May 11, 2005
Institutional Investors Call on SEC, Wall Street, and Companies to Address Climate Risk
by William Baue
The second Investor Summit on Climate Risk focused on information, from the perspectives of
disclosure, data generation, and analysis, as a key to transforming climate risk into opportunity.
Setting the tone for the second Institutional Investor Summit on Climate Risk at the United Nations
Headquarters yesterday was Monday's launch by GE (ticker: GE) of its "Ecomagination" program to enhance eco-efficient products
and services. GE increased its commitment to such technologies as wind and solar power and
efficient engines by a planned boost in research and development from $700 million in 2004 to $1.5
billion annually through 2010 and doubling revenue from $10 billion last year to $20 billion in
This transformation of the financial and investment risks associated with
climate change into opportunities exemplifies one of the primary goals of the Summit, which was
convened by the Investor Network on Climate Risk (INCR). Interestingly, GE was identified as not disclosing enough
to investors about its actions to address climate change in a July 2003 report published by Ceres, a coalition of environmentalists and
investors that helped organize the Summit.
"GE had no disclosure in its 10K [Securities
and Exchange filings], it had no statement about climate change on its website, it had not taken an
inventory of its emissions let alone set a target, and there was silence from the CEO on this
issue, and now he's become a champion " stated Doug Cogan, deputy director of social issues at the
Investor Responsibility Research Center (IRRC).
Ceres commissioned Mr. Cogan to write the report, entitled Corporate
Governance and Climate Change: Making the Connection. "I think this is a remarkable turn of
events at GE and one of the most optimistic developments I can cite in the last 5 years."
GE's initiative is representative of the progress made since the first Climate Risk Summit of
November 2003. This progress includes a number of companies issuing reports on climate change and
the quadrupling in size of the INCR, with 23 US and European participants with more than $3
trillion in assets.
Paul O'Neill, former US Treasury Secretary and former CEO
of Alcoa (AA), was
questioned about another of the primary goals of the Summit: corporate disclosure of material
climate risks and mitigation strategies.
Mr. O'Neill expressed a clear preference for
companies voluntarily issuing sustainability reports covering climate change issues over the US
Securities and Exchange Commission (SEC)
mandating disclosure of climate risk in 10K filings.
"I'm for making this really clear,
and I honestly think we'll get clearer data and disclosure if it's outside the SEC process than if
it's part of that mandated mess we've got now as a gift from Sarbanes-Oxley," said Mr. O'Neill.
However, disclosure need not be an either/or dichotomy: the 10-point Call for Action issued
by the INCR promotes both voluntary sustainability reporting by companies as well as
encouraging the SEC to require more robust disclosure.
Mindy Lubber, president of Ceres,
met with SEC Commissioner Harvey Goldschmid in the weeks before the Summit.
we already call for, in our regulations, companies to disclose material risk," said Commissioner
Goldschmid, according to Ms. Lubber. "If investors or others see places where their risk is clear
and report it to us, we will for the first time start looking at enforcement actions."
example, if one company provides robust disclosure on climate risks, and another company in the
same sector discloses very little, the latter company exposes itself to potential enforcement
action since it presumably faces similar risks as the former company.
"We asked the SEC to
issue a new declaratory letter to define material risk--they did not agree to do that, though we
will still go back and ask them again to do it," Ms. Lubber said.
Ms. Lubber asked Summit
speaker Abby Joseph Cohen, partner and chief US portfolio strategist at Goldman Sachs (GS), to act as a
"reality check," addressing other potential roadblocks. These roadblocks include lack of
information on climate risks, lack of attention to climate risk by portfolio managers, and
fiduciary responsibility issues, according to Ms. Cohen.
Ms. Cohen cited three specific
obstacles: the lack of quality data, short-termism focusing on quarterly performance in portfolios
with long-term benefit horizons such as pension funds, and the relative dearth of studies
correlating environmental strategies with financial performance.
Adam Seitchik, chief
investment strategist with socially responsible investment (SRI) firm Trillium Asset Management, pointed to a study in
the current edition of Financial
Analyst Journal finding that portfolios of eco-efficient companies outperform environmental
laggards. He also noted that the lack of information represents an investment opportunity for
those who recognize correlations between environmental best practice, such as climate risk
mitigation, and financial performance.
"Financial opportunities narrow once more and more
people take advantage of them," Dr. Seitchik said. "Think about hedge funds--the returns to many
of the early strategies, like merger arbitrage, went way down once the opportunity was fully
understood by the marketplace."
"Therefore the early movers at the Summit should capture
the best returns from the eco premium," he added.
As for the lack of data, Ms. Cohen
pointed to a report by her colleague Anthony Ling, who created the Goldman Sachs Energy Environmental and Social
(GSEES) Index to assess 23 companies in the oil and gas sector on a scorecard of 30 metrics in
eight categories. However, such information is relatively rare, and Ms. Cohen called on the
institutional investors at the Summit to urge and incentivize their investment managers to produce
such research, "because it is not a cheap thing to do," she said.
Peter Scales, chair of
the Institutional Investors Group on Climate Change (IIGCC--the European counterpart to INCR) and CEO of London
Pensions Fund Authority (LPFA), addressed
strategies for incentivizing analysts to produce research on climate risks and opportunities. He
pointed out the Enhanced Analytics Initiative (EAI), a European program that allocates five percent
of commissions to brokers who produce the best research on sustainability issues such as climate
risk. While INCR representatives could not confirm that an initiative such as EAI was planned for
the US, a source familiar with both INCR and EAI told SocialFunds.com that discussions are taking
place about the possibility of replicating EAI on this side of the pond.
Mr. Scales also
addressed the fiduciary responsibility issue, characterizing institutional investors' avoidance of
climate risk assessment as the "fiduciary excuse." This comment echoed an earlier statement by
Matthew Kiernan, CEO of SRI research firm Innovest Strategic Value Advisors, which identified a
"perversion" of the interpretation of fiduciary responsibility in North America blocking
consideration of environmental issues. He later described this phenomenon as "fiduciary cancer."
His point? Given the clear scientific implications of climate change, it is impossible to deny the
inevitability of material financial impacts from global warming, so fiduciary duty dictates that
institutional investors must address climate risk in their portfolio decisions.