Climate change presents serious physical and financial risks, opportunities for institutional investors

Climate change presents serious physical and financial risks as well as opportunities that should be factored into businesses' and investors' decision-making, said a number of speakers at the Council of Institutional Investors' Winter Conference in Washington Feb. 27 to March 1.

Stressing the need for climate-competent company boards, Elisse B. Walter, a director at Occidental Petroleum Corp. and the Sustainability Accounting Standards Board, pointed to a 2016 SASB bulletin that reported 72 out of 79 industries, representing $27.5 trillion or 93% of U.S. capital markets, are significantly affected in some way by climate risk.

Seeing climate change risk “as a fundamental part of the corporate governance agenda is very important,” agreed Anne Simpson, investment director, sustainability, at the $311.7 billion California Public Employees' Retirement System, Sacramento, speaking on a separate panel on climate-related financial disclosure. “Companies which intend to be in business for the long term must address these risks and these opportunities.”

Driving the discussion on Ms. Simpson's panel were the recommendations, released in December, of the Financial Stability Board's Task Force on Climate-Related Financial.

The task force was formed in 2015 to “develop voluntary, consistent disclosures for companies to use to provide information about climate-related financial risks to their investors and other market participants,” said Kristen Spalding, director of the investor program at sustainability advocacy group Ceres and moderator of the panel.

The task force's recommendations focus on four themes — corporate governance, strategy, risk management, and metrics and targets.

While executives at some companies might feel they already have a grip on corporate governance or metrics and targets, task force member Neil Hawkins believes the risk management piece will force a closer look at physical risks to property and other impacts of climate change that he doesn't see a lot of companies reporting now.Mr. Hawkins, corporate vice president and chief sustainability officer at Dow Chemical Co., was on the panel with Ms. Spalding and Ms. Simpson.

The other big new piece of information, Mr. Hawkins believes, will be strategy — how companies are dealing with climate change “both as a negative trend and for profits.”

Ms. Simpson applauded the task force's work, saying it “gives us the chance to have a common language around climate risk and opportunity, and that will enable the financial markets to deploy capital and exercise stewardship in a way that's going to support the Paris Agreement (on climate change).”

Mr. Hawkins added: The task force's recommendations “provide a common platform within a sector ... to say which of these companies actually have good governance, which of these companies have a strategy to manage this, and which of these companies have a value-created approach to managing it.”

A public comment period on the task force's recommendations closed Feb. 12. The final recommendations are expected to be published in July.

There's a “global political will to address climate change” and companies should have someone on board who can address climate questions, said Michael Garland, assistant New York City comptroller for corporate governance and responsible investment, speaking on the same panel as Ms. Walter. This could mean “an expert in climate change or capital allocation who understands climate implications,” he said.

For Paul E. Rowsey III, president and CEO at Compatriot Capital Inc., board chairman at Ensco PLC and E2M Partners LLC, and director at Powder Corp., having a pure climate specialist on board isn't necessary, but boards should have access to that expertise and climate change risk should be on the chairman's agenda.

Speaking on the same panel, Edward Kamonjoh, executive director at 50/50 Climate Project, added that a climate-competent board factors climate risk into its board structure, board process, strategic planning, management incentives, investor engagement and disclosures.

The increasing focus on environmental, social and governance issues also came up in a panel discussion on next-generation investing.

ESG investing is a “slow moving, unstoppable train,” said Rebecca Fender, head of the Future of Finance initiative at the CFA Institute.

Ms. Fender pointed to a 2015 CFA Institute survey that found 73% of surveyed portfolio managers said they incorporate ESG factors into their investment decision-making, with the biggest focus on governance.

While risk management was the top reason cited for ESG incorporation, a number of survey respondents also cited client demand.

Much of the demand for ESG investing is coming from younger investors, said Chris McKnett, managing director and head of ESG at State Street Global Advisors, speaking on the same panel as Ms. Fender. “When I think about ... what's front of mind for next-generation investors and what's likely to influence long-term value... I think sustainability is right there,” Mr. McKnett said.

So far, though, ESG pickup has been slow because of limited data and a lack of clear value proposition, among other hurdles, Mr. McKnett said.

Commenting on some investor concerns that ESG investing leaves them with a smaller investment universe and fewer opportunities to add alpha, Thomas Kamei, an investor on Morgan Stanley Investment Managements' global growth equity team, pointed out there are companies like Tesla Inc. and Starbucks Corp. that are “leveraging their ESG ... to become very valuable enterprises.”

Starbucks has “one of the most fantastic sustainability reports that I've come across,” Mr. Kamei said.

Conference speakers also predicted the future of certain U.S. policies and regulations under President Donald Trump's administration and a Republican-controlled Congress.

Investors' rights “are likely to see significant change” with Republican control of Congress and the White House, Theresa Whitmarsh, said CII board chairwoman and executive director of the $112.4 billion Washington State Investment Board, Olympia. “We are worried that shareholder rights might be weakened.”

One particular concern, she said as part of a panel on U.S. policy and regulation, is the recent practice of doing initial public offerings with no voting rights.

The resurgence of dual-class structures is like a game of whack-a-mole, added John Brennan, director at General Electric Co. and LPL Financial and former chairman and CEO at Vanguard Group Inc., in a keynote address. “It is a troubling trend,” he said.

Harvey Pitt, former chairman of the Securities and Exchange Commission, told CII members that “it will be necessary to focus on facilitating the raising of capital” as part of a broader push to stimulate job growth among small- and midcap companies. Once SEC chairman nominee Jay Clayton is confirmed, “a lot of people hope he will focus on capital formation, but you are going to continue to see the SEC be an enforcer as well,” said former SEC Commissioner Annette Nazareth.

She said “the first hint” of the Republican agenda — which includes reforming the Dodd-Frank Wall Street Reform and Consumer Protection Act — is Rep. Jeb Hensarling's Financial Choice Act, which would repeal the Volcker rule, end the concept of “too big to fail”; and retroactively repeal the Financial Stability Oversight Council's authority to designate firms as systemically important financial institutions. CII members are concerned that Mr. Hensarling's bill also would undo several corporate governance gains, including repealing all types of proxy access, reducing or limiting the frequency of say-on-pay votes and situations requiring clawbacks, and restricting proxy advisory firms' ability to inform institutional investors.

On March 1, CII's public pension fund members re-elected Ms. Whitmarsh, as chairwoman of the CII.

New board members for 2017 to 2018 were Cambria Allen, corporate governance director at UAW Retiree Medical Benefits Trust; Mary Collins, trustee at the $6.5 billion District of Columbia Retirement Board, Washington; and Matt Jacobs, general counsel, at CalPERS.

Hazel Bradford contributed to this story.