An Introduction to Climate Change

What is it?
The term "climate change" denotes dramatic changes in climatic conditions, whether these changes are anthropogenic (human induced) or naturally occurring. Anthropogenic climate change is the dramatic increase in global temperatures primarily caused by emissions of greenhouse gases (GHG) from the use of fossil-based fuels and industrial processes.  Other human practices such as deforestation are also spurring climate change because they lead to the loss of natural "carbon sinks" that store or sequester carbon.

Is the earth really warming?
There is no question that the Earth is warming due to human activity. Temperatures at the Earth's surface increased by an estimated 1.4°F (0.8°C) between 1900 and 2005.  While this may sound unalarming, it is not:  the earth's global average temperature varies very little, and a change of even one or two degrees can be dramatic for the creatures that inhabit it.  The difference in global mean temperature between the last ice age and the present is about 5 degrees Fahrenheit; the difference between the present and the hottest period we know, about 35-65 million years ago, when there were alligators living north of the Arctic circle, was only about 5-9 degrees.  The past decade was the hottest of the past 150 years and perhaps the past millennium. The hottest 23 years on record have occurred since 1980; 2005 was the hottest year on record, and NASA scientists believe that 2007 could be even warmer.

What will be the results of climate change?
Climate change is one of the most serious threats to our environment and our livelihoods. The gradual warming of the atmosphere will bring about increasingly severe weather, rising sea levels, and changes in the incidence of floods, fires, drought, and other weather-related patterns that will have potentially profound impacts on basic human activities such as agriculture, water use, and commerce. For example, over $7.2 billion worth of insured property lies on the Gulf and Atlantic coasts of the United States alone-much of it vulnerable to sea-level rise and storms, including hurricanes made more intense by climate change.

What do we expect from companies?
The United States has 5% of the world's population, but produces 25% of the CO2 emissions. Corporations account for well over half of the emissions of greenhouse gases in the US, and the vast majority of all emissions if the impacts of their products are included in the calculation. Yet most companies have yet to establish quantitative targets for emissions reduction, or even measure their emissions.  Climate change will affect both the bottom lines of companies and shareholder returns, in a variety of ways. Property and casualty insurance and reinsurance companies, for instance, are acutely aware of this challenge, and many are working to better understand the changed landscape of risk.  New emissions requirements for automobiles will redraw the competitive boundaries in that industry, and those that are well-positioned on hybrid, alternative fuel technologies, and fuel efficient models could come up winners.  Whether the primary impact is on the risk or opportunity side, the first essential step for companies is accepting that what is measured can be managed.  Few companies can afford to remain ignorant of their own emissions, or the risks associated with these emissions, even if they are not significant emitters. 

For Calvert, climate change is as much a governance issue as an environmental one. We expect companies in which we invest to have a clear understanding of the risks and opportunities of climate change and a strategy for managing both.

Is the Kyoto Protocol likely to affect how companies manage their greenhouse gas emissions?
In 1997, representatives from most of the nations of the world met in Kyoto, Japan to develop a treaty mandating limits on emissions of GHGs for developed nations. That document-the Kyoto Protocol-entered into force in February, 2005 after ratification by all but four of the countries that participated in drafting it. Companies operating in the European Union, Canada, and Japan, among other countries, must abide by its requirements to reduce GHG emissions, regardless of where the companies are headquartered. Thus, most US companies with foreign operations are obliged to meet Kyoto Protocol requirements.

Since the Kyoto Protocol's entry into force, markets to trade emission permits-so-called carbon markets-have developed quickly, primarily in Europe.  As a result, a price for emissions reduction has been established that helps businesses in all Kyoto ratifying nations to quantify the monetary impact of regulation and begin to manage the risks of noncompliance. This development has also helped financial analysts to understand the investment implications. Emissions now have a price and reduction has value. 

While the United States has not ratified the Protocol, and has no mandatory federal program regulating GHG emissions, regulatory risk is still a factor for American companies. Over half of the states have some kind of program in place to deal with climate change and GHG emissions and a Federal Mandate is gaining some strength.  California, for example, is leading the way with the most  comprehensive and aggressive policy.