Global warming, it seems, is finally starting to heat up concern in corporate boardrooms. Driven by government regulations on climate damage such as the Kyoto Accords, plus public pressure agitated by environmental groups, global warming as emerged as one of the more prominent specific issues executives must face if they embrace the concept of corporate social responsibility.
Exactly how much companies should consider global warming—or any other large environmental issue, for that matter—while they ponder CSR and corporate strategy has vexed executives, board directors and investors alike for several years. This spring, however, capped a flurry of activity in the last year or so as a major investor research organization detailed how 100 large companies are approaching the problem.
Boston-based CERES, a coalition of investors and environmental groups that launched the Investor Network on Climate Risk, scrutinized 76 U.S. and 24 overseas corporations and how they weigh the potential risks and opportunities from climate change, whether from expanding greenhouse gas regulations, direct physical damage, or surging demand for climate-friendly technologies.
Among Ceres’ findings: Global giants such as General Electric, Alcoa and DuPont are pouring resources into the area; GE alone, with its “ecomagination” campaign, wants to double investments in climate friendly technologies and hit $20 billion in sales by 2010. Still, CERES also warned that “many others are still largely ignoring the climate issue with business-as-usual strategies that may be putting their companies and shareholders at risk.”
Ambachtsheer
Concern for climate change “is becoming more mainstream,” insists Jane Ambachtsheer, global head of Mercer Investment Consulting’s responsible investment business, pointing to a number of events over the past 24 months or so. “It is an issue a growing number of investors are looking at.”
Earlier this year, Mercer Investment Consulting published the results of a survey of 157 investment management firms from around the world, who were asked to share their views on how environmental, social, and corporate governance issues relate to investment performance, and whether clients will demand related investment services.
In the report, the firms rated 11 factors for their relevance for consideration in mainstream investment analysis, including terrorism, employee relations, corporate governance, globalization, and climate change. 15 percent of the entire global group singled out climate change, ranking it seventh. The issue, however, is least important to U.S. investors: Only 5 percent of singled out climate change, ranking it eighth and tied with human rights.
The sentiment, however, was much different when firms were asked which of the 11 factors will become or will remain material in five years. Climate change surged to second place globally, cited by 51 percent of the respondents. Even in the United States it climbed to sixth place, and was cited by 22 percent of the investors—more than four times the number who believe climate change is relevant to investing strategy today.
One major U.S. investor that believes the issue is important is the California Public Employees’ Retirement System. In March, CalPERS announced it would identify companies in the transportation, utilities, and oil and natural gas sectors that fail to meet minimum standards of environmental data disclosure. The pension fund also said it will follow a new corporate governance guideline in acting on shareowner proposals for the timely, accurate reporting of environmental risks—especially those associated with climate change.
Demand For Disclosure
Cogan
The CERES report uses a “climate governance checklist” to evaluate how major industrial corporations address climate change in five broad areas: board oversight, management performance, public disclosure, greenhouse gas emissions accounting, and strategic planning (see box below, left).
“The biggest message is that [there should be] disclosure of climate risk in securities filings,” says Doug Cogan, author of the report and deputy director of the Investor Responsibility Research Center, a division of Institutional Shareholder Services.
CHECKLIST
A recent CERES report evaluated 100 companies according to a Climate Change Governance Checklist. According to CERES, "The checklist consists of 14 governance steps that companies can take to proactively address climate change." The excerpt below is from "Corporate Governance and Climate Change: Making the Connection," published by CERES in March 2006. The checklist ranked companies on a 100-point scale; each of the five governance categories below carried a different number of maximum points "to reflect the number of
actions available and their relative importance to the overall score":
A. BOARD OVERSIGHT (Up to 12 points)
1. Board committee has explicit oversight responsibility for environmental affairs.
2. Board conducts periodic review of climate change and monitors progress in
implementing strategies.
