating 10 Growing government action on 10 adaptation Sector summaries 11 Aerospace and defence 12 Automobiles and machinery 12 Banks 13 Chemicals 13 Construction and building 14 materials Food-related industry 14 General retailers 15 Hotel and leisure 16 Insurance 16 Media and entertainment 17 Mining, steel and other materials 17 Oil, gas and electricity 18 Pharmaceuticals and 19 biotechnology Real estate 19 Software and computer 20 services Specialty and other finance 20 Support services 21 Telecommunications services 21 Tobacco and beverages 22 Transport 22 Utilities 23 What can business do? 24 Appendices 25 Appendix 1: References 25 Appendix 2: About the Carbon 26 Disclosure Project Appendix 3: CDP4 questionnaire 27 Appendix 4: CDP4 signatories 28 Appendix 5: Companies 30 responses to the CDP4 questionnaire 3

Introduction Introduction "We are not talking any more about what climate models say might happen in the future. We are experiencing dangerous human disruption of the global climate and we are going to experience more." John Holdren, President, American Association for the Advancement of Science This report focuses on the climate risks to business from inevitable climate change. The CDP4 questionnaire included a very specific question (number 3) which, together with responses to other parts of the questionnaire, was designed to assess the understanding of the UK s major companies of the risks they face from a changing climate rising temperatures, rising sea levels, changing rainfall patterns, and extreme events and the adaptation measures currently being used to safeguard assets and operations. The question asks: How are your operations affected by extreme weather events, changes in weather patterns, rising temperatures, sea level rise and other related phenomena both now and in the future? What actions are you taking to adapt to these risks, and what are the associated financial implications? The analysis in this report sits within the context of growing engagement in recent years by both businesses and their advisers in developing an understanding of climate change, and of calls from investors for greater disclosure in forward-looking risk management statements. The report explores why adaptation is and will become an increasingly important issue for businesses, investors and the financial markets. Exposure areas are described and the key risks including litigation, brand and reputation, credit rating, regulation and financial performance are discussed. Summaries are provided for each of the main business sectors. Finally, the report considers the actions that can be taken to embed climate risk management into decision-making, to build resilience and climate-proof businesses. These actions will allow risks to be assessed and managed, and significant market opportunities to be identified. 4

Why adaptation matters to business Why adaptation matters to business We face two climate change challenges, not just one. Any conceivable emissions reductions policies, even if successful, cannot have a perceptible impact on the climate for some decades some change is already locked in by historic emissions and by inertia in the climate system. Global temperatures will continue to increase for the next 30-40 years and sea level will rise for many centuries, and we must develop strategies to address these climatic changes. This is not a reason to be complacent about emissions reductions. Adaptation and mitigation are two sides of the same coin: we must mitigate emissions in order to limit future climate change, and we must adapt in order to deliver a sustainable economy in the face of current and future climate change. These are not alternative strategies. Climate change is happening the process is already underway. It is having an effect on business now. There is no quick fix as these effects will stay with us for decades to come. Business has paid increasing attention to the mitigation agenda, but has not yet grasped the significant emerging risks posed directly by climate change and variability. Investors and businesses alike must recognise that the past climate is no longer a sound basis upon which to plan for the future. Uncertainty is no excuse for inaction. Uncertainty over climate change is often cited as justification for delay or inaction. Yet there is greater consensus in the scientific community that man-made climate change is underway than on almost any other issue. We have more knowledge and understanding about how our climate is changing than we have about demographic change, interest rate movements, currency fluctuations, or market variations, and yet every day businesses are prepared to take decisions which are affected by these uncertain drivers. While there are still uncertainties about the precise impacts of these climatic changes at individual locations, there is sufficient information now to enable businesses to incorporate climate risks into decision-making. Uncertainties can be better understood by using climate change scenarios and by identifying thresholds and sensitivities. The sophistication of climate modelling improves year on year. In the UK, the UKCIP02 climate change scenarios (produced by the Hadley Centre for Climate Prediction and Research and the Tyndall Centre for Climate Change Research) currently provide the best information on how the UK s climate is expected to change over coming decades. The next UKCIP climate change information package, due to be released in 2008, will incorporate probabilistic climate information, and provide a useful tool for risk-based decision-making. A business will only flourish if its leaders are adept at weighing risks and making robust decisions in the face of uncertainty. The successful business of the future is taking climate risks into account today, and is developing adaptive strategies and actions to manage the uncertainties. 5

A changing climate what is the science telling us? A changing climate what is the science telling us? The rising concentration of carbon dioxide (CO 2 ) and other greenhouse gases (GHGs) in the atmosphere is changing its composition and preventing heat from escaping the earth s surface. Man-made emissions have already increased CO 2 concentrations by one third compared to the start of the industrial era and, by mid-century, concentrations are expected to be twice pre-industrial levels. Temperature change ( o C) 8 6 4 2 0 Observations Medium High Emissions The result is climate change. Global average temperature has risen by about 0.6 C since the beginning of the twentieth century, with about 0.4 C of this warming occurring since the 1970s. The Intergovernmental Panel on Climate Change (IPCC) has attributed most of the observed warming of the last 50 years to human activities. The summer of 2003 was an unusually hot one over large parts of Europe, with August temperatures 3 C higher than the long-term average. This caused major business disruptions and over 20,000 excess deaths directly attributable to the high temperatures. In the UK there were an estimated 2,000 excess deaths. The Met Office estimates with high probability that the risk of such anomalously high European temperatures has already doubled due to the effects of GHG emissions. 2 1900 1950 2000 2050 2100 Year In the absence of any human modification of climate, temperatures such as those seen in Europe in 2003 are estimated to be a 1-in-1,000 year event. A simulation using the Hadley Centre s global climate model (Figure 1, red line) of summer warming until 2100 over southern Europe shows that by the 2040s a 2003-type summer is predicted to be about average, and by the 2060s it would typically be the coolest summer of the decade. Under continuing climate change, in the UK we can expect: increasing climatic variability, rising temperatures, increasing risk of heat waves, changing patterns of rainfall, with wetter winters and drier summers, increasing risk of drought and flood, rising sea level, increased frequency and severity of sea storm surges, possible increased storm intensity and frequency. There is also mounting evidence that tropical cyclones (known as hurricanes in the North Atlantic) will become more intense in a warmer world. The devastating impacts of Hurricanes Katrina and Rita in 2005 demonstrate the kinds of risks that could become more common. The Gulf Stream will continue to exert a very important influence on UK climate. Although its strength may weaken in future, perhaps by as much as 25% by the end of the century, it is unlikely that this would lead to a cooling of UK climate since warming from GHGs will more than offset any cooling from a weakening of the Gulf Stream. Figure 1: European 2003 summer temperatures could be normal by the 2040s; cool by 2060s [Source: Hadley Centre, 2005] 6

Significant business risks Significant business risks The impacts of increasing climate variability and a changing climate for business will be far reaching. Our current economic structures and social and cultural support systems have developed over many years partly in response to relatively stable climatic conditions. The stability to which we have become accustomed has allowed a measure of predictability based on the analysis of historic climate data. In a changing world these systems and structures are increasingly exposed to extreme weather conditions and changing long term average climate conditions. Decisions based on a historic analysis of climate data are no longer future-proof. Awareness of climate risks is growing across all areas of government, business and society. There are a number of driving forces that are increasing the visibility of climate risks and the market opportunities: the climate is changing, the frequency and intensity of severe weather events is increasing, there is increased interest in scientific information about the climate and a consensus within the scientific community on climate change, there is also increasing interest from the legal profession and recent cases of litigation on climate change in the US, governments and others in the public sector are beginning to create guidance, legislation and regulation to address changing climate risks, public awareness of climate change is very high and is linked to brand value, the insurance and investment communities have awakened to the risks, and are highlighting their concerns, there is increasing importance attached to business continuity, corporate governance interest in director-level risk management is growing fast, society is becomingly increasingly risk-averse. It is clear that few businesses have yet to recognise the new and unfamiliar threats arising from a changing climate. Fewer still have begun to assess the risks and opportunities and to develop risk management processes and actions to meet the challenges. Impacts will be felt by every business irrespective of their size, location, markets, products and services, and will affect: natural resources and raw materials, supply chains and logistics, fixed asset design and construction, asset operation, performance and maintenance, processes, asset values, markets, products and services, workforces. In this report we discuss some of the risks companies will face to, for example, financial performance, litigation, brand and reputation, credit rating and regulation. Those that fail to respond will be unable to take advantage of the opportunities. Value, return and growth at the tipping point The perception and realisation by the financial markets and investors of the risks to value, growth and return are emerging. The insurance industry in particular, is already acutely aware of the potential impacts and has had first hand experience of the costs arising from events driven by climate change. The direct risks arising from climate change rising sea levels, more extreme weather events, alterations to rainfall patterns will affect operational costs for many businesses as they adapt sites and processes to mitigate them. Tom Burke, Visiting professor at Imperial and University Colleges London, Environmental Policy Advisor to Rio Tinto "Integrating climate change into investment analysis is simply common sense The carbon intensity of profits is an approach that needs to be adopted Climate change is a problem that s not going to be solved by politicians Politicians have an important role to play; but the underlying reality is going to have its effects on the market, regardless of public opinion and government action. Al Gore 7

Significant business risks The potential results of climate change including changing weather patterns, rising temperatures and sea level rises would affect Sky (in the same way as any business) in the long term in many ways. British Sky Broadcasting, FTSE 100 Climate change impacts increasing impacts, risk and cost Current value, return and growth expectations Measures of business success We expect climate change not only to produce extreme capital damaging events but also to increase uncertainty around corporate business plans and potentially reduce asset values. Lloyd s of London Reduced value, return and growth 2006 Tipping point Significant impacts Figure 2: Value, return and growth at the tipping point Sudden financial shocks could still pose a threat to financial stability. Such shocks can take a variety of forms, such as natural disasters (possibly driven by climate change) Financial Services Authority While some companies have begun to treat climate change as a fundamental strategic issue, many more are not disclosing their climate risks or plans to address it, creating uncertainty for investors and difficulty assessing the true longerterm value of our portfolios. Institutional investors at the Investor Summit, May 2005 Climate change could be the next legal battlefield: compensation claims for man-made environmental damages would make the tobacco sector payouts look small. Financial Times, 14 July 2003 Hurricane Katrina has been widely recognised as a tipping point for the insurance industry in the USA. In the UK and Europe insurers have been at the forefront of business sector activity in analysing the potential impacts. The Association of British Insurers assessed the financial risks of climate change and warned of the risk of increasing tropical storm activity and its impact on insurance and economies prior to Hurricanes Katrina and Rita. Lloyd s this year warned of the challenges the industry and its clients faced and the threats to long-term solvency. Aviva, Allianz and Axa have been active in understanding the risks to their businesses; Swiss Re and Munich Re have been at the forefront of raising the profile of climate change as a business risk rather than an environmental issue. Figure 2 shows that the costs, risks and impacts of climate change will increase over time. There will be a point (the tipping point) driven by either a financial shock (for example, an extreme event) or by an increasing awareness and understanding of the reality of climate change, when these costs, risks and impacts challenge expectations for value, return and growth. At this point the financial markets, analysts, credit rating agencies, investors, fund managers etc., are likely to review the risks and their expectations of value, return and growth figures. Although for some sectors there are perhaps 20+ years before the impacts of climate change have a significant effect, the tipping-point will occur earlier, as investors review their portfolios and assess their investment liabilities. Directors are being challenged by investors to demonstrate their corporate governance credentials. The spotlight on financial management and reporting is now also focusing on wider strategic risk management issues. Over the next few years we will see a greater awareness and understanding of the impacts of a changing climate. The importance of this for businesses is that their adaptation strategies and actions need to be in place, that is businesses must become climateproofed, before the tipping point and well before the direct effects of a changing climate are felt. Litigation The interest in climate change from the legal profession has for the most part been restricted to the emerging markets in carbon trading and emissions. There has been limited attention to the issue of adaptation. As the financial impacts of climate change and adaptation begin to be recognised we are likely to see the use of litigation as a means to recover costs. The legal costs and reputational damage associated with defending climate change actions could be enormous. A recent report by Freshfields Bruckhaus Deringer has challenged the traditional narrow interpretation of fiduciary duty. The report identifies the impact of climate change as a risk which may affect any investment; failure to assess the risks may result in claims of neglect of fiduciary duty by beneficiaries. 8

