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May 01, 2002
CERES Calls on Institutional Investors and Corporate Directors to Address Global Climate Change Risk
    by William Baue

A new report from CERES advises institutional investors and corporate directors on the financial risks of global climate change.


Last month, the Boston-based Coalition for Environmentally Responsible Economies (CERES) released the first report in its Sustainable Governance Project series, Value at Risk: Climate Change and the Future of Governance. The study, written by New York City-based Innovest Strategic Value Advisors, documents the financial risks to industry resulting from global climate change, and suggests solutions for both corporate directors and institutional investors.

"The report is one of the first to make explicit the direct link among climate change, fiduciary responsibility, and shareholder value," said Innovest Chairman James Martin, formerly the chief investment officer at TIAA-CREF. "Since climate change is arguably the world's most pressing environmental issue, it follows logically that companies' response to the threats and opportunities of climate change--or their lack of response--could have a material bearing on their financial performance and therefore on shareholder value."

The report chides the U.S. business community for its relative inaction regarding global climate change. Responsibility lies with corporate directors and institutional investors, who are in a state of "double denial," according to the report. First, they deny the existence and magnitude of the global climate change problem, and second, they cling to the increasingly discredited notion that climate change solutions would prove prohibitively costly. The report offers concrete, objective, and compelling evidence to substantiate both the real risks of climate change and the prudence of seeking solutions.

"Neglecting to assess these risks [related to global climate change] is neither prudent nor responsible," the report states. "Simply put, the costs of inaction now outweigh the costs of action, and the sooner the positive action is taken, the greater the economic benefits,"

Four forces have converged to elicit corporate action on climate change, according to the report. First, increasing governmental acknowledgment of the climate change problem; second, increasing substantiation of the link between environmental and financial performance; third, the rise of shareowner action; and fourth, increasing demands for greater corporate disclosure. The report likens the convergence of these trends to a "perfect storm," which will bring climate change to the forefront of institutional investors' and corporate directors' consciousness.

The study highlights the role of shareowner action, especially by institutional investors, in eliciting corporate change. The number of shareowner resolutions filed on global warming nearly tripled from 2001 to 2002, according to a joint Investor Responsibility Research Center (IRRC) and Social Investment Forum (SIF) report on shareowner advocacy. More interestingly, the report identifies a "sea change" in the composition of shareowners filing resolutions, with traditionally mainstream institutional investors recognizing the importance of social and environmental issues in creating shareowner value.

The report makes a series of recommendations to both corporate directors and institutional investors for addressing climate change. Corporate directors should, according to the report, assess and disclose climate risk exposure, benchmark environmental performance against industry peers, implement greenhouse gas emission reduction strategies, and link executive compensation to environmental performance.

Institutional investors should, according to the report, assess climate risk exposure portfolio-wide, consider climate change in investment decisions, require disclosure of climate risk, increase investment in clean energy, and promote the adoption of the Greenhouse Gas Protocol and the Global Reporting Initiative.

One of the main conclusions of the report is that virtually all industry sectors have exposure to climate change risk. The report specifically lists these risks by sector, and includes an in-depth discussion of the electric utility sector to illustrate the implications of these risks. However, the report does not approach all risk from a negative perspective: companies can not only mitigate these risks in cost-effective ways, but also they can capitalize on the situation by transforming risk into opportunity--for example, gaining market share by introducing clean energy alternatives.

"[P]roactive action on climate change presents opportunities for new and expanded business activity, reduced costs, and increased shareholder value that will produce a net economic benefit," explained CERES Executive Director Robert Massie.

 

 
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