Faculty
Professor Anant Sundaram
Objectives
“The warming of the [earth’s] climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.” Intergovernmental Panel on Climate Change, Fourth Assessment Report, 2007.
“Predict catastrophe .......... soon enough to terrify, but distant enough, that people will forget if you are wrong.” George F. Will, 2009
“Huge value is at stake. The winners will be companies that reposition themselves to seize the opportunities of a low-carbon future.” McKinsey & Co, 2008
Course Objectives
I might be overstating this, but looking ahead to the next few decades – a productive time in the span of your careers – there are few issues that will loom larger than ‘climate change.’
The goal of ‘Business and Climate Change (BCC)’ is to explore whether CEOs and CFOs of shareholder value-maximizing companies should care about climate change, if so, why, and how.
Irrespective of opinions you may have formed on the topic, know that forward-thinking companies are taking it head-on. Why? They are the constituency with the largest cause-and-effect relationship to climate change. Through their resource use and greenhouse gas (GHG) emissions, they are the cause; the effect of mitigating and adapting to it will be a major source of costs (for some) and benefits (for others). It is highly likely that your careers will unfold in a world in which there is a significant price on carbon, via a cap-and-trade system or a tax. The implications are enormous.
BCC has four specific goals:
To develop your awareness of the issue of climate change and the opportunities/challenges it presents for shareholder value-maximizing businesses;
To explore the science, the forecasts, and the public policy related to climate change; to learn who the key players are and what their roles and agendas are (including those whose points of view run counter to the emerging consensus);
To develop the financial analysis tools to assess the market value/value-at-risk consequences of firms’ exposure to climate change risks, their fossil fuel use, carbon footprints and GHG emissions; and the economic analysis tools to assess impacts of likely regulatory responses to climate change;
To develop your understanding of corporate responses to climate change and to inform your ability to shape the conversation, so that your company (to use a cliché) can ‘have a seat at the table rather than end up on the menu.’
Why Should You Concern Yourself with Climate Change?
Why has climate change become one of the momentous societal and economic concerns of our time? Here are the issues, simplified: Almost everything we do produces carbon dioxide (CO2) and other GHGs. Lately, we’ve been producing a lot more than in the past. Science says that GHGs linger in the atmosphere for decades, and that higher concentrations will lead to consequential surface warming and other forms of climate change, with potentially irreversible and grave impacts on a wide range of earth systems. But the challenge is: Meaningfully addressing it requires that we start now, rather than wait to see what happens when (and if) the effects kick in.
To put into perspective why it matters for companies, consider three examples. The first example is a contingent liability. S&P500 companies emit 3 to 4 billion metric tons of GHGs. If the costs associated with this ‘externality’ are mandated to be internalized, the impact will be significant. If we use the average (for the past year) EU emissions trading system CO2 market price of $18/ton, the S&P500 would be collectively required to pay $54 to $72 billion annually. Under simplifying assumptions (and 9% cost of capital), the present value of this (pre-tax) liability is $600 billion - $800 billion, or up to one-tenth of the current market cap of the S&P500.
The second example has to do with measuring, managing, and reporting GHG footprints. In 2008, half of the S&P500 companies provided information on GHG emissions to the ‘Carbon Disclosure Project’ according to globally accepted reporting guidelines and protocols. 40% of the S&P500 have a board- or e-level officer, such as a ‘Chief Sustainability Officer’ (CSO) or ‘Chief Energy Officer’ (CNO) managing climate change concerns within the company. One-fifth report linkage between employee incentives and goals related to climate change.
The third example is in growth and career opportunities. Every major bank and asset management firm has initiatives in this arena, often in partnership with NGOs. Advice on coping with climate change is emerging as a major area of consulting practice for firms such as McKinsey and PwC. Many boutique advisors are beginning to set up shop. There are now a half-dozen scorecards and rankings produced by major media outlets and NGOs to which companies are having to start to pay attention. Investments in renewable energy (‘clean-tech’ and ‘green tech’) have become significant in private equity and venture capital. Nearly $4 billion was invested in these in North America by PE/VC in 2007, and the estimate for 2008 is $6 billion. Funding is expected to grow by about one-third every year for the next few years.