Significant business risks Lawyers are beginning to acknowledge that there is now sufficient information available on climate change for companies to take it into account in both strategic and project level decision-making. All decisions taken by directors and professional advisers that do not take climate change into account may be open to legal challenge. In the future the courts will examine claims and may decide that it was reasonable, at the time the decision was made or advice given, to have foreseen the impacts of climate change, based on the information available in the public domain. The issue for the courts will be deciding if there were any knowledge points from which it may have been reasonable to consider that the impacts of a changing climate should have been known. Potential knowledge points may include documents produced by governments, regulatory agencies, professional institutions, sector organisations and advisory bodies setting out the impacts of climate change and actions that may be necessary, relevant or advised. These knowledge points already exist. There is generic information, for instance, reports produced by the Intergovernmental Panel on Climate Change (IPCC) and also sector-specific information. Some examples of these knowledge points are given in the sector summaries in later sections of this report. Figure 3 identifies the effect of knowledge points on decision-making and litigation risks. All decisions made and advice given since the dates of the knowledge points have an accrued litigation liability. The accrued litigation liability will continue to increase through continuing failures to build climate change into decision-making. Reasonable forseeability of climate change and the risk of litigation should be on the radar screens of all companies in their corporate risk assessment procedures. Brand and reputation Consumer preferences and needs will change as the impacts of climate change become apparent. To take a simple example, southern European holiday destinations may become less attractive in summer, due to increasingly hot temperatures. Those sectors and individual businesses that do not respond will find their reputations suffer significant damage. Correspondingly those that recognise the opportunities will become sector leaders. Research commissioned by the Carbon Trust demonstrates that there are high levels of public awareness of climate change in the UK, and that it may not be long until it becomes a mainstream consumer issue. The effects of climate change can now be regarded as being reasonably foreseeable at every stage it must be incumbent upon professional advisors to ensure that appropriate steps have been taken. Malcolm Dowden, Charles Russell LLP It is prudent to plan for a substantial change in consumer behaviour on climate change. The Carbon Trust Figure 3: Increasing liabilities Climate change impacts IPCC First Assessment Report Increasing impacts, risk and cost Future 1990 Generic knowledge point Accrued liabilities for decisions which are not climate-proof Now Accumulating liabilities 9

Significant business risks The insurance industry has to respond to customer and shareholder needs. Both will increasingly look to the industry to provide effective responses to the threats caused by climate change. Evan Mills, Staff Scientist, Lawrence Berkeley National Lab Increased losses could raise the cost of capital and increase the volatility of insurance markets. ABI 2005 These are the conclusions from the research. The public today are aware of the prospect of climate change. Two thirds of Britons say they know a great deal or a fair amount about it. In banking, the mostly likely exposure to climate risks arises from a bank s investment and lending exposure. A bank s position on decisions such as mortgage conditions on properties exposed to increasing flood risk may cause a negative response from consumers. In some sectors, the lead time for action could be several years, leaving unprepared companies at risk. There is an opportunity for differentiation against competitors. Forward-looking companies need to assess the risks, to avoid falling behind on such a mainstream consumer issue. This research is confirmed by further work recently commissioned by BSkyB, which found that 81% of UK consumers are "strongly concerned" by climate change or recognise it as important, demonstrating a significant latent demand. The insurance sector is showing leadership in this area recognising that consumer preferences and needs will be different. A recent report commissioned by CERES explores the opportunities for new products and services. Credit rating Credit ratings and the cost of capital will change in response to the actual and the perceived impacts of climate change. The tipping points on value, return and growth are likely to trigger rating revisions and increases in the costs of capital. We are already seeing these movements in the insurance industry. The increasing frequency and intensity of climate-related catastrophes has exposed a number of insurers and reinsurers who had underestimated their catastrophe exposures. Credit rating agencies around the world have been reassessing the exposures of the industry and adjusting credit ratings accordingly. Increasing storm activity and intensity and the impact of more frequent droughts, heatwaves, fires, subsidence and heave, together with the effect on business continuity and increasing director and officer liabilities will increase the pressure on the insurance industry. Other sectors will be similarly affected with changes to credit ratings and higher costs of capital as they reach their own tipping points. Growing government action on adaptation The response by governments in Europe to inevitable climate change has so far been patchy. In the UK we have seen a tightening of building regulations and planning policy controlling the use of land and construction standards in response to concerns over increasing flood risk and subsidence risk due to climate change. The EU is currently considering a floods directive and an adaptation strategy with calls for greater controls on spatial planning. Government action on adaptation is not confined to flooding. A new Planning Policy Statement, PPS26, focused specifically on climate change, will be published towards the end of 2006. All sectors could be affected by changes in government policy and regulations. There are already, for example, calls for the introduction of maximum workplace temperatures for factories, offices, schools, hospitals and public buildings. If such standards were introduced, there could be significant financial impacts arising from the increased capital and maintenance costs necessary to adapt buildings. It is inevitable that legislation and regulations will change, as will supporting guidance, codes of practice and standards in response to the impacts of climate change. This will impose future liabilities which may require remedial action. Climate-proofing strategies and projects now is a sensible adaptation action. The longer the delay by business in responding to inevitable climate change, the more likely we are to see governments respond and act more aggressively with prescriptive regulation on adaptation. 10

Sector summaries Sector summaries Vulnerability to climate change varies significantly from sector to sector, and from company to company. This variation depends on the individual business or sector s ability to manage the physical, litigation, financial, reputational and market risks of future climate change. The following analysis is not intended as a comprehensive examination of the climate impacts on individual business sectors. It is based on the responses received from the CDP4 information request, supplemented by our comments. It highlights the likely risks and demonstrates the potential scale of the impacts if businesses fail to take account of climate change as a business risk. A complementary report has been prepared for the Carbon Disclosure Project by Trucost, which analyses the responses in the context of greenhouse gas emissions. CDP4 questionnaire response rates for the FTSE 100 differ considerably from the response rates of the smaller companies that make up the, as shown in Figure 4. Whereas 83% of FTSE 100 companies answered the questionnaire, only 36% of did so. The proportion of companies that provided information in place of a questionnaire response was similar: 10% for the FTSE 100 and 15% for the. Only 7% of the FTSE 100 companies declined to participate or did not provide a response. By contrast, half of the companies (49%) declined to participate in the CDP4 process or provided no response. A list of the companies in the FTSE 100 and is provided in Appendix 5. Responses to Q3 (and, to some extent, Q1) of the CDP4 questionnaire described the level of understanding and concern about the risks posed to companies by the impacts of climate change. Our analysis shows that, of the 165 UK companies that responded to the CDP4 information request, 13% are highly concerned about exposure to climate risks, 32% expressed a medium level of concern, 46% expressed a small amount of concern, and 9% were not concerned at all. Figure 5 shows the level of concern over climate risks expressed by CDP4 respondents, by sector and as a total. The highest proportion of highly concerned respondents were found in the following sectors: Utilities (50%), Banks (43%), Chemicals (33%), and Mining, steel and other metals (29%). The highest proportion of respondents who expressed little or no concern were drawn from the following sectors: Software and computer services (100%), Media and entertainment (91%), Real estate (89%), Pharmaceuticals and biotechnology (80%), Automobiles and machinery (80%), Leisure and hotels (75%), Aerospace and defence (67%), Chemicals (67%), and General retailers (67%). A modified version of the Financial Times sector classification system was used for this analysis. Because of the large number of sectors and the low response rate in some sectors, we merged some sector categories on the basis of similar climate risks. As an example, we combined the Mining sector with the Steel and other metals sector to create a new Mining, steel and other metals category. In the following sector summaries we provide a very brief outline of FTSE 350 respondents perception of the climate risks faced by their company, accompanied by quotes drawn from company responses. We have included some quotes from the FT 500 responses, though these are not included in the analysis. This is followed by our expert analysis of each sector s exposure to climate risks, and case studies of impacts that are already being felt. 10% 83% 38% 5% 2% 11% FTSE 100 15% 36% Answered questionnaire Provided information No response Declined to participate Figure 4: Response rates to the CDP4 information request from the FTSE 100 (top) and (bottom). 11

Sector summaries Percentage of respondents 100% 80% 60% 40% 20% None Small Medium High Level of concern over climate change risks 0% Utilities Banks Chemicals Mining, steel & other metals Insurance Specialty & other finance Pharmaceuticals & biotechnology Construction & building materials Tobacco & beverages Food related industry Oil & gas, electricity Transport Support services Telecommunication services Aerospace & defence General retailers Hotels & leisure Automobiles & machinery Real estate Media & entertainment Software & computer services All sectors Figure 5: Level of concern over the risks posed to companies by the impacts of climate change. At the moment we do not anticipate major threats to our key facilities due to climate change. Rolls-Royce, FTSE 100 Every individual is exposed to the effects of extreme climatic events and changes. BMW, FT 500 The potential effects of climate change include a combination of physical and material damage as well as operational losses. Other possibilities are image risk, thirdparty liability and, in certain cases, market risk. To date, there have been no tangible or visible effects in our operations. Renault, FT 500 Aerospace and defence Despite the significant potential climate risks in this sector, most aerospace and defence respondents (67%) show little or no concern about the impacts of climate change on their business. Like all high technology and engineering industries, the aerospace and defence sector is vulnerable to any disruption in supply chain or manufacturing processes. Both incremental changes and extremes of climate can interrupt engineering operations. Just-in-time manufacturing and delivery systems can exacerbate the vulnerability of supply chains and operations. Climate variability and change can also have knock-on impacts on quality, timeliness, precision and performance in manufacturing. The climate risks to global security are potentially enormous. Climate change will likely trigger severe disruptions with significant consequences for local, regional, and global security. These events could exacerbate existing tensions, prompting diplomatic and trade disputes. In the worst case, extreme events have the potential to destabilise the global economy and geopolitical balance, and incite conflict. The market repercussions for the aerospace and defence industries are considerable. This sector is heavily reliant on both water and energy. Climate-related reductions in the availability, or disruptions to the supply, of either resource will affect sector performance. This industry is also reliant on production line and factory workers, whose comfort and productivity can be compromised by warmer working conditions. Automobiles and machinery CDP respondents in this sector do not yet appear to have experienced losses or increased costs due to climate risks. These industries are most vulnerable where businesses are dependent on climatesensitive resources, or where their supply and operations are affected through consumer behaviour or transport disruption. Of those who provided a response to the CDP questionnaire, 80% expressed little or no concern about climate risks. Climate variability and change can cause significant supply chain interruptions to intensive production schedules, with subsequent cost implications. Transport systems, on which the global supply chain depends, are also vulnerable to climate impacts. The high value of finished stock in transport or port storage is vulnerable unless the ports and shipping risks are managed. The complexity of this sector s production network makes it vulnerable to interruption. The automobile and machinery sector should review the climate risks to supply chains and logistics, particularly where extreme 12

