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April 22, 2003
Earth Day Founder Not the Only One to Link Climate Change and Investing
    by William Baue

The voices of institutional investors representing public pension funds join those from the insurance industry to advance a business case for addressing climate change.

In his keynote speech at the Coalition for Environmentally Responsible Economies (CERES) conference earlier this month, Earth Day founder Denis Hayes observed some similarities between man-made markets and natural ecosystems. Economic bubbles, he said, can be likened to ecological overshoots, such as when prairie dogs reproduce beyond the land's carrying capacity.

"Everything seems to be going swimmingly until suddenly, like cartoon characters, they find that they have run over the edge of the cliff," Mr. Hayes stated. "And no matter how fast they churn their legs, they can't avoid a long drop."

"And as with bubble economies, the greater the violation of the boundary conditions, the sharper and deeper the eventual collapse," he continued.

During his talk Mr. Hayes cited several historical examples of classic bubbles, including the Soviet economy and the recent irrational exuberance over technology stocks. However, he said, those bubbles pale in comparison to the severity of the current "ecological" bubble.

"Throughout the global economy, prices don't reflect ecological reality," Mr. Hayes told the CERES conference attendants. "We've been liquidating our natural capital and not reflecting this on our books. Indeed, when we consume a natural resource, we stick this loss in the income column."

This liquidation of natural capital also applies to greenhouse gas emissions. Many companies emit greenhouse gases without restraint and do not view climate change as a threat. Mr. Hayes pointed out that precious few companies are following the examples of BP (ticker: BP), DuPont (DD), IBM (IBM), and Johnson & Johnson (JNJ), which are recognizing the business case for improving environmental performance and reducing greenhouse gas emissions.

In the absence of governmental regulation (the Bush Administration's voluntary greenhouse gas goals actually allow for increases in emissions), Mr. Hayes exhorted shareowners to advance the cause of addressing climate change at the corporate level.

Later in the CERES conference, state and city treasurers and comptrollers from Connecticut, Vermont, New York State, and New York City echoed this call by summoning institutional investors to a summit addressing climate change. These officials act as the principal fiduciaries for approximately $130 billion in combined investments. They also helped file many of the record 31 resolutions involving global warming at 27 companies this year.

"We need to pull corporate America's heads from the sand and look at this obvious long-term economic risk," said Connecticut State Treasurer Denise Nappier in her CERES speech.

Shareowner action is not the only avenue for promoting the assessment of climate change risk. Insurers and reinsurers, which are often stereotyped as conservative number crunchers, may be the most progressive voice addressing climate change risk comprehensively. Perhaps this is because risk-assessment is their stock-in-trade.

"Reinsurers such as ourselves are making business decisions based on climate change prediction," said Christopher Walker, managing director of greenhouse gas risk solutions at Swiss Re (TUKN.SW). "We anticipate risks by trying to understand them before they've come to pass. Along the way, we manage risks and try to mitigate them."

"We're also a facilitator. An important part of our role is our ongoing effort to educate our clients and the public about risks," Mr. Walker told

Toward this end, Swiss Re released a report last year entitled Opportunities and Risks of Climate Change. While much controversy surrounds the determination by the International Panel on Climate Change (IPCC) that human activity contributes to global warming, the report points out that climate change will affect us regardless of whether it is human-induced or not.

"As an industry, we can raise awareness and change attitudes [regarding climate change risks] with our investment clout," said Mr. Walker. "Investors need to be similarly aware of the risks facing the companies they are invested in."

The state treasurers and comptrollers are heeding this advice and adding their investment clout to help create a compelling business case for corporations to address climate change risks or suffer the consequences.

"We have two options: we can begin working very hard to build a global economy designed along ecological principles to operate within the planet's carrying capacity," said Mr. Hayes in his CERES address. "Or we can carry on with business as usual and race off the cliff."


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