Requirements
The most important requirement of BCC is that you commit to a co-learning process, i.e., a process of shared knowledge-creation with me. That, in turn, requires careful and thoughtful preparation for discussion in class, the assigned reading material or assignment for the day. The amount is by no means onerous, but, given the breadth of disciplines involved in understanding the phenomenon of climate change, the course will necessarily be reading-intensive. In signing up for BCC, I will assume that you have made a commitment to yourself and your colleagues that you will, indeed, do the readings required for every session.
BCC will deal with the topic of climate change in a self-contained way. No prior knowledge of the science or public policy aspects of climate change is presumed. However, given that some sessions (and at least one major assignment; see below) will address issues in economics and in finance, pre-requisites for BCC are Managerial Economics and Corporate Finance (or equivalent).
We have a lot of issues to cover in nine sessions. Therefore, I expect that you will attend every class. If, for extenuating reasons, you are not able to attend class on a particular day, I will assume that it is for an important reason and that you have thought it through. Therefore, I do not need to be told the reason. But you should try and notify me in advance since this avoids inadvertent cold calls on those not in class. You should get caught up with the material you missed.
Materials
Course Material/Readings/Books
There has been an explosion of material – articles/reports, books, and websites/blogs/rants – on climate change in the past few years. We will focus on a subset of those that, in my view, are sufficient to deal with the topic in a confident manner. Based on these, for every session, there will be a set of required readings and a set of supplementary readings: the former are necessary, but if you can get to the latter too, your thinking on climate change will be truly pushed forward. (If nothing else, treat the latter as a summer reading project!).
Articles/Reports
(I am including both required and supplementary readings, and links for each. Almost all of them can be downloaded without registration, but a couple of them may require you to register. I will leave a few color hard-copies of each on reserve at Feldberg. Bolded names refer to how these readings will be identified in the detailed syllabus below).
Carbon Disclosure Project (CDP1), ‘CDP S&P500 Report 2008,’ September 2008 Web Link
Carbon Disclosure Project (CDP2), ‘CDP Global 500 Report 2008,’ September 2008 Web Link
Intergovernmental Panel on Climate Change (IPCC1), ‘Climate Change 2007: Synthesis Report,’ 2007 Web Link
Intergovernmental Panel on Climate Change (IPCC2), ‘Fourth Assessment Report – Summary for Policy Makers,’ 2007 Web Link
McKinsey & Co (McKinsey), ‘Carbon Productivity Challenge: Curbing Climate Change and Sustaining Growth,’ 2008 Web Link
Pew Center on Global Climate Change (Pew Climate), ‘Climate Change 101: Understanding and Responding to Global Climate Change,’ 2009 Web Link
Pew Center on Global Climate Change (Pew Business), ‘Adapting to Climate Change: A Business Approach,’ 2008 Web Link
Pew Center on Global Climate Change (Pew EU-ETS), ‘The European Union’s
Emissions Trading System in Perspective, 2008 Web Link
UN Foundation (Sigma Xi), ‘Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable,’ 2007 Web Link
UN Framework Convention of Climate Change (UNFCCC), ‘Investment/Financial Flows and Climate Change,’ 2008 (orig: August 2007) Web Link
US Climate Action Partnership (US-CAP Blueprint), 'A Blueprint for Legislative Action', 2009 Web Link
Books
(We will use relevant chapters from these books; I will leave a few copies of each book on reserve at Feldberg. The Nordhaus book manuscript can be downloaded for free)
Thomas Friedman (Friedman,) ‘Hot, Flat, and Crowded,’ FSG Press, 2008
Sonia Labbatt and Rodney White (Carbon Finance), ‘Carbon Finance,’ 2007
William Nordhaus (Nordhaus Book), ‘The Challenge of Global Warming: Economic Models and Environmental Policy,’ (manuscript: Web Link.