B. MANAGEMENT EXECUTION (Up to 18 points)
3. Chairman/CEO clearly articulates company’s views on climate change and GHG control measures.
4. Executive officers are in key positions to monitor climate change and coordinate response strategies.
5. Executive officers’ compensation is linked to attainment of environmental goals and GHG targets.
C. PUBLIC DISCLOSURE (Up to 14 points)
6. Securities filings identify material risks, opportunities posed by climate change.
7. Sustainability report offers comprehensive, transparent presentation of company response measures.
D. EMISSIONS ACCOUNTING (Up to 24 points)
8. Company calculates and registers GHG emissions savings and offsets from projects.
9. Company conducts annual inventory of GHG emissions from operations and publicly reports results.
10. Company has set an emissions baseline by which to gauge future GHG emissions trends.
11. Company has third party verification process for GHG emissions data.
E. EMISSIONS MANAGEMENT AND STRATEGIC OPPORTUNITIES (Up to 32 points)
12. Company sets absolute GHG emission reduction targets for facilities and products.
13. Company participates in GHG trading programs to gain experience and maximize credits.
14. Company pursues business strategies to reduce GHG emissions, minimize exposure to regulatory and physical risks, and maximize opportunities from changing market forces and emerging controls.
Source
Corporate Governance and Climate Change: Making the Connection (CERES, March 2006)
The report was one of several requests from more than two dozen institutional investors, stemming from an action plan announced at the Institutional Investor Summit on Climate Risk one year ago at the United Nations. The investors are part of the Investor Network on Climate Risk, an alliance of U.S. institutional investors coordinated by CERES.
At the summit, those investors released a 10-point plan calling on U.S. companies, Wall Street firms and the Securities and Exchange Commission to intensify efforts to provide investors with comprehensive analysis and disclosure about the financial risks presented by climate change. The group also pledged to invest $1 billion in what it called “prudent business opportunities” emerging from the drive to reduce greenhouse gas emissions.
“Corporate and financial leaders need to look strategically at climate change and how it will impact the long-term health of businesses, industries and our economy,” Connecticut State Treasurer Denise Nappier, one of 26 investors who issued the action plan at the U.N. climate risk meeting, said in a statement at the time.
Meanwhile, in February, the fourth Carbon Disclosure Project information request was sent on behalf of 211 institutional investors to the chairmen of more than 1,900 companies, asking for the disclosure of investment-relevant information concerning their greenhouse gas emissions.
Dickinson
“The numerous indications of accelerating human induced climate change make it clear that there are business risks and opportunities that have implications for the value of investments in corporations worldwide,” Paul Dickinson, the project coordinator for the London-based group, said in a statement at the time.
“You can discern a trend that is heading upward,” Ambachtsheer says. “All information suggests the trend will continue.”
Jim Letsky, a research analyst at ISS’ Social Investment Research Service, said the proxy governance firm supports requests of companies to report on greenhouse gas emissions, but refrains from supporting calls for specific emissions reductions.
So far, few shareholder resolutions related to greenhouse gas emissions, climate change, or renewable energy have emerged. According to Letsky, only 14 such resolutions were proposed this year, compared to 17 in 2005. The average vote for all environmental topics only generated 9 percent support in 2005, down from 19 percent the prior year and 17 percent in 2003 (2005 figures are U.S.-only, while 2003 and 2004 are global.)
Even so, at least some companies have tackled environmental issues directly rather than let shareholders or other CSR activists seize the debate. Ford Motor Co., for example, late last year kept its promise to issue a report addressing the business implications of global warming and environmental concerns. A shareholder resolution to that effect, filed by the Interfaith Center on Corporate Responsibility, CERES and others, was subsequently withdrawn earlier this spring.
Ford’s report addresses how concerns about emissions of greenhouse gases, including carbon dioxide, are linked to other factors affecting the business; the steps the company is taking to manage those risks and capture opportunities associated with climate change; and the market, policy, social and technological instruments necessary to achieve significant changes in the industry’s carbon footprint.
No comments yet