Serious About Smog; New rules force 'green' business to do more than talk.

Byline: Karen Lowry Miller

Enron in its day was big on "corporate social responsibility," which tells you all you really need to know about that fad. Nine parts PR, one part charity, the movement was the boardroom response to a growing cottage industry of green investors and consultants who never seriously altered the corporate credo: make money. Yet in these more sober times, changing laws are forcing CEOs to put real time and resources behind their talk about good corporate citizenship.

The catalyst is global warming. To meet its Kyoto Protocol obligations, the European Union will place a cap on carbon emissions from each of its 12,000 smokestack plants come January and will slap steep penalties on violators. Accountants are preparing to count carbon as a liability, analysts are factoring pollution into share prices and insurers are threatening to raise rates on companies for "carbon risk." AXA, the big French insurer, says climate risk is now more important than currency or interest-rate risk. A global group of 95 fund managers representing more than $10 trillion in assets surveyed 500 multinationals on emissions and published the results on May 19. "Climate change is the vehicle through which sustainability questions are going mainstream," says Matthew Kiernan, CEO of Innovest, a Toronto-based research firm.

The bottom line: pollution now has a price. The EU is creating tradable allowances for each ton of carbon emitted; some companies will profit by selling unused allowances, while others will be forced to shut or refit plants to stay within their limit. Just over a year ago, Dresdner Kleinwort Wasserstein issued the first Europewide report on carbon trading, calling it the greatest disruption since the Industrial Revolution. By autumn, investment houses were handicapping companies, starting with utilities, the heaviest carbon polluters. These issues are no longer just for green "nerds," says Benedikt von Butler of Evolution Markets, a London energy broker. "Suddenly we've entered a world where carbon is a key part of risk management."

The impact is on dramatic display at RWE of Germany, Europe's third largest power company. An RWE task force has spent two years studying its options and running its own scenarios for a wide range of prices. RWE will manage its options day by ...