Nicholas Stern (“Stern”), ‘The Economics of Climate Change: The Stern Report,’ Cambridge University Press, 2007.
Websites/Blogs
(There are now hundreds of blogs, websites, and rants - on both sides of the issue - on climate change. The noise-to-signal ratio is high. The following, however, are oases of sanity that I regularly keep tabs on. A quick scan of these is an excellent way to stay on top of the material).
Climate Debate Daily (A site that regularly updates key insights, arguments, and issues from both sides of the debate; also includes links to just about every climate change-related website or blog): Web Link.
Dot Earth (A blog about climate change, the environment, and sustainability by New York Times's Andrew Revkin): Web Link.
Goddard Institute of Space Studies (The original source of a great deal of surface temperature data; lots of great pictures/videos/animations): Web Link.
Pew Center on Global Climate Change (A great resource for facts and figures, all things climate change): Web Link.
Roger Pielke Jr.'s Blog 'Prometheus' (A relatively neutral site - but tends to favor some degree of skepticism on climate science - that takes a hard look at IPCC's claims): Web Link.
Roger Pielke Sr.'s Blog (One of the more solid 'skeptics' on climate change): Web Link.
US Climate Action Partnership (
A group of businesses and environmental organizations that have come together to call on the federal government to quickly enact strong national legislation to require significant reductions of GHG): Web Link.
Honor Code
You are expected to bring integrity to the learning process, and accept personal responsibility to uphold high ethical standards in your academic work. You are expected to promote a classroom atmosphere in which honest, participative, and imaginative work flourishes. This entails adequate preparation, sharing and challenging each others’ ideas in the classroom, and contributing to joint learning on a daily basis. If you have your laptop open, it must be only for the purposes of note-taking, unless the particular class requires the use of your computer. (As you no doubt have experienced yourself, web-surfing and emailing during class detracts from your learning if those around you are doing it.) As a courtesy to visitors, your laptops must remain closed during visitor sessions.
Grading & Assignments
The course will be graded on the basis of class participation (individual), a ‘fossil fuel beta’ assignment (group), and a 10-page final project report (group), with each component weighted at one-third. More details will be forthcoming, but a summary is shown below.
Fossil Fuel Beta (FFß) Assignment: You will have a database on stock returns and other relevant data to calculate the FFß of a set of firms in various industries, and interpret your findings. FFß is a measure of the sensitivity of a firm’s market-adjusted returns to changes in the price of fossil fuels. The idea is that an FFß close to zero (‘neutral FFß’) is desirable, since CFOs might want to work to decouple the effects of an increasingly volatile variable on the value of the firm. The goal is to understand, and develop arguments for why, for instance, UPS has a neutral FFß while Fedex has a negative FFß (package delivery); Southwest Airlines positive FFß and American Airlines negative (air transport); Walmart positive and Target negative (retailing).
Groups
The ideal group size for this class is 2 or 3, preferably the former, but the absolute upper limit is the latter. I strongly urge that you prepare for every class in study groups, whether or not there is a group assignment. You will work as a group on both the FFß assignment, and on your term paper. More details on both will be forthcoming.
Grading
The course will be graded on the basis of class participation (individual), a ‘fossil fuel beta’ assignment (group), and a 10-page final project report (group), with each component weighted at one-third. More details will be forthcoming.
Schedule
Session 1:
Tue, Mar 24
Climate Change and the Corporation – 1
Sessions 1 and 2 are one continuous session. Apart from the issues raised by the study questions below, an important goal is also to understand the protagonists and terminologies: Who has a seat at the table, who is driving the agenda, and what language are they speaking?
What is climate change? What are its causes, what are its effects? Are you persuaded by the evidence - why or why not? (Think specifically about: Observed changes in climate and their drivers; observed changes in climate and their effects; aspects of climate that have not changed; emissions scenarios and forecasts, climate forecasts).