Sector summaries events have the potential to cause significant disruption. Higher indoor temperatures, when combined with the heat of process environments, will result in more uncomfortable working conditions. This has the potential to reduce productivity and increase workforce health risks, respiratory problems and absenteeism. Any adaptation strategy will need to weigh up these productivity costs against, for example, costs of improving building ventilation. Process environments will become hotter with increased need for cooling. Any additional cooling must be low carbon, in line with climate change mitigation objectives. Increased humidity will increase drying time for painted products. Some product components and testing regimes may need to be adapted to cope with climate change. Regulatory risks include the possible introduction of maximum working temperatures in manufacturing and process environments. Banks Respondents in the banks sector show a high level of awareness of the risks they face from the impacts climate change. Over 85% of companies who responded to the CDP4 questionnaire in this sector expressed a high or medium level of concern about the vulnerability and exposure. The banking sector faces a potentially high level of risk if investments are made in assets that are vulnerable to climate change. Climate risk management strategies should incorporate a risk screening for assets and investments. Fund managers face potential risks and opportunities associated with climate change. These include risks to equities, debt (both corporate and governmental), and real estate. Impacts will vary between sectors, companies, and the countries in which particular assets are based. Corporate investment decisions made now should take into account the potential physical impacts of a changing climate. Where possible, adaptation strategies should ensure that they are appropriate to future climate risks. As climate change will affect shareholder value now and in the future, fund managers should be taking appropriate steps to ensure that the risks and 13 opportunities associated with climate change are actively considered within investment processes. The office-based banking industry also faces business risks from decreased employee productivity in buildings that are not designed to cope with higher temperatures. Much of the discussion on climate risks and vulnerability for the insurance sector is relevant to the wider financial service sector because of the inter-linking of insurance and capital markets. A proactive stance on dealing with climate change could enhance the reputation of individual banks and the financial sector. Chemicals One third of CDP4 respondents in this sector are highly concerned about their exposure to climate risks. Rising ambient air temperatures, variations in water quality, and the availability of cooling water will all have an effect on chemical processes. These must be considered thoroughly, as they will have knock-on impacts across all activities in this sector. Low river flows during hot, dry summers can lead to restrictions on water abstractions, with consequences for cooling processes when the need for cooling is highest. Low flows also mean restrictions on the volume of high temperature water that companies are allowed to discharge to rivers and streams, with impacts on production. Finally, low river flows are less able to dilute pollutants, leading to tightened restrictions on effluent discharge. Changes to chemical processes, particularly under extremes of high temperature, will affect process operations and corrosion rates. Volatile chemical storage procedures will need to take account of rising temperatures and the impacts on tank pressure. The stability and performance of some chemical formulations are temperature dependent. Vulnerability of supply chains may lead to an increased disruption to supply. This may mean that providing additional materials storage capacity may be desirable to provide greater resilience. There are considerable regulatory risks to consider, as handling, transmission and storage safety standards may be compromised. Barclays considers adaptation to be an important issue which society must start to address in order to face the future impacts of climate change. Barclays, FTSE 100 The impact of climate change on the costs of extreme weather events is of major concern to HBOS, particularly as we are the UK s leading mortgage lender and home insurer. HBOS, FTSE 100 Climate change, climate policy and adaptation processes create risks as well as opportunities for Bayer. Bayer, FT 500

Sector summaries No direct physical risks today or expected for the future. Saint-Gobain, FT 500 Climate change impacts on our business in several areas, e.g. design of buildings, infrastructure and support services, transport, biodiversity, through our supply chain and through all our atmospheric impacts (energy and fuel consumption). Carillion PLC, Sainsbury s is potentially affected by these symptoms of climate change both directly (in so far as store operations, warehousing and distribution could be affected having a direct effect on product availability) and indirectly (in so far as our global supply chain could be affected by events further afield which in turn could potentially compromise product availability). J. Sainsbury, FTSE 100 Construction and building materials As buildings generally have an expected lifetime of between 20 and 100 years, it is important that we take the impacts of climate change into account when designing or retrofitting our built environment. Despite this, more than 40% of companies in this sector expressed low levels or no concern over their vulnerability in the face of a changing climate. Many non-domestic buildings such as offices and shops have high internal heat gains and therefore require cooling in all except cold winter weather. Temperature increases will significantly increase cooling loads in new and existing building stock. It is vital that any new cooling is low-carbon, in line with emissions reductions targets. Warmer winters will also reduce heating requirements. In order to meet comfort criteria for a present-day hot summer, several features can be included in building design to manage indoor temperatures. Examples are high thermal mass, shading, and natural (windows open) or mechanical (fans) night-time ventilation. These features may be lacking in existing buildings, and are expensive, difficult or sometimes impossible to retrofit. The vulnerability of housing and commercial developments to floods is partly a function of design and the materials used. Modern housing is more vulnerable to flood damage because of the greater use of chipboard floors, dry wall plasterboard, cavity insulation, and design features such as lower door thresholds to improve access. Building design should take full account of future potential water constraints, through use of grey water recycling and other water conservation practices. Climate change adaptation and mitigation are closely related for the built environment; many single measures will have effects on both. For example planting trees reduces summer temperatures (adaptation) and cooling loads (mitigation). Figure 6: Knowledge points for construction and building materials sector 2006 Adapting to climate change: lessons for London London Climate Change Partnership 2005 Beating the heat: keeping UK buildings cool in a warming climate Arup and UKCIP Climate change and the indoor environment: impacts and adaptation CIBSE TM36 Adapting to climate change: a checklist for development Three Regions Climate Change Group Climate change risks in building an introduction CIRIA 2003 Building knowledge for a changing climate EPSRC and UKCIP 14

Sector summaries Food-related industry Because of its reliance on agricultural production, stable energy supplies and distribution systems, the food-related industry is exposed to climate risks across all activities. CDP respondents in this sector as a whole have not grasped the sector s vulnerability to climate risks, with only 12.5% of companies expressing a high level of concern about the impacts of climate change, though a few market leaders are taking this issue very seriously. As part of a wider global market, the UK s food-related industry is vulnerable to the complex impacts of climate change on competitors and customers. Higher temperatures, changing patterns of rainfall, and knock-on impacts on pests, diseases and competing plants all mean that crops may no longer be economically viable in current locations under future climate conditions. Crops that remain workable may be of reduced quality. Current production methods and market standards (e.g. supermarket washed produce) are water and energy intensive, and may become increasingly expensive. Diversification into new crops with which they have little experience growing exposes producers to vulnerability. In addition, investment in equipment constrains producers to specific crops until the capital is repaid, making it difficult to diversify. As temperatures increase, suppliers and distributors will be increasingly forced to rely on refrigerated/cooled systems for produce and livestock. Any new refrigeration or cooling systems should be low-emission and low-carbon, in line with emissions reductions targets. During hot, dry summers there will be an increasing risk of interruption of water supply to irrigation systems. Staff may need training in new skills associated with new crops, new technologies and new approaches to land management. A largely outdoor agricultural workforce is at increased risk of heatstroke and skin cancer. General retailers It is clear that the weather plays a significant part in affecting consumer preferences, and the complex distribution systems of general retailers can make this sector vulnerable to the impacts of climate change. Despite this, none of the general retailers who responded to the CDP4 questionnaire expressed a high level of concern. More than two thirds of respondents expressed low levels or no concern over their vulnerability in the face of a changing climate. General retailers are less exposed to the direct impacts of climate change than, for example, the agricultural or manufacturing sectors, but they face knock-on impacts in terms of supply chains and distribution, premises, and changing structures of market demand. All premises and transport systems are vulnerable to weather-related events like floods, storms, subsidence. Infrastructure for transport and utilities is particularly vulnerable, and therefore places at risk wholesale and retail trade businesses. Retailers with global markets or suppliers will be affected by climate change impacts in other countries. People tend to consume different kinds of products in different weather conditions and in different seasons. Market opportunities may result from climate change. The impacts of temperature, rainfall and wind upon the buildings in which retail business is conducted are important. Working conditions in such buildings could become adversely affected in high summer temperatures, reducing morale and productivity, whilst driving rains could necessitate higher levels of routine maintenance. Additional cooling may be required to alleviate higher working temperatures, and this must be achieved without jeopardising emissions reductions targets. Buy now while stocks last (The Indepedent, 31 May 2006) GlaxoSmithKline, the company that owns Ribena and buys 95% of the UK blackcurrant harvest, is concerned that production of the fruit will suffer in milder winters. The pharmaceutical group has asked scientists to cross-breed varieties that are less reliant on harsh winters and heavy frosts. Growers of UK blackcurrants have noted that crops, currently worth about 10 million annually, have declined in recent years. A weather eye on the bottom line (The Observer, 6 August 2000) Weather has a strong effect on consumer preferences, and retailers stand to benefit by taking this into account for supply planning. The Observer reports that sales of canned lemonade rise as temperatures exceed 18 C, but decline again on very hot days when consumers prefer water to quench their thirst. Banana sales slump during cold months and also perform badly during the hottest months. Understanding the impact on customer demand can be the difference between a good and a bad trading statement. Sales suffer after hot summer (Financial Times, 8 September 1995) The long hot summer of 1995 affected seasonal consumer purchasing patterns, with customers uninterested in autumn and winter clothing while temperatures remained high. Many retailers postponed acceptance of, and payment for, autumn/winter orders, causing share prices in some clothing manufacturers to suffer. It s too hot to shop as records tumble (Daily Telegraph, 27 July 2006) Continuing hot weather is causing problems for shops with sales down 5%. Department stores reported that trade was down 7.3%. 15

