Jack Ehnes
01/01/2006
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.
• 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.
These are
encouraging developments, but more action is needed. The SEC and New York Stock
Exchange should follow Europe’s lead by requiring companies to boost their
climate risk disclosure. Wall Street should be analyzing how companies and
sectors are threatened by global warming.
In the absence of decisive national
leadership from the government, it falls to business leaders and investors to
push for change and accountability in facing this enormous global challenge.
Inaction may mean financial trouble down the road as U.S. companies fall behind
their global peers.
 | Jack Ehnes is CEO of the $133 billion California State Teachers’ Retirement System, a member of the Investor Network on Climate Risk. |