The central economics question can be framed as: What are the short-run costs of mitigating the effects of climate change versus the long-run benefits of disasters averted and of costs saved? What does the evidence show in this regard? (Think specifically about the following: Forecasts of mitigation and adaptation costs; global GDP and growth impacts; importance of demographics; the role of carbon productivity/efficiency; cost/benefit analysis of climate change investments; long-run investment flows resulting from climate change).
How do these issues translate into a workable concern for you as the CEO, or CFO, or Board Member of a company? Specifically: What is the likely impact of climate change and the efforts to deal with it on a company's market value, i.e., its cash flows and cost of capital? What is the value-at-risk, and how can it be measured and managed? How could climate change affect a company's growth strategies?
Are there the risks of inaction? What are those risks? How significant are those risks?
Required Reading:
1) IPCC 2: “Summary for Policy Makers,” pp 2 – 22
2) IPCC 1, Chapter 6 “Robust Findings and Key Uncertainties”
3) Friedman, Chapter 2 “Today’s Date: 1 ECE; Today’s Weather: Hot, Flat, and Crowded,” Chapter 5 “Global Weirding” Folder Link
Supplementary Reading (skim, or use as additional reference):
1) IPCC 1, Annex 2 “Glossary,” Annex 3 “Key Acronyms” (pp. 76 – 91)
2) UNFCCC, pp. 4-10; p 17 (Para 59) - p. 21 (Para 73); pp. 51-60 (Sec 4)
3) Nordhaus, “Summary for the Concerned Citizen” pp. 10 – 35.
4) Sigma Xi, pp. 3 – 11
Session 2:
Wed, Mar 25
Climate Change and the Corporation – 2
Preparation questions from Session 1, continued.
Required Reading:
1) McKinsey, read the whole report
Supplementary Reading (skim, or use as additional reference):
1) IPCC 1, Annex 2 “Glossary,” Annex 3 “Key Acronyms” (pp. 76 – 91)
2) UNFCCC, pp. 4-10; p 17 (Para 59) - p. 21 (Para 73); pp. 51-60 (Sec 4)
3) Nordhaus, “Summary for the Concerned Citizen” pp. 10 – 35.
Session 3:
Mon, Mar 30
The Science of Climate Change
Visitor:
Professor Andrew Friedland, Chair of Environmental Studies
Dartmouth College
This session will review the science of climate change and quantify the release of greenhouse gases from human activity. We will examine the level of uncertainty around estimates of carbon pools and projected temperature changes and evaluate scenarios for remediating or reducing the effects of greenhouse gas emissions.
Required Reading:
1) Testimony of Dr. James Hansen, House Select Committee on Energy Independence & Global Warming.
2) S. Pacala and R. Socolow, “Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies, ”Science, August 2004.
Supplementary Reading (skim, or use as additional reference)
:
1) Stern, Chapter 1 “The Science of Climate Change”
(A few copies on reserve at Feldberg)
Session 4:
Tues, Mar 31
Climate Change - Economics and Regulation
Visitor:
Professor Robert Hansen, Senior Associate Dean
Tuck School of Business
This session will cover the essential economics of carbon, from the concept of externality to alternative economic control methods.
The CBO study is a very good review of the two main control techniques, either a carbon tax or a "cap and trade" system. In a fundamental sense, these two methods are theoretically equivalent. Yet they are likely to differ in important practical ways, and each method has its own supporters. See if you can understand why they should be similar, and also how they are likely to differ. Think of which industry and company you might end up working for: do you have reason to prefer one method over the other?
The Nordhaus article is an interesting reply to the Stern Report. How does this relate to either a carbon tax or a cap and trade system?
Required Reading:
1) CBO Study, “Policy Options for Reducing CO2 Emissions,” February 2008.