Sector summaries Breton tourism boosted by the heat wave (AFP, 14 June 2004) Tourism professionals in Brittany attributed one million additional visitor nights in last minute reservations or lengthened stays to the heatwave of August 2003. Visitors keen to flee the strong heat of the south or centre of France found refuge on the moderate Finistère coast of Brittany. Global warming to wash away beaches, warns Spanish study (The Guardian, 11 September 2006) Spain s beaches are expected to decrease by an average of 15 metres by 2050, according to a Spanish environment ministry report that highlights the effects of rising sea levels and stronger waves and currents on the country s coasts. Holiday homes on unprotected beaches are directly at risk of flooding. The report s coordinator, Professor Raúl Medina, said that property in areas currently popular with British holiday home buyers is an increasingly bad long-term investment. Hotels and leisure The global nature of the hotel and leisure industry makes this sector particularly vulnerable to climate risks worldwide. It will be affected by market shifts in the UK, as well as changes to global competitors and international consumer preference. Despite this, none of the CDP respondents indicated that they were highly concerned about their exposure to climate risks. Three-quarters of the leisure and hotel respondents expressed a low or no level of concern. Southern Europe and other traditional destinations may become less attractive for summer holidays due to increasingly hot temperatures and the potential for water availability problems and loss of beaches to sea level rise. Though this may result in increased visits to British and other northern European destinations, in order to exploit this potential opportunity operators and managers must maintain a high quality environment, efficient transport systems and sufficient capacity to cope with a rise in tourist numbers, all of which will be vulnerable to climate risks. Sea level rise, coupled with an increased frequency and severity of sea storm surges will contribute to the loss of UK beaches. Hotels and other leisure developments must be built with the future climate in mind. Many hotels, cafes, restaurants, and visitor attractions in the UK do not have air conditioning at present. Lowcarbon cooling of indoor environments may be necessary to meet customer expectations. Riverside locations may become less attractive with increased risk of flooding. Sports and recreational fishing could suffer in dry summers, and there may be insufficient water to maintain inland canal navigation. Maintaining water quality will be critical during hot, dry summers with low stream flows. This could also affect the attractiveness of waterside commercial leisure developments. Insurance The insurance industry has considered adaptation more thoroughly and for longer than most other sectors. Most major insurance organisations globally are beginning to ask questions and produce guidance on management of climate risks. More than half of the respondents in this sector expressed a high or medium level of concern about climate change impacts, reflecting the fact that this industry is gaining a clear understanding of the complexity of this as a business issue. Scotland s ski industry balances precariously (Financial Times, 10 January 2006) The number of skier days across Scotland fell to just under 150,000 in the 2005-06 season, down from over 650,000 in 1987-88, according to Visit Scotland. Figure 7: Knowledge points for insurance sector 2006 2005 Climate change: adapt or bust Lloyd s Availability and affordability of insurance under climate change: a growing challenge for the US CERES The impact of climate change on the already unpredictable winter sports season has influenced managers to market ski resorts as all-year destinations. This follows the example of Whistler in Canada, a centre for skiing in winter and mountain biking and walking in the summer. 2004 2002 Financial risks of climate change Association of British Insurers A changing climate for insurance Association of British Insurers Climate risk to global economy UNEP Financial Initiatives 2001 Climate change and insurance Chartered Insurance Institute Climate change & insurance Chartered Insurance Institute The implications of climate change for the insurance industry Building Research Establishment 1994 The impact of changing weather patterns on property insurance Chartered Insurance Institute 16

Sector summaries The insurance sector is highly sensitive to weather and climate risks, and the industry has developed wide experience and understanding of the impacts of climate on its operations. These include claims associated with short term extreme events like flash flooding, and longer term events such as hot, dry spells which can lead to increased subsidence. Insurance markets have significant overseas exposures to climate change risks around the world. Typically, weather damage accounts for one quarter of total property insurance claims in the UK, but this may rise to between one third and one half of total claims in event years such as 1990 and 2000. The severe storms in 1990 in the UK led to property claims of more than 2.4 bn, while the floods in autumn 2000 resulted in insured costs of 1 bn (both 2004 prices). Climate change could significantly increase the costs of storm damage, flooding and subsidence, and climate risks in other sectors of the economy could have further implications for financial markets. Life and pensions products typically lockin assumptions (on investment returns, mortality, morbidity, policyholder behaviour etc) for very long periods, often 20-30 years and beyond. Because the insurance industry is so vulnerable to climate risks, the sector can be seen as a useful barometer of the financial impacts of climate change. Media and entertainment CDP4 respondents in the media and entertainment sector have not considered the impact of climate change on their business. Over 90% of companies who answered the questionnaire expressed little or no concern about the climate risks they face. Workers in the media and entertainment sector are highly office-based, and may experience working conditions beyond acceptable thresholds in buildings designed for the current, rather than the future, climate. Nearly all businesses make use of premises, transport systems, and utilities, all of which are vulnerable to weatherrelated events like floods, storms, subsidence. Disruption to electricity supplies, water supply and sewerage as a result of extreme events will have significant impacts on businesses. Transport and delivery systems for goods and services are also vulnerable to climate risks. Premises affected by flooding can severely damage business profitability through costly refurbishment, temporary lack of access, and disruption to trading. Mining, steel and other metals Several CDP4 respondents in the mining, steel and other metals sectors referred to the risks they face due to inevitable climate change. A third of the companies who responded to the questionnaire expressed a high level of concern, while another third expressed a medium level of concern. Mining and metals are energy and water intensive industries, already susceptible to varying climatic patterns. The availability and maintenance of these two climate-sensitive resources is essential to the success of the sector s operations. Mining operations today are conscious of the risks of heavy rains and of high flood potential, and these risks will increase in the future. Increased rainfall and risk of flooding creates a higher risk of overflow of storage reservoirs and of holding ponds containing contaminants. If released into the surrounding environment, contaminants can pollute soils, plants and surface and groundwater supplies. Refineries and smelters use large volumes of water for processing and cooling. Metal and mining metal processes cannot proceed efficiently when low rainfall produces too little water. Plant discharge water and drainage infiltrating through refinery and smelter wastes can become contaminated. During long hot summers, low stream and river flows may necessitate tighter discharge regulations. Global impacts of warming on, for example, permafrost, sea lanes, and flying weather could significantly improve or reduce the efficiency of resource extraction. As the mining and metals industries play an important and often central role in many rural economies, climate affects community livelihoods as well as productivity. In general insurance Aviva currently incurs several hundred million pounds worth of claims per annum from weather based events across our European and Canadian businesses. Aviva, FTSE 100 Weather is an important operational aspect for Rio Tinto operations. Many Rio Tinto operations are in areas where there is competition for water. Some operations are in storm (cyclone) prone areas. Shipping is vital to the transport of our bulk commodities, particularly from Australia. Some operations have unusual dependence upon climate eg Diavik diamond mine in Canada s Northwest Territories is mostly supplied in winter using an ice road. Rio Tinto, FTSE 100 Potential changes in weather patterns including the intensity and frequency of storm activity and rainfall patterns will impact some sites directly. BHP Billiton, FTSE 100 17

Sector summaries Only last year in 2005 the integrity of our operations was severely challenged by the two hurricanes Katrina and Rita that struck some of our US assets. BP, FTSE 100 Hot summer topic: Why heat waves spur electricity blackouts (ScienceDaily, 24 August 2006) Very high temperatures in the northeastern United States during August 2006 saw ISO New England, the company that operates the region s electrical grid, introduce innovative measures to deal with record power demands. To ease pressure on the power grid, the company reimbursed businesses willing to curtail daytime usage of electricity, redirected excess power from other parts of its network, and purchased additional power from Canada. By contrast, California suffered a longer heatwave and blackouts, caused mainly by failed distribution equipment. The majority of blackouts are not caused by power shortages. In fact, about 90% of blackouts in the region are the result of equipment failure on ageing and overloaded distribution networks. Air-conditioners spark power shortage fear (The Daily Telegraph, 27 July 2006) The National Grid urged companies to increase generation capacity for the second time in a week to avoid a shortage. Demand has increased above traditional summer figures due to the increase in use of air conditioning during the heatwave. During summer months the generating companies switch-off some of their power stations to carry out maintenance. More warnings from the National Grid are possible if the heatwave continues during the period when generators seek to carry out maintenance work. The spot price of electricity jumped 73%.The electricity supplier said it had suffered four separate network failures, aggravated by high demand for air conditioning in the unusually hot weather. Oil, gas and electricity This sector is highly exposed to climate risks across all industry activities, from electricity generation, oil and gas extraction, energy distribution and trading. Despite these significant risks, only 10% of CDP respondents expressed a high level of concern about climate change impacts on their business. Almost half (40%) of respondents expressed little or no concern. Many of the UK s coal- and gas-fired power stations are cooled by river water. Hot dry summers and decreased stream flow increase the risk that river water volumes will be insufficient to dilute cooling water effluent. In these cases power stations are forced to reduce output in order to meet regulatory pollution control standards. Significantly, these episodes usually coincide with peak demand for energy for cooling. Many of the UK s coal, oil and gas (and all nuclear) power stations are located along the coast, and are significantly exposed to flooding and erosion risks due to sea level rise and increased storm-surge height. The observed shift in demand, from energy for heating in winter towards cooling and refrigeration in summer, will be exacerbated by rising summer temperatures. Summer peak demand will be amplified in cities through the Urban Heat Island effect. Output from many forms of generation, particularly gas-fired, is lower in hot weather due to reduced turbine efficiency. In a hot 2003-type summer, for example, output could be reduced by 10%. By the 2040s, summers like the one experienced in 2003 will become the norm. Extreme weather events, like Hurricanes Rita and Katrina, can mean losses in oil refining capacity and consequent oil price rises. As facilities age, and as more demand is put on them, they are more likely to fail under extreme events and incremental climate change. 18

Sector summaries Pharmaceuticals and biotechnology CDP respondents in this sector do not yet appear to have considered their vulnerability to climate risks. Of those who provided a response to the CDP questionnaire, 80% expressed little or no concern about climate risks. This sector is heavily reliant on both water and energy. Climate-related disruption to the supply of either resource will affect sector performance. This industry is also reliant on production line and factory workers, whose comfort and productivity can be compromised by warmer working conditions. Higher indoor temperatures can compromise high technology and precision engineering processes. This can have knock-on impacts on performance conditions and quality standards for production processes. Changes to chemical processes, particularly under extremes of high temperature, will affect process operations, corrosion rates, storage materials and times. Vulnerability of supply chains may lead to an increased disruption to supply. This may mean that providing additional storage capacity may be desirable to provide greater resilience. Changes to chemical processes and storage may also contribute to an increased potential for contamination. There are considerable regulatory risks to consider, as handling, transmission and storage safety standards may be compromised. Factory, lab and storage premises are generally vulnerable to extremes of wind, summer heat, driving rain. It is difficult to adapt existing buildings to future climatic conditions, and new facilities should be designed with climate change in mind. There are significant opportunities for delivering new products and treatments to meet the challenges of new diseases and health issues. Real estate Buildings, developments and their locations will be affected by climate change, through changes to structural integrity, or increased vulnerability of external fabric, internal environment and service infrastructure. Despite these risks, almost 90% of respondents in this sector expressed little or no concern about their exposure. Property has a high level of exposure to the physical impacts of climate change. The main risks include increased incidence of overheating, flooding, and subsidence. Analysis of both location and design will be important aspects of climate-proofing property investments. Meeting demand for building comfort (e.g. requirements for cooling under hotter summer conditions) will complicate the situation still further. These demands must increasingly be met through innovative building techniques and thermally efficient properties, rather than energy dependent devices such as airconditioners. Consumers and regulatory bodies may require better performance from buildings as climatic conditions change, providing an opportunity for early movers to gain competitive advantage. The changing climate poses additional risks, including delays to construction and maintenance programmes, poor internal environment and mould growth, slope instability, damage to building fabric and cladding, and structural damage from wind and precipitation events. Unless these risks are managed this sector may be vulnerable to reputational, litigation and regulatory risks in the future. Our operations have relatively limited exposure to these risks however our investment decisions are heavily influenced by others ability to factor in these considerations. F&C Asset Management, 19

