When this year's edition of the Barclays Equity Gilt Study landed on the desks of City editors, one sentence screamed out for attention: "When the history books are written, the past couple of years are likely to be seen as an inflexion point in the global economic order."

That claim shouldn't be dismissed as hyperbole. Behind it lies the reality that the climate change debate is having, and will continue to have, a dramatic impact on all areas of economic life.

Unlike many of the contributors to the debate, however, Barclays Capital sees that impact as positive overall. The need to meet the world's increasing demands for energy while reducing reliance on hydrocarbons will, say the study's authors, force a radical restructuring of the world's energy infrastructure. In the coming revolution, there will, of course, be losers—but there will be winners, too.

"The climate change policy debate is couched in terms of the cost to GDP growth," says Tim Bond, head of asset allocation at Barclays Capital and the principal author of the study. "Even the proponents of policy shifts tend to assume a negative effect on growth. But this stance is underselling the actual impact of an energy revolution. The process should prove immensely stimulative to economic growth."

The idea that climate change is an opportunity as well as a threat, and that it's far too important to ignore, has been gaining currency in the City for some time (see panel below) but this year seems to be something of a watershed. Hot on the heels of the much-publicised Stern Review on the economic impact of global warming in November 2006 came a trio of climate-change reports by investment analysts at Lehman Brothers, UBS and Citigroup. The central thesis of each can be summed up in the following statement from Klaus Wellershoff and Kurt Reiman, co-authors of the UBS report: "Whether or not you agree with the view that human activity is influencing the climate system is largely irrelevant to the investment thesis. What is important is that numerous policies to combat the threat of global warming are converging to influence people's behaviour, alter the risk profile of various businesses and improve the investment outlook for others."

On one level, it no longer matters whether global warming is real or not. What matters is that the global community is behaving as if we are on a collision course. In the investment arena, this means that the greenest companies will be seen as the safest long-term bets.

The rules for both business leaders and investors have changed. Arthur Moretti, a portfolio manager in Neuberger Berman's socially responsive investment team, says: "Global climate change and its implications for businesses' long-term sustainability should, in our view, be a significant consideration for the investment management industry."

Mindy Lubber, president of Ceres, a coalition of investors and environmental groups in the US, adds: "We want all companies to understand the business impacts of climate change—and plan for it accordingly. It's what any corporate director would expect of their CEO."

These "impacts" vary in degree and kind from sector to sector and include not only reputational risks and the high costs of energy inefficiency (heavy users are penalised through the tax system) but also threats to industrial infrastructure and asset bases. The hurricanes that ravaged the Gulf of Mexico in 2005 exposed the perilous vulnerability of the oil and gas industry to climate change. The world's chemicals industry faces similar threats. It has been estimated that, of the actual and planned global ethylene capacity of 173 million tonnes, 45 per cent is at a high risk of flooding. Increased protection and relocation inland, away from the deep water ports needed to accommodate bulk cargo vessels, would have significant capital and transport costs. Meanwhile, the prospect of more storm damage is an obvious concern to fixed-line operators such as BT.

Investors are taking much closer interest in companies' exposure to the various risks posed by climate change. The Carbon Disclosure Project (CDP) is a global initiative supported by 225 institutional investors who collectively manage more than $31trn of assets, around a third of the global total. The CDP pushes for greater disclosure of information by the world's largest companies about their exposure to climate change risks and the steps they are taking to mitigate them.

Ceres recently named and shamed 10 large US firms for dragging their feet on climate change. "Companies in every industry, especially energy sectors, must act now to assess and mitigate climate change risks," says New York City comptroller William Thompson. So how are the world's businesses responding to the pressures?

There is no shortage of companies staking their futures on a low-carbon economy. General Electric, for example, has put around 40 of its "clean technology" subsidiaries into what it calls its "Ecomagination" programme, the focus of its ongoing R&D spending. It increased sales of these energy-efficient businesses from $6.1bn in 2004 to $10.1bn in 2005.

BT, one of the biggest industrial power users in the UK signed up with Npower and British Gas in 2004 for what it describes as "the world's biggest green energy contract". It claims to have reduced its CO2 emissions by 70 per cent between 1991 and 2005.

Meanwhile, big retailers have been announcing plans to safeguard their reputations with consumers by taking the environment seriously (see panel below). These plans will affect the whole supply chain and, so, change the behaviour of smaller companies, too.

