Climate change is not just bad for the environment; it is bad for business and investors. Experts say dealing with global warming could cost major companies up to 15 percent of their total market capitalization and slice the value of shareholders' investments by between 5 percent and 7 percent. Yet only a handful of companies address the costs of climate change in their financial reports.
State retirement funds managers recognize the risks of this form of nondisclosure and are beginning to act. But they are not responding with mounds of new regulation. Rather, they are launching initiatives to promote greater awareness of the problem and using their massive public pension funds to invest in firms that develop cleaner technology.
California, which has two of the nation's three largest public pension funds, is leading the charge. The California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) are the largest pension funds in the world with assets, together totaling $250 billion. When they speak about their investments, businesses listen. Companies certainly were listening in February 2004 when State Treasurer Phil Angelides, who sits on the boards of both funds, launched "Green Wave," a targeted investment initiative that will push for a cleaner environment while bolstering financial returns to California retirees.
The climate change initiative follows efforts similar to Angelides' in 2003 to use the pension funds' economic power to promote corporate governance reform. "There is a parallel between the corporate CEO who cooks the books to pump up the value of his company's stock while he is simultaneously looting the firm for his own gain, and a corporation that increases its returns for a few quarters by exploiting the environment," Angelides said. "The corporation that exploits the environment leaves behind both a damaged environment and, ultimately, a degraded company."
The Green Wave has four purposes. It demands environmental accountability and disclosure, targets private investment in environmental science, invests in stocks of environmentally responsible companies, and audits real estate portfolios to boost long-term value.
The CalPERS and CalSTRS will encourage companies they invest in to consistently and clearly report their environmental practices and liabilities. Angelides hopes greater corporate transparency about the costs of climate change will bring public pressure and compel companies to adopt sound environmental practices.
The funds will also invest up to $500 million in the form of private equity, venture capital, and project financing in environmental technologies, and another $1 billion in corporations and stock funds whose environmental practices have been carefully screened. The Green Wave's targeted investment thrust promises to spur new and growing industries developing clean, renewable energy. For example, the World Energy Council reports that the global market for renewable energy should reach $625 billion by 2010 and $1.9 trillion by 2020. As that market grows, it will create new jobs, provide significant financial returns on the pension funds' original investments, and contribute to cleaner land, air, and water. In addition, studies show that in recent years environmentally screened funds have consistently out-performed their non-screened counterparts. In 2001 and 2002, screened portfolios grew by 7 percent despite a significant overall market downturn.
Finally, the pension funds will audit their combined $16 billion in real estate holdings to advance green-building standards (see the "PPI Green Buildings Play") and the use of clean and efficient energy, not just in California, but around the world.
California has been known for years for its tough energy efficiency standards, which help cut down on both environmental and economic waste. The savings are projected to reach $57 billion by 2011, according to the state's energy commission.
Ultimately, Angelides hopes the Green Wave initiative will send a message to companies that responsible attitudes about the environment add value for investors. The initiative's principles were developed after a series of roundtable discussions among environmental technology experts, financial leaders, and public interest groups held at the Institutional Investor Summit on Climate in 2003 at the United Nations. The summit was sponsored by the Coalition for Environmentally Responsible Economies (CERES), a coalition of national investment funds, environmental organizations, and public interest groups.
During the past 13 years, CERES has emerged as the worldwide leader in standardized corporate environmental reporting and the promotion of transformed environmental management within firms. Formed out of a unique partnership between some of America's most progressive investors and environmental groups, CERES has pioneered an innovative, practical approach toward encouraging greater corporate responsibility on environmental issues.
Representing over $400 billion in assets, CERES' investor members include state and municipal pension funds, socially responsible investment firms, religious groups, union funds, and foundations.
The 2003 U.N. meeting also served as a launching pad for a new Investor Network on Climate Risk (INCR), launched by managers of 10 major pension funds, including the state treasurers of California, Connecticut, and New York and the heads of several major labor union funds. Together, INCR participants oversee more than $1 trillion in long-term investments. The group has released an action plan asking the Securities and Exchange Commission (SEC) and corporate boards of directors to address climate change risks in their evaluations of stock values.
"We believe that climate change may emerge as one of the most important financial risks of our time, with consequences that could affect us and our beneficiaries long into the future," a statement from INCR 's leaders said.
Topping INCR's priority list is pressing the SEC to enforce corporate disclosure requirements on environmental liabilities. According to a June 2003 CERES report, the U.S. Environmental Protection Agency and the General Accounting Office found that corporations consistently fail to fully disclose their environmental liabilities, such as toxic waste cleanup costs, to the SEC or shareholders. Many more companies choose to ignore climate change liabilities altogether in their financial reports.
"Climate change information presented in company environmental reports run the gamut -- from mere blurbs to detailed accounts of science, policy, and company views," the CERES report found. "The lack of disclosure in securities filings about climate change raises serious questions about the adequacy of reporting and enforcement of SEC rules."
Meanwhile, the re-insurance industry, which provides insurance for other insurance companies, is also pressing for greater disclosure. According to recent press reports, for example, Swiss re-insurance giant Swiss Re has been asking its customer companies about their preparedness for climate change when those firms' re-insurance policies come up for renewal. Re-insurers reportedly are concerned about the potential financial fallout of shareholder lawsuits against companies that ignore shareholder warnings about the need to act on climate change now when the costs would be less than under strict future regulatory schemes.
The investor network's action plan also calls for major greenhouse gas emitters, such as coal-fired power plants, to prepare reports detailing how the shareholder value may be affected by climate change and the costs of failing to respond to these threats. Reacting to similar entreaties from shareholders, including religious denominations, executives at American Electric Power Co. and Cinergy Corp. recently announced they will release company studies estimating how greenhouse gas regulation could affect their operations and financial health.
Investor network members said they are asking companies to leapfrog possible government regulation of greenhouse gas emissions in the interest of healthy corporate governance. As California Treasurer Angelides notes, "the corporate scandals over the last couple of years have made it clear that investors need to pay more attention to corporate practices that affect long-term value."
The Green Wave Initiative
http://www.treasurer.ca.gov/news/greenwave.htm
Coalition for Environmentally Responsible Economies (CERES)
www.ceres.org
CERES Investor Network on Climate Risk
http://www.incr.com/
Fact Sheet for the Green Wave Initiative
California State Treasurer's Office
http://www.treasurer.ca.gov/news/envrmt/green_facts.pdf
"Corporate Governance and Climate Change: Making the Connection"
CERES
http://www.ceres.org/pdf/ceres_cg_rprt.pdf
"Investor Call for Action on Climate Risk"
CERES Investor Network on Climate Risk
http://www.incr.com/call_for_action.htm
Phil Angelides
California State Treasurer
915 Capitol Mall, Room 110
Sacramento, CA 95814
(916) 653-2995
(916) 653-3125 (fax)
www.treasurer.ca.gov
Mindy S. Lubber
Executive Director
CERES
99 Chauncy St.
Boston, MA 02111
(617) 247-0700
(617) 267-5400 (fax)
lubber@ceres.org
Chris Fox
Investor Network on Climate Risk
99 Chauncy St.
Boston, MA 02111
(617) 247-0700 x15
(617) 267-5400 (fax)
fox@ceres.org
Jan Mazurek
Director
Center for Innovation & the Environment
Progressive Policy Institute
600 Pennsylvania Ave. SE, Suite 400
Washington, DC 20003
(202) 547-0001
(202) 544-5014 (fax)
jmazurek@dlcppi.org
NDOL.org Keywords: PPI Green Waves Play
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