Sector summaries Heatwave puts IT leaders in hot seat as systems wilt (Computer Weekly, 1 August 2006) The prolonged heatwave during July 2006 affected IT departments and datacentres as power supply interruptions caused the loss of vital cooling systems. The London site of Globix, a datacentre operator, was protected by back-up generators, but others were not so lucky. A local authority was forced to turn off non-essential servers and a leading media firm suffered a server room air conditioning failure. These organisations experienced minimal impacts because business continuity plans were in place. Server design can limit airflow to individual components and around racks. By leaving cabinet doors open manager can significantly reduce server temperatures, though this may not be feasible in high-security environments. Power cuts hit UK businesses (IT Week, 31 July 2006) Major internet services and IT companies were hit by power cuts and blackouts in North America and the UK during the hot weather in July 2006. Yahoo UK suffered service disruptions and Level 3 s London datacentre was temporarily without power, affecting several other companies. In Los Angeles power interruptions brought down large web services like MySpace, the popular social networking site. Software and computer services Although high temperatures this summer caused serious problems for computer systems on both sides of the Atlantic, 100% of respondents in this sector expressed little or no concern about their exposure to climate risks. This sector has seen massive expansion in recent years. As high users of energy, software and computer services industries are vulnerable to any damage to infrastructure or energy supply. Climate change will increase the risk of subsidence damage to communications masts and possible increased storm damage to overhead cables, disrupting operations and processes. Any increase in downtime from loss of energy supply or telecommunications could have significant cost implications. Higher indoor temperatures can compromise high technology and precision engineering processes. This can have knock-on impacts on performance conditions and quality standards. Like all high technology and engineering industries, the software and computer services sector is vulnerable to any disruption in supply chain or manufacturing processes. Both incremental changes and extremes of climate can interrupt engineering operations. Just-in-time manufacturing and delivery systems can add to the complexity of supply chain and operational risks. Increased awareness and concern about climate change may broaden the market for technologies in both mitigation and adaptation (e.g. monitoring building temperatures and/or flood risks). Companies in this sector are strongly advised to have well worked out and tested business continuity plans. Specialty and other finance Respondents in the specialty and other finance sector show a relatively high level of awareness of the risks they face from the impacts climate change. Over 50% of companies who responded to the CDP4 questionnaire in this sector expressed a high or medium level of concern about their vulnerability and exposure to climate risks. The specialty finance sector is beginning to recognise that it faces significant impacts from climate change. These include the threat of business failure when companies cannot maintain sufficient financial capacity to deal with climate risks. The wider financial service sector is a truly global industry, and as such will be affected by both domestic and global extreme events. Some fund managers are assessing and responding to the implications of climate change now and in the future by encouraging appropriate research into the implications of climate change, and by asking appropriate questions of corporate management on how they are responding to climate change. These measures can reveal exposure to climate change and implications for portfolios. Risk management of potential climate change impacts, coupled with the implementation of regulatory regimes for greenhouse gas emission mitigation, provide significant business opportunities. Risk management is resulting in the development of specialist financial instruments like catastrophe bonds and weather-related international trading markets. 20

Sector summaries Support services Companies within the support services sector are exposed to supply chain, process, market and workforce risks associated with the impacts of climate change. In addition, they are indirectly vulnerable to the risks faced by their client sectors. CDP4 respondents show a low awareness of these risks, with 70% expressing a low or no concern over their exposure to climate risks. The support services sector underpins business in all other industries, providing facilities management, procurement, security, maintenance, cleaning, administrative and customer services. As such, support services will be vulnerable to the compound impacts of climate change on other sectors. The business risks from climate change include the increased frequency of extreme weather conditions, rising sea levels, emerging health impacts, knockon impacts on insurance markets, business resources, personnel, and corporate preparedness, and increasing legal and regulatory pressures. Support services will be open to all of these risks. Businesses within the support sector will be particularly exposed to their clients risks. Businesses with a property management focus will be susceptible to the risks faced by the real estate, construction and building materials sector. Companies with large, officebased workforces will be vulnerable to risks associated with indoor working conditions, as well as telecommunications and energy supply disruptions. Climate risks present new opportunities for businesses, particularly as the number of companies publicly addressing the risks has increased dramatically over the past several years. These opportunities include risk management, consultancy opportunities in engineering and environmental fields, and reputational gains. Telecommunication services Very few of the telecommunications companies which answered the CDP4 request for information expressed a high level of concern about their vulnerability to climate risks, though a few market-leading respondents showed a thorough understanding of their exposures. These described well thought out contingency and adaptation plans. The majority of respondents (60%) expressed a medium level of concern. Climate change will increase the risk of subsidence damage to communications masts and possible increased storm damage to overhead cables, disrupting operations and processes. Any increase in downtime from loss of energy supply or telecommunications could have significant cost implications. The substantial fixed assets managed by the telecommunications sector are vulnerable to damage as climatic conditions change. Extreme events present a significant risk, but steady incremental changes in temperature, precipitation and sea levels will also present an increasing challenge to operations and distribution of services. Any requirement for increased maintenance and repair will have a direct cost impact. If facilities are affected by extreme events or strained by incremental climate change, network failure or damage can result in serious service disruption. This can cause significant harm to a service provider s reputation. All other business sectors are reliant on the telecommunications services and infrastructure. Any negative impacts in this sector increase the risks in every other industry. Higher indoor temperatures can compromise the operation of high technology and telecommunications equipment. This can have knock-on impacts on performance conditions and quality standards. Telecommunications systems should be actively managed to test their resilience and flexibility to climatic conditions over their lifetimes. Management options that enhance flexibility and resiliency of assets should be developed. Henderson Global Investors has begun to be affected by the physical impacts of climate change, notably through investments in the insurance sector and in companies damaged by increased extreme weather events (such as oil and gas facilities in the Gulf of Mexico). As a result, we are incorporating the issue of adaptation into the questions we pose to sell-side investment analysts. Henderson Group, Climate change is not believed to be a significant commercial risk or opportunity for our operations or our products. De La Rue, The threat to BT operations arises from the extreme weather conditions associated with climate change, which can cause damage to our infrastructure and faults in our transmission network, both leading to customer dissatisfaction. BT Group, FTSE 100 21

Sector summaries Shake-up hits Starbucks shares (The Guardian, 4 August 2006) During the July 2006 heatwave staff at Starbucks coffee shops struggled to keep pace with demand for frappuccinos and other frozen drinks during the busiest morning hours, when customers normally order hot beverages. Sales growth slowed as a result, and shares fell by 11% after the company announced a change in store operations to improve service. Sales recovered after the chain reviewed its employee training and instore production process. English wine sparkles as global climate warms up (The Times, 11 September 2006) The English wine making industry is enjoying extraordinary success, partly as a result of higher average temperatures. Warmer September temperatures have created a lengthened thermal growing season which, when combined perfect summer weather, create superb conditions for grape cultivation. Cultivators anticipate an abundant harvest this year, with production expected to top 3 million bottles. This represents a 50% increase in English wine production. Prospects are particularly good for sparkling wine. Vineyards in southern England benefit from the same chalk soil enjoyed by those in northern France, yet industry experts have speculated that in ten years it is likely to be too warm for champagne to be made in northern France. English wines are popular at Sir Terence Conran s Le Pont de la Tour restaurant in London. Tobacco and beverages Although many companies in this sector are critically dependent on agricultural output, availability of water, and complex production processes only 14% of respondents expressed a high level of concern over the risks they face as a result of the impacts of climate change. The beverage and tobacco industries are heavily reliant on raw materials and resources, and thus highly exposed to climate risks surrounding availability of water and changes in agricultural growth patterns. Some CDP respondents are aware of these risks, and many are responding with multiple sourcing schemes or production continuity plans. CDP respondents are less aware of the risks to markets and workforce. Although some identified possible changes in consumer behaviour, none had considered the risks associated with a large outdoor workforce. There is low awareness within this sector of the climate risks associated with production processes, logistics, performance and operations. However, if companies design operational processes to be flexible and resilient, they can often adapt to changing demand or risk in very short time scales. Transport The transport sector is often viewed simply as a source of greenhouse gas emissions. However, it is also essential to consider the impacts of climate change on transport infrastructure and users. A very low proportion (10%) of CDP respondents in this sector expressed a high level of concern about exposure to climate risks, while 50% expressed little or no concern. Transport infrastructure is vulnerable to flooding, which can cause severe disruption to services and require frequent repair. An increased requirement for maintenance has a direct cost impact. Infrastructure is similarly at risk of damage in extremely hot weather. The high temperatures in the summer of 2003 melted some road surfaces. Speed restrictions due to real and potential rail buckling caused widespread delays on the rail network. Passenger comfort can be significantly compromised during summer heatwave events, leading to reputational damage. Elderly or vulnerable passengers, who use public transport disproportionately to their numbers in the population, are at serious health risk in conditions that the fit and healthy find merely uncomfortable. Reputation can also be negatively affected by the delays caused by speed restrictions imposed on very hot days. Railways along the coast are vulnerable to storm surges, high tides and cliff instability while tunnels are vulnerable to flooding. Subsidence affects structures on which the road and rail network is reliant, including bridges, tunnels, embankments and cuttings. Land-slips may increase as higher winter rainfall intensities lead to increased slope instability. The thrust from a jet engine falls off as the air temperature rises above 25 C to 30 C, depending upon design. This can restrict the take-off payload below a specific density threshold. Higher temperatures will increase the need for longer runways or payloads restrictions. Even though the number of days of frost and snow will decrease, it will be important to retain experience in dealing with sub-zero temperatures. Any disruption within the transport sector has knock-on impacts for businesses in every other economic sector. Infrastructure should be built and maintained to withstand hotter temperatures, more intense rain, and higher sea levels. Contingency plans should be adjusted in anticipation of more frequent use for more extreme impacts. Port and harbour facilities will need to be able to cope with changing sea levels, wind speeds and storm surges. 22

