As concern grows over the enormity of the corporate worlds energy demand, businesses are coming under increasing scrutiny over their readiness to deal with the flip side of that same coin: climate change. A recent move by more than two dozen institutional investors, managing $1 trillion in assets, to persuade US regulators that publicly traded companies should disclose the financial risks of climate change in their public documents is only the latest indication of investors escalating concerns, analysts agree.
Its only the tip of the iceberg. Its the part you see, says Tim Little, executive director of the Rose Foundation, a non-profit group based in Oakland, California. He was referring to the June letter sent by 28 members of the Investor Network on Climate Risk (INCR) to Christopher Cox, chairman of the Securities and Exchange Commission (SEC) in Washington, DC. But its indicative of the mass movement of investors and environmentalists that is trying to obtain greater disclosure of environmental risks. Theres a mounting groundswell around the world, Little adds.
Launched three years ago by six US state treasurers, two state and city comptrollers and labor pension fund leaders to promote better understanding of the financial risks and investment opportunities posed by climate change, the investor network now has 50 members with $3 trillion in assets between them.
The June letter was the networks second attempt to nudge the SEC into action. A similar letter signed by 14 INCR members and sent to former SEC chairman William Donaldson two years ago failed to spark any agency action. But investment experts are optimistic that the escalating global focus on climate changefrom new scientific findings to the ratification of the Kyoto Protocol to the Chinese governments public commitment to increase its use of renewable energy sourceswill induce federal regulators to take a closer look this time around.
In the past year, there has been a sea changea lot of noticeable events that have raised the level of attention on climate risk, says Emma Stewart, research manager at Business for Social Responsibility in San Francisco. SEC officials must now weigh the greater attention being paid by the international business community to climate risk. Investment bank Goldman Sachs last November, for example, adopted a comprehensive environmental policy that acknowledges the scientific consensus on climate change and asks federal regulators to reduce greenhouse gas emissions. Insurer AIG set up an Office of Environment and Climate Change four months ago as it adopted a policy explicitly addressing climate change. That follows General Electrics decision last year to launch an Ecomagination strategy that aims to cut its output of greenhouse gases as it invests heavily in carbon-free technologies. In May of this year GE announced that sales of its energy-efficient and environmentally advanced products and services hit $10.1 billion in 2005, up from $6.2 billion in 2004.
A New Form of Risk
We want more disclosure on climate risk. The Wall Street community needs the certainty of federal policy to do it, says Chris Fox, director of investor programs at Ceres, a Boston-based coalition of environmental groups and institutional investors that coordinates the Investor Network on Climate Risk. Our goal is to have the SEC clarify their guidelines so companies must include climate risk information in their reporting, he adds. Interestingly, the investor network doesnt want the SEC to place material reporting for climate risk in an environmental category. We think climate risk is a new form of risk that is not being given adequate attention, Fox adds.
Other experts see climate risk as just the latest corporate financial risk stemming from environmental hazards. Climate risk has a deep financial impact on many industries and is just not an environmental risk; its a financial risk, says Julie Gorte, a vice president at the Calvert Group, a Washington, DC, investment firm that set up the Calvert Social Investment Fund in 1982 as a way to help investors sink their money into socially responsible funds.
The immense financial risk of climate risk is not being lost on shareholders and the investment professionals that manage billion-dollar portfolios. [Climate risk] has been on the table a long time. But institutional investors and money managers are increasingly saying, Let me take a look at my portfolio and see what investments I have that are at risk from climate change, says Joanne Dowdell, vice president of corporate responsibility for Citizens Advisors in Portsmouth, New Hampshire. The industries at risk go up and down the food chain.
Called To Account
Unlike asbestos liabilities, which began hitting asbestos manufacturers and insurers in a dramatic way in the early 1980s, or the Superfund legislation that affected property owners of polluted property, climate risk has an impact on a much wider range of industries. Oil and natural gas producers, utilities and manufacturing plants that produce carbon dioxide emissions are natural targets that will be affected by the growing number of government directives to reduce emissions. Simply put, the higher a companys energy use, the greater the potential financial risk it faces.
Climate risk also will jolt the bottom lines of big-box retailers that have large warehouses along the Gulf Coast of the United States or in the path of windstorms in northern Europe. Real estate companies with large property holdings in susceptible areas and the financial institutions that lend to them will also be at risk.
Investors want the SEC to make sure corporations take these environmental risks into account and disclose them, says Meredith Miller, assistant treasurer for policy in the Office of the Connecticut State Treasurer, another signatory to the Ceres letter. Theres a groundswell of support by investors to urge the SEC to do this. [Investors] want this information in the public domain, says Miller, who sees the push as a coalescing of environmentalists with corporate governance experts. Its part of the issue of greater disclosure and transparency of risk. Investors simply dont want to face more hidden risks.
Little, of the Rose Foundation, notes that the investor networks push to have climate risk woven into SEC regulatory filings is not the first or only initiative to ensure corporations lay out the costs of potential environmental hazards on their accounting ledgers. The Rose Foundation, for example, asked the SEC back in 2002 to clarify the intent of its material disclosure requirement with respect to financially significant environmental liabilities. And two years ago the group issued a report, titled Fooling Investors and Fooling Themselves, that identified aggressive accounting and asset management tactics by specific companies that could lead to environmental accounting fraud. It included recommendations for the SEC, the Financial Standards Accounting Board and the Public Company Accounting Oversight Board.
Theres no magic bullet, says Little, of the investor and business communitys efforts to ensure regulators officially recognize that environmental sustainability is highly material to corporate profits and shareholder value. Its like a tidal wave, he adds. Investors are increasingly saying that these kinds of sustainability issues matter.
Paula L. Green