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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 2010.

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 believe 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."

For 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 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.


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