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| Opportunities & Exposures: Environment |
Hot and Bothered
Jack Ehnes
01/01/2006
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Global companies and investors are beginning to wake up to the enormous
challenges posed by climate change. From costly limits on greenhouse gas
emissions in Europe, Japan and dozens of other countries to skyrocketing losses
from extreme weather events, a company’s ability to effectively respond to
climate change is becoming an important competitive factor with potentially
far-reaching consequences for its bottom line.
The financial impact of global
warming is growing every day. Scientists expect that this phenomenon will
increase the frequency and intensity of extreme weather events—and, in fact, may
already be doing so. A spate of hurricanes in 2004 caused a record $30 billion
in insured losses in the United States; last year’s toll will be substantially
higher from Hurricanes Katrina and Rita alone. A new report written by insurance
industry experts for Ceres (www.ceres.org), a
U.S.-based coalition of investors, environmental groups and public interest
organizations, finds that since 1971, catastrophic losses from extreme weather
events in the U.S. have grown 10 times faster than insurance premiums, and
predicts even bigger losses in the years ahead if climate change trends
continue.
Regulatory changes are also affecting global companies. China,
Canada and California are pursuing tighter auto emissions standards. European
countries are requiring carbon reductions as part of the Kyoto Protocol. So
serious is the climate change issue that Swiss Re, a major reinsurer, has
suggested it will cut directors and officers liability coverage for corporate
clients who fail to devise appropriate strategies for handling global warming
risks.
Tackling the climate risk challenge falls not just on companies, but
on investors, too.
• Investors must understand the financial
risks that climate change poses to companies in which they own shares, and
companies must do a better job of analyzing and describing those risks in public
reports.
• Investment managers need to more accurately assess climate
risk exposure when evaluating companies and industry sectors.
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Investors must channel their investment capital to take advantage of new
clean-technology opportunities that are emerging as carbon controls take
hold.
Investor Blowback
A growing number of pension and investment funds, many
of them part of the Investor Network on Climate Risk (www.incr.com), are already taking action. Three
of the five largest public pension funds in the U.S.—including the $133 billion
California State Teachers’ Retirement System, which I manage—now routinely vote
their proxies to request that companies analyze and disclose financial risks and
opportunities from climate-change impacts.
At a recent climate risk summit
organized by Ceres and the UN Foundation, leading U.S. and European
institutional investors endorsed a 10-point action plan seeking deeper analysis,
disclosure and action from Wall Street firms, securities regulators and
companies on the business risks and opportunities of climate change. Two-dozen
institutional investors controlling more than $3 trillion in assets signed on to
the plan, which also included a pledge to invest $1 billion in companies with
clean technologies.
Companies are responding to the increasing investor
pressure. Shareholder negotiations with electric power giants Cinergy and Duke
Energy were instrumental in prompting the companies to publicly call for the
U.S. government to adopt a comprehensive climate change policy. We’ve also seen
six oil and gas companies take substantive actions to disclose their potential
financial exposure from climate change, and develop strategies to reduce
greenhouse emissions and boost their renewable energy investments.
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