By Mindy S. Lubber
Climate change and emerging limits on greenhouse gas emissions pose new challenges for global companies and investors. Whether it's cars in China, aluminum in Europe or electric power in regions of the United States, the carbon footprint of goods and services made by U.S. companies is becoming a bigger competitive factor.
The financial risks from global warming are growing every day. Scientists expect global warming will increase the frequency and intensity of extreme weather events — and, in fact, already might be doing so. Last year's spate of hurricanes in the U.S. caused a record $30 billion in insured losses and this year's toll could be substantially higher because of Hurricane Katrina alone. A new Ceres report by three insurance industry experts says U.S. catastrophic losses from drought, wildfires, hurricanes and other extreme weather events have grown 10 times faster than premiums since 1971, and predicts even bigger losses in the years ahead if climate change trends continue.
Regulatory changes also are affecting global companies, whether from tighter auto emissions standards being pursued in Canada, China and California, or greenhouse gas reduction measures imposed in Europe and elsewhere under the Kyoto Protocol. So serious is the climate change issue that Swiss Re, a major reinsurer, has suggested it will cut directors and officers liability coverage for corporate clients that don't come up with appropriate strategies for handling global warming risk.
Tackling the climate risk challenge falls not just on companies, but on investors, too. There are three strategies they should be pursuing.
• First, investors must understand the financial risks that climate change poses to companies in which they own shares, and companies must do a better job of analyzing and describing those risks in public reports filed with the Securities and Exchange Commission.
• Second, investment managers need to more accurately assess climate risk exposure when evaluating companies and industry sectors. More robust research practices are needed to better analyze and model how businesses and sectors are threatened by various global warming scenarios, whether from weather or regulatory changes.
• Third, investors must channel their investment capital to take advantage of new clean-technology opportunities. As more countries adopt carbon controls and set ambitious renewable energy goals, markets for wind and solar power, hybrid vehicles, clean-coal processes and other clean technologies will only increase.
A growing number of major U.S. pension and investment funds, many of them part of the Investor Network on Climate Risk, are already taking action. Three of the five largest public pension funds in the United States — the California Public Employees' Retirement System, the California State Teachers' Retirement System and the New York State Common Retirement Fund, which collectively hold $446 billion in assets — now routinely vote their proxies to support global warming shareholder resolutions. TIAA-CREF, a major manager of pension assets, is also voting most of its proxies in favor of these resolutions.
European investors are also joining forces with their U.S. peers to confront climate change. At a recent climate risk summit organized by Ceres at the United Nations, two of Europe's largest pension funds — $36 billion Universities Superannuation Scheme Ltd. and the $5.44 billion London Pensions Fund Authority — endorsed a 10-point plan seeking deeper analysis, disclosure and action from Wall Street firms, securities regulators and companies on the business risks and opportunities from climate change. Two dozen leading institutional investors controlling more than $3 trillion in assets signed on to the plan, which also included a pledge to invest a combined $1 billion in the next year in companies with clean technologies.
The dramatic surge in investor activity on climate change has led to important breakthroughs with regulators such as the National Association of Insurance Commissioners, which will be focusing on climate change at its winter meeting in December. "After New Orleans, it's becoming clearer that we are experiencing more frequent and more powerful weather events that pose huge challenges for the insurance industry," said Tim Wagner, Nebraska's state insurance director and chair of NAIC's property and casualty committee.
Investors are also winning record-breaking support for shareholder resolutions. A 2005 resolution with Exxon Mobil Corp. asking the company to assess the impact of the Kyoto Protocol on its business received 28% support, the highest vote ever on a global warming resolution with the company. Similar resolutions at Apache Corp. and Anadarko Petroleum Corp. in 2004 received even higher votes.
These global warming resolutions are not about doing what is environmentally sound. They're about prudent financial and strategic planning that will enhance long-term shareholder value.
And companies are responding to the rising investor pressure. Shareholder negotiations with electric power giants Cinergy Corp. and Duke Energy Corp. were instrumental in the companies' recent strong leadership in calling publicly for the U.S. government to adopt a comprehensive economywide climate change policy, arguing that taking such action will benefit, not hinder, the U.S. economy in the long term.
We've also seen a half-dozen oil and gas companies take substantive actions to disclose their potential financial exposure from climate change and develop strategies to reduce greenhouse emissions and boost their renewable energy investments. Chevron Corp., for example, reduced its greenhouse emissions by 1 million tons in 2004 and is planning to invest more than $100 million a year in renewable energy projects.
These are all encouraging developments. But more action from more companies and more investors is needed. In the absence of decisive leadership from national governments, it falls to business leaders and financial fiduciaries to push for change and accountability in facing this enormous global challenge. Action on climate risk is needed today if financial and environmental consequences are to be avoided tomorrow.
Mindy S. Lubber is president of Ceres and director of the Investor Network on Climate Risk, both of Boston. Ceres, formerly the Coalition for Environmentally Responsible Economics, is a group of about 80 investors, environmental groups and public interest organizations. Ceres spearheaded the development and coordinates the activities of INCR, an alliance designed to promote better understanding of the risks of climate change and formed by some 50 leading U.S. and European institutional investors with total assets of more than $2.7 trillion. More information is available at www.ceres.org and www.incr.com.