Sector summaries Utilities All utilities face some significant climate risks. The impacts of climate change will compound an already challenging situation, and this sector is already taking this issue very seriously. All of the CDP4 respondents in this sector expressed a high or medium level of concern about their exposure to climate risks. Water management companies and other utilities already manage for climate variability as part of their core business activities. Climate change will mean they have to deal with new conditions. Utilities typically manage large fixed asset registers. Climate change will increase the risks and costs associated with asset design, construction, performance, maintenance and value. Low river flows are more affected by pollutant loading. During hot, dry summers discharge consents are tightened for sewage treatment works. Hot, dry summer conditions create water supply problems precisely when demand is highest. Failure to plan effectively for these conditions will result in reputational risks. Storm events may increasingly affect storm drainage and sewers, which are already highly susceptible to flooding, Flash flooding and combined sewer overflows will increase with greater rainfall event intensity and frequency, leading to greater property damage and associated cost recovery. Coping with water and climate related risks will require a range of measures, structural and non-structural. This presents opportunities to market new products and services for assessment, forecasting, communication, planning and implementation. Water and electricity utilities have a duty to restore services to dwellings as soon as feasible after extreme weather events. Climate change will exacerbate risk and damage to reputation if services are disrupted or curtailed. Trapped in oven jet : Passengers 5-hour hell at Heathrow as plane s air con fails (Evening Standard, 18 July 2006) With temperatures hitting 33 C, on one of the hottest days of the year, over 170 passengers bound for the USA were forced to remain on board a flight at Heathrow for five hours as engineers repaired a failed air conditioning system. The crew refused requests to disembark as the aircraft was too far from a terminal. Long delays on Tube as more tracks buckle in heat (The Evening Standard, 10 May 2006) Speed limits were imposed on some Underground routes in May 2006, when engineers failed to pre-stress and test the rails as temperatures increased. Speed limits of 20 mph were imposed. The delays caused significant disruption to tens of thousands of commuters, with knock-on impacts for the rest of the network. Raw sewage flows into the Thames (The Evening Standard, 2 May 2006) Storm overflows present a major problem for the Olympic Games. Computer models have shown that sewage could flow into the Olympic village. The Environment Agency has expressed concern that there is a significant risk of a discharge occurring during the Games. As a significant proportion of our product is derived from agricultural means, the supply chain is affected by weather patterns and changing landscapes. British American Tobacco, FTSE 100 As a ports operator we are at high risk from extreme weather conditions and as a result insure against these risks wherever possible. However, we also have to ensure that all new developments are built with due regard to the future conditions. Associated British Ports, The potential financial impacts could be significant, in particular due to loss of revenue as a result of major disruption to services. FirstGroup, 23

What can business do? What can business do? Businesses can respond to build resilience and climate-proof their interests. Uncertainty about the future is not a reason for inaction. There is sufficient information to enable the impacts of a changing climate over the next 40 years to be embedded in decisionmaking at strategic and project levels. Adaptive management is feasible. Businesses should review their climate risk management strategies and check that they are responding to both the mitigation and the adaptation agendas. Action is required on both now. Taking adaptive action early may be cost-effective when compared with the costs associated with remedial action at a later date (although clearly each investment decision has to be subject to its own financial appraisal). When analysing potential action, companies should consider their fiduciary responsibilities. Changing markets, customer needs and investor expectations will present significant opportunities for those companies that take action to climateproof their businesses. The London Climate Change Partnership (LCCP) Finance Group, which has members from insurance, institutional investment and banking, as well as the Greater London Authority and the Environment Agency, has written a report on the implications of climate change for the financial services sector. Based on this report, the Mayor of London, Ken Livingstone, is hosting a round table discussion with senior representatives from the financial services industry in late 2006, aimed at identifying actions that the industry can take to climate-proof its decision-making. 24

Appendix 1: References Appendices Appendix 1: References Association of British Insurers (2005). Financial Risks of Climate Change. London. Chartered Institute of Insurers (2001). Climate Change and Insurance. Ed. Dlugolecki, A. Chartered Insurance Institute Research Report, London. Chartered Insurance Institute (1994). The impact of changing weather patterns on property insurance. London. Crichton, D (2001). The Implications of Climate Change for the Insurance Industry. Building Research Establishment, Watford, England. Dlugolecki, A (2004). A changing climate for insurance. A summary report for Chief Executives and Policymakers. ABI, London. Emanuel, K (2005). Increasing destructiveness of tropical cyclones over the past 30 years. Nature, 436, 686-688. Hacker, JN, Belcher, SE & Connell, RK (2005). Beating the Heat: keeping UK buildings cool in a warming climate. UKCIP Briefing Report. UKCIP, Oxford. Hacker, JN, Holmes, MJ, Belcher, SE and Davies, G (2005). Climate change and the indoor environment: impacts and adaptation. (CIBSE TM36) Chartered Institution of Building Services Engineers. London. Hadley Centre (2005). Climate change and the greenhouse effect a briefing from the Hadley Centre. Hewer, F (2006). Climate change and energy management. Prepared for National Grid, EDF Energy and E.ON UK. Hulme,M, Jenkins,GJ, Lu,X, Turnpenny,JR, Mitchell,TD, Jones,RG, Lowe,J, Murphy,JM, Hassell,D, Boorman,P, McDonald,R and Hill,S (2002). Climate Change Scenarios for the United Kingdom: The UKCIP02 Scientific Report. Tyndall Centre for Climate Change Research, School of Environmental Sciences, University of East Anglia, Norwich, UK. 120pp. IPCC (2001). Climate change 2001: The Scientific Basis. Summary for Policy Makers. Cambridge University Press, Cambridge. 98pp. Lloyd s (2006). Climate change: adapt or bust. 360 Risk Project. London. London Climate Change Partnership (2006). Adapting to climate change: Lessons for London. Greater London Authority, London. London Climate Change Partnership (2005). Climate change and London s transport systems. Greater London Authority, London. London Climate Change Partnership (2002). London s warming: The impacts of climate change on London. Metcalf, G, Chambers, F, Charlesworth, A, Forrest, V, Hunt, J, McEwen L, Russell, K, and Schofield, S (Eds) (2003). Warming to the Idea, Technical Report, South West Region Climate Change Impacts Scoping Study. Cheltenham, UK. Mills, E, Roth, RJ, and Lecomte, E (2005). Availability and affordability of insurance under climate change: a growing challenge for the US. Ceres. Palutikof, JP, Subak, S and Agnew, MD (Eds) (1997). Economic Impacts of the Hot Summer and Unusually Warm Year of 1995. University of East Anglia, Norwich, UK. Stott, PA, Stone, DA and Allen, MR (2004). Human contribution to the European heatwave of 2003. Nature, 432, 610 614. Three Regions Climate Change Group (2005). Adapting to climate change: a checklist for development. Greater London Authority, London, UK. UKCIP (2005). A changing climate for business: business planning for the impacts of climate change. Oxford, UK. UNEP Finance Initiative (2005). A legal framework for the integration of environmental, social and governance issues into institutional investment. Freshfields Bruckhaus Deringer. UNEP Finance Initiative (2002). Climate Risk to Global Economy. Executive Briefing Paper. Vivian, S, Williams, N, and Rogers, W (2005). Climate change risks in building an introduction. CIRIA C638. London. 25

Appendix 2: About the Carbon Disclosure Project Appendix 2: About the Carbon Disclosure Project The Carbon Disclosure Project (CDP) provides a coordinating secretariat for institutional investor collaboration regarding climate change. CDP s aim is twofold: to inform investors regarding the significant risks and opportunities presented by climate change; and to inform company management regarding the serious concerns of shareholders regarding the impact of these issues on company value. Having launched in December 2000 at No 10 Downing Street, CDP has four times invited institutional investors to collectively sign a single global request for disclosure of shareholder value relevant information1 regarding Greenhouse Gas Emissions. In doing so it has created four of the largest ever collaborations of institutional investment capital $4.5trillion, $10.2 trillion, $20.2 trillion, and now $31 trillion of assets under management. The information requests have historically been sent to the 500 largest global companies (the FT 500) but in 2006 CDP expanded and the information request was sent to 2000 companies globally, of which 900 answered the questions. More than 350 of the worlds 500 largest corporations have completed our previous information requests regarding their Greenhouse Gas emissions and these responses can be downloaded from www.cdproject.net. In summary the project has created: The largest registry of corporate Greenhouse Gas emissions data in the world A world-leading and up to date information repository for the investment community facilitating superior equity and debt investment decision-making Shareholder support for corporations to measure and manage the climate change issue Investor community leadership supporting the work of other stakeholders engaging with the climate change issue (e.g. policymakers, consultants, accountants) A process applauded by investors such as Sir John Bond of HSBC (May 2004), business leaders such as Jeff Immelt CEO GE (May 2003), and politicians such as Tony Blair (February 2003) The reasons for CDP s success are many. No longer can fiduciaries claim to be unaware of what is at stake. Taking climate risks into account is now becoming part of smart financial management. Failure to do so may well be tantamount to an abdication of fiduciary responsibility and indication of poor management. CDP is able to accept disclosure statements from any company at any time. These responses will be made available from the CDP website www.cdproject.net Future plans CDP is now an annual process and the CDP5 information request will be sent on 1 February 2007. CDP will focus on improving the quality and quantity of responses from corporations and helping to expand the project in relevant countries and sectors. CDP would be delighted to explore future participation with all interested institutions and we invite organizations to contact us at info@cdproject.net The CDP Secretariat extends sincere thanks to the signatory investors and responding corporations for participation in CDP4. 26

Appendix 3: CDP4 questionnaire Appendix 3: CDP4 questionnaire This is the fourth CDP information request (CDP4). Please state the dates of reporting periods, and if reporting emissions for the first time, please provide data for the last four measurement periods, where available. For previous respondents, please highlight developments and trends since CDP3. The following pages provide guidance on answering the questionnaire and further information about CDP4. 1 General How does climate change represent commercial risks and/or opportunities for your company? 2 Regulation What are the financial and strategic impacts on your company of existing regulation of GHG emissions, and what do you estimate to be the impact of proposed future regulation? 3 Physical risks How are your operations affected by extreme weather events, changes in weather patterns, rising temperatures, sea level rise and other related phenomena both now and in the future? What actions are you taking to adapt to these risks, and what are the associated financial implications? 4 Innovation What technologies, products, processes or services has your company developed, or is developing, in response to climate change? 5 Responsibility Who at board level has specific responsibility for climate change related issues and who manages your company s climate change strategies? How do you communicate the risks and opportunities from GHG emissions and climate change in your annual report and other communications channels? 6 Emissions What is the quantity in tonnes CO 2 e of annual emissions of the six main GHG s produced by your owned and controlled facilities in the following areas, listing data by country? Globally. Annex B countries of the Kyoto Protocol. Emissions Trading Scheme. To assist in comparing responses please state which methodology you are using for calculating emissions and the boundaries selected for emissions reporting. Please standardise your response data to be consistent with the accounting approach employed by the GHG Protocol (www.ghgprotocol.org). Please list GHG Protocol scope 1, 2 and 3 emissions equivalent showing full details of the sources. How has this data been audited and/or externally verified? 7 Products and services What are your estimated emissions in tonnes CO 2 associated with the following areas and please explain the calculation methodology employed. Use and disposal of your products and services? Your supply chain? Emissions reduction: What is your firm s current emissions reduction strategy? How much investment have you committed to its implementation, what are the costs/profits, what are your emissions reduction targets and time-frames to achieve them? 8 Emissions trading What is your firm s strategy for, and expected cost/profit from trading in the EU Emissions Trading Scheme, CDM/JI projects and other trading systems, where relevant? 9 Energy costs What are the total costs of your energy consumption, e.g. fossil fuels and electric power? Please quantify the potential impact on profitability from changes in energy prices and consumption. N.B. For electric utilities ONLY Explain to what extent current and future emissions reductions involve a change of use in existing assets (i.e. fuel switching at existing facilities) or a need for new investment? What percentage of your revenue is derived from renewable generation in a government sponsored price support mechanism? 27

