The Cost of Being Clean

Companies brag about slashing emissions, but we're just now learning how to check their math

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Jeff Jacobson / Redux

Powerlines at the Gates substation in the San Joaquin Valley of California..

Bet you didn't know the global warming crisis is over. Yup, it is--and it's U.S. industry that solved the problem. Just look at the press releases. Company A is going to cut greenhouse-gas emissions 10% by 2015. Company B will hit 15% by 2020. Company C will soon reach the Nirvana of carbon neutrality. It's like a post-Christmas-day sale, and all carbon dioxide must go.

But there's a problem. Despite the flurry of green boasts and sustainability reports, hard numbers on corporate environmental performance remain frustratingly difficult to find. Carbon neutral may be the reigning Oxford Dictionary term of the year, but too few companies can and do size up their carbon footprints accurately. "You have CEOs making commitments on carbon, but they haven't even measured anything yet," says Mike Wallace, a vice president at Trucost, an environmental-research firm based in London. "How can you be carbon neutral without any numbers?"

Getting those numbers is not easy. For electric utilities, it might seem relatively straightforward to count the carbon burned through smokestacks, but even there, emissions need to be weighed against the size of a company and its plans for growth. For retailers with long and varied supply chains, it can be almost impossible to tell where a carbon footprint begins or ends.

The lack of hard metrics for measuring these things makes it awfully easy for companies to gin up their equations and then brag about their green cred. But even the most cynical p.r. departments know that that's hardly a long-term solution. Climate change is already having a serious financial impact on business. Julie Gorte, a vice president for the mutual fund Pax World, points out that nearly half of the top-100 companies in the S&P 500 reported that their earnings had been affected by Hurricane Katrina--the kind of superstorm scientists believe will become more common as the globe warms. And as Washington finally begins to consider legislation that would cap greenhouse-gas emissions, companies that produce lots of carbon dioxide could be forced to purchase costly carbon offsets to meet the new regulations. These are material financial risks, the same as high oil prices or a falling currency, yet many U.S. corporations are entirely unprepared for them and could pay a steep price among both consumers and stockholders. "Climate risk is going to hit very broadly, and investors want to see what companies are doing about it," says Gorte.

Last month a group of major institutional investors and green groups took steps to start fixing the problem, petitioning the Securities and Exchange Commission (SEC) to require public companies to fully disclose their financial risks from climate change. That was followed on Oct. 9 by the launch of the Supply Chain Leadership Coalition, a new grouping of large multinationals, including Nestlé and Unilever, formed to encourage suppliers to detail their greenhouse-gas emissions. Both groups argue that climate risk should become an essential part of financial reporting, no different from a price-to-earnings ratio. "This is about being able to judge the viability and the value of your investment," says Jack Ehnes, CEO of the California State Teachers' Retirement System, which joined the SEC petition.

For there to be carbon transparency, however, there first must be carbon measurement--and the field is still in its infancy. The big accounting firms are slowly entering the market, but for now carbon assessment is usually done either in-house--in which case investors should be wary of the numbers--or with the help of environmental consultants like Trucost, which does appear to have a more objective formula, factoring in such variables as overall emissions and annual revenue (see graphics).

Even Trucost doesn't pretend this is the only formula, and the market for carbon accounting will likely explode once companies realize they have no choice but to embrace openness. That will happen only when investors vote with their money, not just their mouths. The market forces that helped make the mess may then play a big part in cleaning it up.