Global investors are turning up the heat under corporate executives to ensure they spell out how climate change and other environmental liabilities will affect their bottom line.
As concern grows over the enormity of the corporate world's energy demand, businesses are coming under increasing scrutiny over their readiness to deal with the flip side of that same coin: climate change. A recent move by more than two dozen institutional investors, managing $1 trillion in assets, to persuade US regulators that publicly traded companies should disclose the financial risks of climate change in their public documents is only the latest indication of investors' escalating concerns, analysts agree.
"It's only the tip of the iceberg. It's the part you see," says Tim Little, executive director of the Rose Foundation, a non-profit group based in Oakland, California. He was referring to the June letter sent by 28 members of the Investor Network on Climate Risk (INCR) to Christopher Cox, chairman of the Securities and Exchange Commission (SEC) in Washington, DC. "But it's indicative of the mass movement of investors and environmentalists that is trying to obtain greater disclosure of environmental risks. There's a mounting groundswell around the world," Little adds.
Launched three years ago by six US state treasurers, two state and city comptrollers and labor pension fund leaders to promote better understanding of the financial risks and investment opportunities posed by climate change, the investor network now has 50 members with $3 trillion in assets between them.
The June letter was the network's second attempt to nudge the SEC into action. A similar letter signed by 14 INCR members and sent to former SEC chairman William Donaldson two years ago failed to spark any agency action. But investment experts are optimistic that the escalating global focus on climate change-from new scientific findings to the ratification of the Kyoto Protocol to the Chinese government's public commitment to increase its use of renewable energy sources-will induce federal regulators to take a closer look this time around.
"In the past year, there has been a sea change...a lot of noticeable events that have raised the level of attention on climate risk," says Emma Stewart, research manager at Business for Social Responsibility in San Francisco. SEC officials must now weigh the greater attention being paid by the international business community to climate risk. Investment bank Goldman Sachs last November, for example, adopted a comprehensive environmental policy that acknowledges the scientific consensus on climate change and asks federal regulators to reduce greenhouse gas emissions. Insurer AIG set up an Office of Environment and Climate Change four months ago as it adopted a policy explicitly addressing climate change. That follows General Electric's decision last year to launch an "Ecomagination" strategy that aims to cut its output of greenhouse gases as it invests heavily in carbon-free technologies. In May of this year GE announced that sales of its energy-efficient and environmentally advanced products and services hit $10.1 billion in 2005, up from $6.2 billion in 2004.
A New Form of Risk
"We want more disclosure on climate risk. The Wall Street community needs the certainty of federal policy to do it," says Chris Fox, director of investor programs at Ceres, a Boston-based coalition of environmental groups and institutional investors that coordinates the Investor Network on Climate Risk. "Our goal is to have the SEC clarify their guidelines so companies must include climate risk information in their reporting," he adds. Interestingly, the investor network doesn't want the SEC to place material reporting for climate risk in an environmental category. "We think …