Appendix 4: CDP4 signatories Appendix 4: CDP4 signatories Aachener Grundvermogen Kapitalanlagegesellschaft mbh, Germany Aberdeen Asset Managers, UK ABN AMRO Bank N.V., Netherlands ABP Investments, Netherlands ABRAPP Associação Brasileira das Entidades Fechadas de Previdência Complementar, Brazil Activest Investmentgesellschaft mbh, Germany Acuity Investment Management Inc, Canada AIG Global Investment Group, USA Allianz Group, Germany AMB Generali Asset Managers Kapitalanlagegesellschaft mbh, Germany AMP Capital Investors, Australia ANBID National Association of Brazilian Investment Banks, Brazil ASN Bank, Netherlands Australia and New Zealand Banking Group Limited, Australia Australian Ethical Investment Limited, Australia AXA Group, France Baillie Gifford & Co., UK Banco do Brazil S.A., Brazil Banco Fonder, Sweden Bank Sarasin & Co, Ltd, Switzerland BayernInvest Kapitalanlagegesellschaft mbh, Germany BBC Pension Trust Ltd, UK BMO Financial Group, Canada BNP Paribas Asset Management (BNP PAM), France Boston Common Asset Management, LLC, USA BP Investment Management Limited, UK Brasilprev Seguros e Previdência S.A., Brazil British Coal Staff Superannuation Scheme, UK British Columbia Investment Management Corporation (bcimc), Canada BT Financial Group, Australia BVI Bundesverband Investment und Asset Management e.v., Germany Caisse de Depots et Placements du Quebec, Canada Caisse des dépôts, France Caixa Econômica Federal, Brazil California Public Employees Retirement System, USA California State Teachers Retirement System, USA Calvert Group, USA Canada Pension Plan Investment Board, Canada Carlson Investment Management, Sweden Carmignac Gestion, France Catholic Superannuation Fund (CSF), Australia CCLA Investment Management Ltd, UK Central Finance Board of the Methodist Church, UK CERES, USA Cheyne Capital Management, UK CI Mutual Funds Signature Funds Group, Canada CIBC, Canada Citizens Advisers Inc, USA Close Brothers Group plc, UK Comite syndical national de retraite Bâtirente, Canada Connecticut Retirement Plans and Trust Funds, USA Co-operative Insurance Society, UK Credit Suisse Group, Switzerland 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, Luxembourg DnB NOR, Norway Domini Social Investments LLC, USA DWS Investment GmbH, Germany Environment Agency Active Pension fund, UK Erste Bank der oesterreichischen Sparkassen AG, Austria Ethos Foundation, Switzerland Eureko B.V., Netherlands F&C Asset Management, UK FAPES Fundacao de Assistencia e Previdencia Social do Bndes, Brazil Fédéris Gestion d Actifs, France First Swedish National Pension Fund (AP1), Sweden Five Oceans Asset Management Pty Limited, Australia Folksam Asset Management, Sweden Fonds de réserve pour les retraites FRR, France Fortis Investments, Belgium Frankfurter Service Kapitalanlagegesellschaft mbh, Germany Franklin Templeton Investment Services Gmbh, Germany Frater Asset Management, South Africa Fukoku Capital Management Inc, Japan FUNCEF, Brazil Fundação Atlântico de Seguridade Social, Brazil Fundação CESP, Brazil Fundacao Forluminas de Seguridade Social, Brazil Gartmore Investment Management plc, UK Gen Re Capital GmbH, Germany Generation Investment Managament, UK Gerling Investment Kapitalanlagegesellschaft mbh, Germany Goldman Sachs, USA Hastings Funds Management Limited, Australia Helaba Invest Kapitalanlagegesellschaft mbh, Germany Henderson Global Investors, UK 28

Appendix 4: CDP4 signatories Hermes Investment Management, UK Hospitals of Ontario Pension Plan (HOOPP), Canada HSBC Holdings plc, UK Hyundai Marine & Fire Insurance Co, Ltd, South Korea I.DE.A.M -Integral Dévelopment Asset Management, France Indexchange Investment AG, Germany ING Investment Management Europe, Netherlands Inhance Investment Management Inc, Canada Insight Investment Management (Global) Ltd, UK Interfaith Center on Corporate Responsibility, USA Internationale Kapitalanlagegesellschaft mbh, Germany Ixis Asset Management, France Jupiter Asset Management, UK KLP Insurance, Norway LBBW Landesbank Baden-Württemberg, Germany Legal & General Group plc, UK Light Green Advisors, LLC, USA Local Authority Pension Fund Forum, UK Lombard Odier Darier Hentsch & Cie, Switzerland London Pensions Fund Authority, UK Maine State Treasurer, USA 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 Investment Managers, UK 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, UK Münchner Kapitalanlage AG, Germany Munich Re, Germany Natexis Banques Populaires, France National Australia Bank Limited, Australia Nedbank, South Africa 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, UK NFU Mutual Insurance Society, UK Nikko Asset Management Co., Ltd., Japan Ontario Municipal Employees Retirement System (OMERS), Canada Ontario Teachers Pension Plan, Canada Oregon State Treasurer, USA Pax World Funds, USA PETROS The Fundação Petrobras de Seguridade Social, Brazil PGGM, Netherlands PhiTrust Finance, France Pictet & Cie. (Europe) S.A., Germany Portfolio Partners, Australia Prado Epargne, France PREVI Caixa de Previdência dos Funcionários do Banco do Brasil, Brazil Prudential Plc, UK Public Sector Superannuation Scheme and Commonwealth Superannuation Scheme, Australia Rabobank, Netherlands Railpen Investments, UK Rathbone Investment Management / Rathbone Greenbank Investments, UK REAL GRANDEZA Fundação de Previdência e Assistência Social, Brazil RLAM, UK Robeco, Netherlands Rockefeller & Co Socially Responsive Group, USA SAM Sustainable Asset Management, Switzerland Sanlam Investment Management, South Africa Sanpaolo Imi Asset Management Sgr, Italy Sauren Finanzdienstleistungen, Germany Schroders, UK Scotiabank, Canada Scottish Widows Investment Partnership, UK Second Swedish National Pension Fund (AP2), Sweden Service Employees International Union, USA Shinkin Asset Management Co., Ltd, Japan Siemens Kapitalanlagegesellschaft mbh, Germany SNS Asset Management, Netherlands Social Awareness Investment, ClearBridge Advisors, a unit of Legg Mason Inc., USA Societe Generale Asset Management UK Limited, UK Societe Generale Group, France Sogeposte, Finland Sompo Japan Insurance Inc., Japan Standard Life Investments, UK State Street Global Advisors, USA State Treasurer of California, USA State Treasurer of North Carolina, USA Storebrand Investments, Norway Stratus Banco de Negócios, Brazil Sumitomo Mitsui Financial Group, Japan Superfund Asset Management GmbH, Germany Swedbank/FöreningsSparbanken incl. Robur, Sweden Swiss Reinsurance Company, Switzerland TfL Pension Fund, UK The Collins Foundation, USA The Co-operative Bank, UK The Dreyfus Corporation, USA The Ethical Funds Company, Canada The Royal Bank of Scotland Group, UK The Shiga Bank, Ltd (Japan), Japan The Wellcome Trust, UK Third Swedish National Pension Fund (AP3), Sweden Threadneedle Asset Management, UK 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 UBS Global Asset Management (Deutschland) GmbH, Germany Unibanco Asset Management, Brazil UniCredit Group, Italy Union Investment, Germany United Methodist Church General Board of Pension and Health Benefits, USA Universal-Investment-Gesellschaft mbh, Germany Universities Superannuation Scheme (USS), UK Vancity Group of Companies, Canada Vermont State Treasurer, USA VicSuper Proprietary Limited, Australia Walden Asset Management, a division of Boston Trust and Investment Management Company, USA Warburg-Henderson Kapitalanlagegesellschaft mbh, Germany WestLB Asset Management (WestAM), Germany Zurich Cantonal Bank, Switzerland 29

Appendix 5: Companies responses to thecdp4 questionnaire Appendix 5: Companies responses to the CDP4 questionnaire Key: Answered questionnaire CR Considering response DP Declined to participate IP Information provided NR No response RS Response status Company name Index RS 3i FTSE 100 888 Holdings (WI) Abbot Group DP Aberdeen Asset Management Aberforth Smaller Companies Admiral Group Aegis Group NR AGA Foodservice Group Aggreko DP Alfred McAlpine IP Alliance & Leicester FTSE 100 IP Alliance Trust NR Alliance Unichem FTSE 100 NR Allied Domecq see Pernod Ricard FTSE 100 IP AMEC Amlin DP AMVESCAP FTSE 100 Anglo American FTSE 100 Aquarius Platinum IP Arm Holdings IP Arriva Ashtead Group DP Associated British Foods FTSE 100 DP Associated British Ports AstraZeneca FTSE 100 Autonomy NR Avis Europe NR Aviva FTSE 100 AWG BAA FTSE 100 Babcock International Group BAE Systems FTSE 100 Balfour Beatty IP Company name Index RS Bankers Investment Trust see Henderson Group Barclays FTSE 100 Barratt Developments BBA Group Bellway IP Benfield Group NR Berkeley Group Holdings Plc BG Group FTSE 100 BHP Billiton FTSE 100 BOC FTSE 100 Body Shop International see L Oreal Bodycote International Plc Boots FTSE 100 Bovis Homes Group IP BP FTSE 100 BPB see Saint Gobain FTSE 100 Bradford & Bingley Brambles Industries FTSE 100 IP Brit Insurance Holdings NR British Airways FTSE 100 British American Tobacco FTSE 100 IP IP British Assets Trust PLC NR British Empire Securities NR British Land FTSE 100 British Sky Broadcasting FTSE 100 Brixton Estate BSS Group BT Group FTSE 100 Bunzl IP Burberry Group Burren Energy Cable and Wireless FTSE 100 Cadbury Schweppes FTSE 100 Company name Index RS Cairn Energy FTSE 100 Caledonia Investments Plc Candover Investments Plc IP NR Capita FTSE 100 Capital & Regional PLC NR Carillion PLC Carnival FTSE 100 Carpetright NR Carphone Warehouse NR Catlin Group LD Coms IP Cattles IP Centrica FTSE 100 Charter PLC IP City of London Investment Trust Plc see Henderson Group Close Brothers Group CLS Holdings CR Cobham NR Collins Stewart Tullett Plc NR Colt Telecom Group Compass FTSE 100 Computacenter Cookson Group NR Corus Group Countrywide PLC DP Crest Nicholson Croda International CSR DP Daily Mail & General Trust FTSE 100 IP Dairy Crest Group CR Dana Petroleum NR Davis Service Group Plc De La Rue De Vere Group NR Derwent Valley NR 30

