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June 02, 2012
Investors Urge Corporations to Consider Physical Impacts of Climate Change
    by Robert Kropp

A new report notes improved corporate reporting on greenhouse gas emissions emerging from SEC guidance, but calls for improved management and disclosure of extreme weather events and other physical risks.

The attention of sustainable investors is turning to the Rio+20 Conference on sustainable development, scheduled for later this month; and increasingly, key stakeholders are warning that the pace of climate change and other sustainability efforts is too slow.

Much of the criticism in recent reports has been directed at governments, whose representatives have failed to agree on meaningful climate change mitigation and adaptation measures. Meanwhile, global consumption patterns continue to outpace the Earth's capacity for renewal of resources.

But corporations have come in for their share of criticism as well. "Voluntary corporate social responsibility reporting has made significant contributions to corporations' operation," the Dialogue on a Convention on Corporate Social Responsibility and Accountability (CSRA) recently stated. "However the incremental progress of such initiatives poses environmental and societal risks."

A recently published report confirms both that extreme weather events and other physical risks from climate change are occurring now, and that corporate efforts to manage risk need improvement.

The report was produced by Ceres, Calvert Investments, and Oxfam America. At a press conference announcing its publication, Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk (INCR), a $10 trillion investor initiative, observed that corporate disclosure of regulatory risks from greenhouse gas (GHG) emissions has seen improvement.

To an extent, improved corporate disclosure of regulatory risks has occurred as a result of interpretive guidance issued by the Securities and Exchange Commission (SEC) early in 2010. The guidance "is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors," according to the SEC.

"Investors have been heard to some extent," Lubber said at the press conference, noting that the guidance was issued in response to an investor petition led by Ceres.

"However, companies have not done as well on physical risk disclosure," she continued.

The report itself observes, "Despite the SECís guidance, SEC disclosures tend to contain only generic statements (if any at all) about changing climate hazards, usually focused on extreme events versus incremental change." Yet, it states, "Robust corporate risk disclosure is the hallmark of a transparent and fair marketplace in which investors can make informed decisions."

That position was seconded at the press conference by Bennett Freeman, the senior vice president of sustainability research and policy at Calvert.

"We will use this report as a guide to inform our research and advocacy efforts," Freeman said. "We plan on sending the report to a number of big companies we hold in our portfolios to encourage them to disclose to a much greater extent."

"Competitive companies must commit not only to mitigating climate change by reducing their carbon footprint, but must also plan for and adapt to climate change impacts," Freeman continued. "Not just on a short-term, reactive or practical basis, but on a longer-term, proactive strategic basis."

Calvert will "integrate these risks into our investment decision-making process," he added.

While the report focuses on seven industry sectors it deems most vulnerable to the physical risks of climate change, "Virtually every sector of the economy faces risks from the short- and long-term physical effects of climate change," it states. "Impacts across the entire business value chain, from raw materials through to the end users."

At the press conference, David Waskow, Climate Change Program Manager for Oxfam America, pointed out that flooding in Thailand and Cambodia in 2011 affected more than 160 companies in the apparel sector, and reduced production in Thailand by one-quarter. Furthermore, "It was reported that Dell's share price fell by five percent because of the impacts of the flooding," Waskow said of the computer manufacturer.

Such effects are not confined to developing nations. Droughts, hurricanes, and rising temperatures have led to significant losses in the US for companies in the insurance, utilities, and oil and gas sectors. And as Maryland State Treasurer Nancy Kopp said at the press conference, the economy of her state, with its thousands of miles of coastline, is dependent upon tourism.

"Maryland is one of the most vulnerable states to the effects of sea level rise," she said.

The report provides a checklist to help companies improve both their climate change management strategies and their disclosures to investors and other stakeholders. Recommendations include analysis of risks and opportunities; the creation of robust management systems; and diligent and consistent disclosure in both voluntary and mandatory forums.

"If voluntary statements suggest that physical climate risks may be material while mandatory disclosures do not," the report stated, "Investors may be confused (and liabilities may be incurred)."

Also, in an overview of investor engagement, the report notes that investor concerns are increasingly focused on community impacts, a point made by Waskow of Oxfam at the press conference.

"This guide stems from our recognition that climate impacts occur exactly at the point where businesses intersect with the communities we work with," he said. "A critical step that businesses should take now is to make sure that information is clearly available, that they understand the risks of what they face from a changing climate, and what proactive steps they are taking to adapt to that reality."

"We can't invest well without good disclosure," State Treasurer Kopp added. "It's essential to capitalism. We need not only clear disclosure but comparable information."


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