Although corporate liability for carbon emissions has been overshadowed by louder calls for governance reform, it has risen inexorably on the shareholder's agenda (Exhibit 1).¹ Large institutional investors, such as Calpers and the pension funds of New York State and New York City, are pushing companies to report their carbon "footprint"—the total amount of carbon dioxide that they and their suppliers emit—and to define their risk exposure to regulations that limit emissions. The Carbon Disclosure Project,² a group representing institutional investors managing $10 trillion in assets, has sent questionnaires to 500 of the world's largest companies (including airlines, automobile manufacturers, insurers, power generators, retailers, steelmakers, and technology companies) asking them to explain their emissions policies and strategies. The project then publicizes the response (or lack of one) for investors to note.

This intensifying level of scrutiny isn't simply a call for environmental stewardship, although that might play a role. Rather, it is born of concern that over the next 5 to 15 years the way a company manages its carbon exposure could create or destroy shareholder value. The companies with the most to lose,...