And some smaller companies will themselves help to drive the revolution and become architects of the new order. John Llewellyn, author of the Lehman Brothers report, The Business of Climate Change: Challenges and Opportunities, says: "Climate change not only brings technological opportunities, it also enables new businesses to appear and develop. The firms that will prosper are most likely to be those that are early to recognise the importance and inexorability of climate change."

Nonetheless, it's impossible to overestimate the challenge that faces the business and corporate worlds. Llewellyn likens the impact of climate change to that of globalisation and demographic change, "both of which are slowly but inexorably changing patterns of demand, structures of production, geographic location, and other key parameters that influence firms' behaviour".

But he warns that just because an influence is slow-moving, it does not mean its effects will always follow at the same pace. "Slow-moving forces can, on occasion, impact business sharply and suddenly," says Llewellyn. "In some circumstances, consequences can be seen in the present."

For example, houses built on low-lying land, for which the likely impact of climate change is years or decades away, have already become difficult or impossible to insure.

Then there's the sheer scale and range of the problem, and the depth of its complexity. Global warming is, by definition, a worldwide phenomenon. Developing countries are expected to account for 75 per cent of the increase in emissions over the next 25 years, according to investment bank Goldman Sachs.

That means that businesses and investors in the increasingly globalised companies that dominate the UK stock market have to make global judgements about how change will unfold, how governments around the world will respond, and how best to capitalise on the opportunities presented by the new economic order.

For those companies that successfully rise to the challenges, the rewards are likely to be huge. Bond believes the next few years "will be coloured both by high levels of risk and uncertainty, but also by extraordinary returns".

Stretching the Square Mile

The change in the City's definition of a "good" business can be traced to the beginning of the decade, when the big institutions started introducing policies explaining how they would address ethical and sustainable development issues across their investment portfolios. Three regulatory factors lay behind the shift.

• The first was the 1999 Turnbull Report on Internal Control. Now part of the Combined Code on Corporate Governance, which is annexed to the Stock Exchange's Listing Rules, the report  identified several non-financial risks that companies should consider as part of their systems for internal control. They included environmental risks.

• The second was a change to the 1995 Pensions Act requiring occupational pension funds to state the extent to which social, ethical and environmental issues are taken into account in the investment process. Since pension funds are key clients of many City investment managers, the significance of this was immense.

• The third was the climate change levy. Introduced in 2001, this brought increased recognition that shareholder value could be created by new, sustainable technologies but also destroyed by reliance on carbon-based energy. If businesses were going to be taxed for high use of energy and the emission of greenhouse gases then they were ultimately going to be less profitable. Alternative sources of energy had to be found, and subsequently, North American fuel cell companies saw something of
an investment boom.

Source: Dr Craig Mackenzie, A Director's Guide to Sustainable Development, IoD, 2001.

A word from the aisles

Retailers are paving the way for a carbon-neutral economy

The enthusiasm of the City for sustainable development is more than matched by the retail sector, as it bows to pressure from the green consumer.

Marks & Spencer's latest 100-point manifesto includes a pledge to reduce packaging by a quarter, achieve carbon-neutral status by 2012 and use Fairtrade cotton for even its cheapest items.

For a company with the power to affect 2,000 factories and 10,000 farms, this is a dramatic development. Chief executive Stuart Rose has pledged that the £200m cost will not be passed on to the consumer so he's taking a gamble that shareholders will be "paid back" through increased sales.

Likewise, Tesco, which was quick to respond to the Stern Review, has said it will spend £500m over five years to reduce its own energy consumption and a further £100m to develop renewable technology. Some of that cost will be recovered by reducing its annual £220m energy bill but, like M&S, Tesco is betting that the cost of the new strategy will be exceeded by sales.

Wal-Mart, which owns ASDA in the UK and has over 60,000 suppliers, is aiming for what it calls "total corporate sustainability". It wants to be supplied 100 per cent by renewable energy, to sell sustainable (and ethically sourced) products and to produce zero waste. Its plan to reduce packaging by five per cent equates to around 324,000 fewer tonnes of coal a year, according to Wal-Mart chief executive Lee Scott.

"But there's also a business advantage—and a pretty big one," noted Scott at an event organised by the Prince of Wales's Business and the Environment Programme earlier this year. "This effort will generate nearly $11bn in total economic savings. Wal-Mart alone will save $3.4bn—which is equal to more than a third of our current annual profits."

Retail analysts are relaxed about the costs of the new green push. Freddie George of Evolution Securities says: "From an investment perspective it isn't of huge importance. But from a consumer perspective it is. I'm assuming retailers wouldn't be doing it unless they thought it would be offset by increases in their top line."