Panel Detail:

Wednesday, April 26, 2006
2:10 PM - 3:25 PM

Moderator:

Glenn Yago, Director, Capital Studies, Milken Institute

Richard Sandor tells the audience that when it comes to businesses and the environment, "You can do good and do well."

What was a major theme for many of conference panels was, in fact, the entire focus of this session, summed up by panelist Richard Sandor of the Chicago Climate Exchange with the succinct phrase, "You can do good and do well."

In this session, the panelists fleshed out this proposition in very concrete (or perhaps carbon) terms, demonstrating not only the success of their own firms, both in terms of emissions control and financial gain, but also suggested several ways in which market forces are providing powerful incentives for potentially limitless growth in this direction for businesses in all lines and across all borders.

Representing leaders in industry, finance and the rapidly developing climate exchange market, each panelist had hopeful insight to provide, based on his own experience on how saving the planet is not only possible, but profitable.

Beginning with the time-honored assumption that "as goes GM, so goes the United States," a mere nod in the direction of GM's current predicament provided the backdrop for the urgency with which leaders in the business community are turning toward green solutions in general, and to carbon asset markets, in particular. For the non-believers, Sandor pointed out that not long ago, the commoditization of debt was regarded as impossible. Now we have the commoditization of pollution.

Sandor explained that the general trajectory of government regulation was moving from no controls to what he characterized as the "one size fits all" controls of the 1970s and to the 1990 Clean Air Act, which for the first time targeted one environmental problem (acid rain) and one pollutant, sulfur dioxide (SO2). The subsequent success the act in dramatically lowering SO2 emissions led, even if only as an indirect consequence, to the establishment of opportunities for new financial markets, ultimately manifested in the Chicago Climate Exchange and later the European Climate Exchange.

Neil Eckert of the European Climate Exchange predicted a $2.3 trillion carbon market by 2012 but asserted that the liquidity required to foster continued entry from new sectors is dependent upon cap-and-trade legislation. He described the myriad opportunities for investment that caps provide to businesses seeking to meet emissions requirements and, in turn, trade carbon points, ranging from the energy needs of small businesses to the infrastructure needs of developing countries.

Sandor added to this that financial performance of publicly traded companies has been shown by market analysts to be influenced to a very real extent by their eco-performance, based on consumer preference. Tipping his hat to the increasingly popular theme of financial transparency, Sandor said "... in other words, now is not a good time to be a misogynist, homophobic, racist polluter in the world market."

Each panelist, when asked why he became involved in carbon trading, credited Sandor as both the inspiration and motivation, which would seem to go a long way toward emphasizing the importance of leadership and human capital in addressing the environmental problems facing the world today. Beyond their collective endorsement of Sandor's ideas, two reasons for involvement in this market were cited repeatedly: the first being necessity (cap), the second being opportunity (trade).

In the case of DuPont Co., according to Edward Mongan, the company’s director of energy and the environment, initial interest in reducing emissions stemmed directly from the Clean Air Act and the increased awareness in the early 1990s of the dangers of greenhouse gases. The realization that this could have potentially disastrous financial repercussions on DuPont's particular line prompted immediate action long before the company saw potential for financial growth through carbon trading -- which it eventually did, a point not to be overlooked.

In the first instance, however, merely in an attempt to meet tightening government regulations beginning with the Clean Air Act, DuPont enacted policies that reduced its output of greenhouse gases from 90 million metric tonnes in 1990 to roughly 25 million metric tonnes in 2003.

It also bears mentioning, said Mongan, that during the period from 1999 to the present, DuPont's emissions have remained relatively flat, but that production has increased by more than 30 percent. This would appear to imply increased efficiency in production, even in excess of what the figures on total emissions reflect, perhaps providing the emissions points that have propelled DuPont into a prominent position in the emissions market. Beyond the initial need to fall into line with government caps, the potential for revenue generation via emissions credit trading was a huge incentive, not only for DuPont's involvement in this market, but for its continued effort to decrease emissions levels.

Echoing Edwin Mongan's sentiments, Bill Marcus of Chicago Calyon Financial cited the sheer enormity of the market itself as his company's primary motivation for participation. As he explained, a certain level of liquidity in any given market automatically attracts other players to the field, regardless of their level of concern about the environment. By his estimation, the brokerage community's involvement in the carbon asset market has reached that point in its parabolic curve where it is poised to explode, with potential to become perhaps the largest financial market in history within the next 50 years.

Other ideas that were addressed on the subject of opportunities and challenges presented by a brand new asset class (such as carbon) included the creation of new bodies of experts who can analyze and study the role of such variables as weather, policy, new consumer bases, geographic borders and education on the development of the market and its efficacy, not only in financial terms but also in human and environmental terms. Increased attention from academia was called for in producing knowledge, especially with regard to the developing world, and Sandor announced that as of the previous week, the Chicago Climate Exchange had added its first Chinese company to the membership.

In response to a question from the audience about how to convince businesses to open carbon accounts -- in this case, based upon a disappointing meeting with a major player in the entertainment world -- Sandor and the other panelists suggested two strategies, one negative, the other positive.

It is indeed odd, Sandor pointed out, that for all of their lip service to environmental causes, there are currently no major Hollywood studios with carbon asset accounts, an example, he said, of what they call in Chicago a case of "all hat, no cattle."

Mongan suggested that the first thing would be to attract a given company's attention to its own carbon footprint. Running those numbers, which is not yet a standard practice, is frequently enough of an eye-opener to motivate a board of directors to move in a greener direction, especially in light of the likelihood of stricter government regulations.

Sandor added that along with risks posed by government intervention, there is also the potential for financial risk in the form of a class-action lawsuit from the effects of pollution, and in turn for related negative publicity. In the case of the particular Hollywood giant in question, he said, any connection between its emissions and associated health crises in children could be its undoing.

On the positive side, he added, the incentive for financial gain and the potential to be in the entertainment world what DuPont is in the chemical world, i.e., the leader, could prove to be the most powerful motivator.

Whether altruistic government regulation or profit-motivated innovation (or flexible and creative combinations of the two) actually has the potential to save the planet remains to be seen. One thing is apparent, however, and it is that potential exists beyond what might have been conceivable to most as little as five years ago. This panel not only demonstrated the enormous degree of change already occurring, but the ever-increasing opportunity for the business community as a whole to join this movement and increase its momentum.

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