2) Nordhaus, “A Review of the Stern Review on the Economics of Climate Change,” Journal of Economic Literature, September 2007
Folder Link
Supplementary Reading (skim, or use as additional reference)
:
1) Stern, Chapter 2, ‘Economics, Ethics, and Climate Change’
(A few copies on reserve at Feldberg)
Session 5:
Mon, Apr 6
Climate Change - Financial Implications (1)
Why should a CFO be concerned about climate change: What are the risks and value-creation opportunities?
How are the following four specific issues: GHG emissions, fossil fuel use, mitigation of climate change effects, and adaptation to consequences of climate
change linked to a company’s cash flows, cost of capital, and investment opportunities?
What are the emerging standards and practices with respect to carbon disclosure? What are Scope 1, Scope 2, Scope 3 emissions? What are the issues involved in implementing this methodology, and assessing your GHG footprint? Are there any other disclosure issues that may arise?
What new types of financial instruments and financial markets might evolve from efforts to address climate change? Specifically, what are weather derivatives? Catastrophe bonds? What might a cap-and-trade market look like? How does it work anyway? What can we learn from the operation of the EU-ETS, and systems such as RGGI and WGI?
How is venture capital and private equity impacted by, and impacting, investments related to climate change?
Required Reading:
1) US-CAP Blueprint
2) Carbon Finance (Skim), Chapter 5 “Institutional Investors and Climate Change;” Chapter 6 “Emissions Trading in Theory and Practice.”
(A few copies on reserve in Feldberg)
3) UNFCCC, pp. 61-68
4) Chicago Mercantile Exchange, “What Every CFO Needs to Know About Weather Risk Management,” 2009
Supplementary Reading (skim, or use as additional reference):
1) Pew EU-ETS
2) Pew Business, pp. 7-18; case study section optional
3) CDP2, Chapters 1 and 3
Session 6:
Tue, Apr 7
Climate Change - Financial Implications (2)
GROUP WRITE-UP DUE. (More details will be forthcoming)
Continue with discussion from the previous session
“Fossil Fuel Beta (FFß)” assignment:
Derivation and interpretation of FFß; Pairwise comparisons of firms’ FFß in various industries;
Constructing plausible arguments for the signs and magnitudes of FFß
Implications for managing the effects of energy use and carbon footprint on cash flows and cost of capital
Required Reading:
1) Dataset for ‘FFß’ assignment
2) CFO Magazine, “What Goes Down, Must Come Up”, December 2008:
3) Trucost Research Note, “Manufacturers: Profits at Risk from Carbon Costs,” July 2008; (registration required)
Supplementary Reading (skim, or use as additional reference)
:
1) Pew EU-ETS
2) Pew Business, pp. 7-18; case study section optional
3) CDP2, Chapters 1 and 3
4) Institutional Investor, “Confronting Climate Change,” July/August 2008: Folder Link
Session 7
Mon, Apr 13
Climate Change - Implications for Firm Strategy
Understanding energy in the value chain
Strategies to improve carbon productivity: Optimizing assets and products; building a low-carbon business; shaping the regulatory agenda
Understanding what stakeholders demand: Is there a shareholder/stakeholder trade-off? If so, how should it be mediated and managed?
Retooling decision-making frameworks and processes to create value from future growth: Capital budgeting, R&D, M&A, new product introductions, supply chains.
Reading:
1) McKinsey, “Business Strategies for Climate Change,” McKinsey Quarterly, April 2008, pp. 24 – 33. Folder Link
2) “Climate Business/Business Climate,” Harvard Business Review, Oct. 2007 (read pp. 1-10). Folder Link
3) Friedman, Chapter 9 “205 Easy Ways to Save the Earth;” Chapter 10 “The Energy Internet: Where IT Meets ET” (A few copies on reserve at Feldberg)
Session 8:
Tue, Apr 14
Private Equity/VC Activity in Renewable Energy
Visitor:
John Cavalier, Managing Partner, Hudson Clean Energy Partners
Session 9:
Mon, Apr 20
Corporate Best Practice
Visitor:
Barbara Chung, Director: Sustainability, Fiji Water Company