Appendix 5: Companies responses to thecdp4 questionnaire Company name Index RS Diageo FTSE 100 Dimension Data NR Dixons FTSE 100 DS Smith PLC Easyjet PLC IP Edinburgh Investment Trust NR Edinburgh US Tracker NR Electra Private Equity (Electra Investment Trust) NR Electrocomponents EMAP NR EMI Group Enodis NR Enterprise Inns FTSE 100 NR Euromoney Institutional Inv. NR Exel see Deutsche Post FTSE 100 Expro International Group NR F&C Asset Management F&C Commercial see F&C Asset Management F&C Investment Trust see F&C Asset Management Fidelity European Values NR Filtrona DP Findel First Choice Holidays NR FirstGroup FKI DP Forth Ports DP Friends Provident FTSE 100 Gallaher FTSE 100 Gcap Media PLC George Wimpey PLC IP GKN GlaxoSmithKline FTSE 100 Go-Ahead Group Gondola Holdings PLC NR Grainger Trust Great Portland Greene King PLC Greggs DP Group 4 Securicor GUS FTSE 100 Gyrus Group NR Halfords NR Halma DP Company name Index RS Hammerson FTSE 100 IP Hanson FTSE 100 Hays NR HBOS FTSE 100 Headlam Group NR Helphire Group NR Henderson Group Hikma Pharmaceuticals Plc Hiscox HMV Group NR Homeserve PLC NR HSBC FTSE 100 Icap PLC NR IG Group IMI Group Imperial Chemical Industries FTSE 100 Imperial Tobacco FTSE 100 Inchcape IP Informa PLC NR Inmarsat PLC IP Insight Foundation Property Trust see HBOS InterContinental Hotel Group Intermediate Capital Group FTSE 100 IP NR NR International Power PLC FTSE 100 Interserve Intertek Group NR Invensys NR Invesco Perpetual NR Investec NR Isoft Group IP ITV FTSE 100 J Sainsbury FTSE 100 Jardine Lloyd IP JD Wetherspoon PLC NR JJB Sports NR John Laing DP John Wood Group DP Johnson Matthey Plc FTSE 100 Johnston Press JP Morgan Fleming Cont. European Investment Trust see JP Morgan JP Morgan Fleming Japanese Investment Trust see JP Morgan Company name Index RS JP Morgan Fleming Mercantile Investment Trust see JP Morgan Morgan Fleming Overseas Investment Trust see JP Morgan JP Kazakhmys PLC FTSE 100 Kelda FTSE 100 IP Kensington Group NR Kesa Electricals NR Kier Group NR Kingfisher FTSE 100 Ladbrokes FTSE 100 NR Laird Group NR Land Securities FTSE 100 Legal and General FTSE 100 Liberty International FTSE 100 Lloyds TSB FTSE 100 Logica CMG London Merchant Securities London Stock Exchange NR Lonmin PLC Luminar CR Man Group plc FTSE 100 Mapeley Ld NPV DP Marks and Spencer FTSE 100 Marshalls PLC Matalan NR McCarthy & Stone DP Meggitt DP Merchants Trust NR Merrill Lynch World Mining Trust see Merrill Lynch MFI Furniture Group Michael Page International Millennium & Copthorne Hotels NR Minerva NR Misys DP Mitchells & Butlers PLC NR MITIE Group PLC DP Monks Investment Trust PLC Morgan Crucible Co PLC Morgan Sindall Murray Income Investment Trust IP NR 31

Appendix 5: Companies responses to thecdp4 questionnaire Company name Index RS Murray International Trust NR Mytravel NR N Brown Group PLC NR National Express National Grid plc FTSE 100 Next FTSE 100 Northern Foods Northern Rock FTSE 100 Northgate Northgate Information Solution Northumbrian Water Group NR Old Mutual FTSE 100 P&O Group FTSE 100 IP Paragon Group NR Partygaming FTSE 100 Pearson FTSE 100 Pendragon NR Pennon Group IP Persimmon FTSE 100 Petrofac Resources Ltd Photo-Me International NR Pilkington NR Premier Farnell DP Premier Foods PLC Premier Oil Provident Financial Prudential plc FTSE 100 Punch Taverns NR PZ Cussons NR Quintain Estates & Development Randgold Resources Ltd CR CR Ran k Group DP Rathbone Brothers Reckitt Benckiser FTSE 100 Redrow Group NR Reed Elsevier FTSE 100 Regus Group PLC NR Renishaw DP Rentokil Initial FTSE 100 NR Resolution Reuters FTSE 100 Rexam FTSE 100 RHM PLC Rio Tinto FTSE 100 Company name Index RS RIT Capital Partners DP Rolls-Royce FTSE 100 Rotork IP Royal & Sun Alliance FTSE 100 Royal Bank of Scotland FTSE 100 SABMiller FTSE 100 Sage FTSE 100 Savills NR SCI Entertainment Group NR Scottish & Newcastle FTSE 100 Scottish & Southern Energy Scottish Investment Trust PLC Scottish Mortgage & Trust FTSE 100 Scottish Power FTSE 100 Second Alliance Trust NR Serco Group DP Severn Trent FTSE 100 Shaftesbury NR Shanks Group IP Shire Pharmaceuticals FTSE 100 SIG NR Signet Group NR Skyepharma Slough Estates IP Smith & Nephew FTSE 100 IP Smiths FTSE 100 IP Soco International NR Spectris NR Spirax-Sarco Engineering Spirent NR SSL International NR St James s Place IP St.Modwen Properties IP Stagecoach IP Standard Chartered FTSE 100 Stanley Leisure PLC SVG Capital plc DP Tate and Lyle FTSE 100 IP Taylor Nelson Sofres NR Taylor Woodrow Telent no longer included in Index Temple Bar Investment Trust IP IP IP DP DP Company name Index RS Templeton Emerging Market IT NR Tesco FTSE 100 Tomkins DP Topps Tiles PLC TR Property Investment Trust NR Travis Perkins Trinity Mirror NR Tullow Oil Ultra Electronic Holdings IP Unilever FTSE 100 Unite Group IP United Business Media United Utilities FTSE 100 IP Vedanta Resources NR Venture Production IP Victrex DP Virgin Mobile Holdings (UK) CR Viridian Group PLC IP Vodafone FTSE 100 VT Group Weir Group Wellington Underwriting NR WH Smith Whatman NR Whitbread PLC William Hill IP Wilson Bowden IP Wincanton NR Witan Investment Trust PLC see Henderson Group Wm Morrison Supermarkets FTSE 100 DP Wolseley PLC FTSE 100 Wolverhampton & Dudley Breweries Woolworths NR Workspace Group WPP FTSE 100 WS Atkins PLC Xstrata FTSE 100 Yell FTSE 100 Yule Catto & Co PLC DP 32

acclimatise Acclimatise is the market leader in climate risk management guidance and the development of tools to help businesses adapt. We bridge the gap between the scientific community and the corporate world, reviewing the latest science, providing clear guidance on the potential business and financial impacts of a changing climate. While other companies provide business support on climate change mitigation advising clients on managing their carbon emissions and energy usage acclimatise is unique in its focus on adaptation. Acclimatise offers a variety of tools, consultancy packages and risk intelligence products. Our RiskAssessment service provides a structured process that can be integrated into existing business decisions and risk management processes. This is the first step to understanding the risks and opportunities from climate change. Our RiskManagement service builds on the initial risk assessment to identify and appraise risk management options, and helps you develop a climate adaptation strategy or action plan. RiskScreening is our audit and due diligence service. It provides a high-level strategic view of potential risks and has been designed to meet the needs of clients considering mergers and acquisitions, investment decisions and IPOs. Our RiskIntelligence services help build capacity in your organisation and keep you up to date with latest developments. Our personalised RiskRetainer service provides one-to-one access to an acclimatise Director for clients who require dedicated expert advice. UK Climate Impacts Programme The UK Climate Impacts Programme (UKCIP) helps organisations in the UK to assess how they might be affected by unavoidable climate change, so they can prepare for and adapt to its impacts. Based at the University of Oxford, UKCIP was set up by the Government in 1997 and is funded by the Department for Environment, Food and Rural Affairs (Defra). UKCIP is led by its stakeholders decision-makers in both private and public sectors who are beginning to address the adaptation agenda. UKCIP provides climate information, guidance and tools for its stakeholders and also aims to learn from them the practical lessons of adapting to the impacts of climate change. UKCIP has co-ordinated stakeholder-led studies on climate change impacts for all regions of England, for Northern Ireland, Scotland and Wales and also for a number of sectors, including the built environment, biodiversity and health. UKCIP offers a range of free material. This includes: climate change scenarios for the 21st century, a decision-making framework to help organisations manage their activities in the face of the uncertainty of a changing climate, a methodology for costing impacts and adaptations, and the Adaptation Wizard an interactive online guide to the adaptation process.

acclimatise Acclimatise is a specialist risk management consultancy primarily serving businesses in the infrastructure and property sectors, and those with large, fixed assets. Acclimatise helps clients assess and manage the threats, opportunities and costs of climate variability and climate change. From this base, it also advises pension funds, investors, insurers and law firms on how to manage these risks across their portfolios. John Firth +44 1636 812868 j.firth@acclimatise.uk.com www.acclimatise.uk.com UK Climate Impacts Programme UKCIP was set up and fully funded by Defra in 1997, and is part of the Environmental Change Institute at Oxford University. UKCIP is tasked with helping organisations to assess how they may be affected by climate change, so that they can prepare for its impacts. Chris West +44 1865 285717 enquiries@ukcip.org.uk www.ukcip.org.uk Carbon Disclosure Project Paul Dickinson Executive Director +44 7958 772 864 paul@cdproject.net 57a Farringdon Road London EC1M 3JB United Kingdom www.cdproject.net The contents of this report may be used by anyone providing acknowledgement is given to acclimatise. The information herein has been obtained from sources, 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 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 this report and are subject to change without notice due to economic, political, industry and firm-specific factors. 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. 2006 acclimatise and Climate Risk Management, Ltd. Acclimatise is the trading name of Climate Risk Management, Ltd. All rights reserved. Printed using waterless printing with vegetable based inks on paper made from 75% post-consumer waste and 25% mill broke.