An interesting coalition of groups joined together for a side event at the Copenhagen climate change summit on Dec. 12. Gathered were the Worldwatch Institute, a respected think tank represented by its leader, Christopher Flavin; the United Nations Foundation, established by Ted Turner, and represented by its head, Tim Wirth, a former Senator and the main US negotiator for the Kyoto Climate Conference during the Clinton administration; and the American Clean Skies Foundation, which promotes natural gas as a clean alternative to coal, represented by its CEO, Gregory Staple.
Their three-hour conference was about a low-carbon energy source that could reduce US dependency on both imported oil and domestic coal: shale gas.
One of the lead speakers was Aubrey McClendon, CEO of Chesapeake Energy, a large natural gas producer. He stated that he was in Copenhagen to drive home the point that shale gas production was a game changer in "de-carbonizing" the US economy.
Mr. McClendon explained the potential of shale gas:
- New technologies, such as hydraulic fracturing ("fracking") and horizontal drilling, have made it feasible to extract vast "new" reserves of gas from underground formations of shale;
- Natural gas emits about 25 percent less CO2 than oil and 50 percent less than coal;
- Installed natural gas electricity capacity is already in place, and could meet current U.S. energy demands (unlike nuclear, wind, solar, or "clean" coal plants equipped with carbon capture and storage, or CCS);
- The steady output of gas plants can help balance the irregularity of solar and wind power; and
- Unconventional US gas would reduce the nation's dependency on foreign (OPEC) hydrocarbons.
While this message has been delivered consistently to investors by many of the US's independent gas players, the industry could do more to make its case to Congress and the public. The coal, electric utility, and railroad industries have employed top lobbyists to represent their interests, but the natural gas industry has been much less involved in the drafting of US climate change regulations.
Natural Gas Share of US Energy Use to Grow
Still, in its assessment of the American Clean Energy and Security Act of 2009 (also known as ACES, and the Waxman-Markey bill), the Energy Information Administration (EIA) projected that the share of natural gas in US electricity production could increase to 31 percent by 2020 from a 2007 level of 21 percent. EIA further projects a 39-percent contribution to the electricity supply from natural gas by 2030. This would lift the share of natural gas in the overall US energy supply to 26 percent in 2020, up 3 percentage points from 23 percent in 2007, and to 28 percent by 2030.
These projections, however, assume that the US will be unable to take advantage of overseas offsets for its domestic carbon output. EIA also assumes limited deployment of other low-carbon technologies, such as CCS and new nuclear plants.
Gas Industry Seeks Higher Profile
The US natural gas industry believes that ACES should have included greater explicit support for gas in the draft carbon regulation, and also taken a less lenient approach to coal, particularly in the allocation of emissions allowances. The gas industry's presence in Copenhagen is an attempt to raise its public-policy profile, as is the decision by 28 of the largest natural gas independents to form the "American Natural Gas Alliance," which is charged with promoting the benefits of natural gas to the public.
Big Oil Moving into Gas in a Big Way
In a sign of great expectations for the gas market, ExxonMobil recently announced a $41 billion, all-stock acquisition of XTO Energy, an offer price that represents a 25 percent premium above XTO's Dec. 11 closing share price. XTO has the largest proved natural gas reserves among the US independents, and Exxon's commitment to natural gas production in the U.S. not only will offset some of the carbon risks inherent in Exxon's portfolio, but it will also bolster the industry's ability to lobby Congress as it takes up climate change legislation in 2010.
The Impact of "Fracking"
While natural gas is set to play a more significant role in the US energy mix, increased domestic production will carry environmental costs. The industry will need to spend as much political capital on addressing these concerns as it will on improving the position of natural gas in carbon legislation. High on the list of these concerns are the environmental impacts of "fracking."
The Sustainable Investment Research Analyst Network (SIRAN) recently conducted a seminar on the implications of expanded fracking operations. In a follow-up to this article, Alan Petrillo will explore SIRAN's perspective on how the fracturing of shale formations could affect the environment, including the nation's water supply. The process of extracting the fossil fuel with the least impact on the atmosphere could have a big impact on the American landscape.
[Ed. Note: RiskMetrics analyst Mario Lopez-Alcala is attending the Copenhagen summit as an official observer.]
As the Copenhagen climate summit draws to a close, many are disappointed by the lack of progress being made here. The biggest announcement is likely to be a plan to compensate countries that preserve forests and other natural landscapes that store carbon dioxide, the main greenhouse gas tied to global warming.
While other agreements could be reached to place carbon regulations on aviation and shipping, other goals to curb industrial emissions of greenhouse gases and set new financing mechanisms to help developing countries mitigate and adapt to climate change remain elusive. Now the hope is to reach a legally binding agreement sometime next year.
Different World From a Year Ago
Still, as US Deputy Special Envoy for Climate Change Jonathan Pershing observed at Copenhagen's Bella Center last week, today's world is very different from the one we lived in a year ago when it comes to climate politics.
The Copenhagen summit has brought developing countries to the fore, with progressive proposals on mitigation, adaptation, and finance. The United States has also undergone a sharp policy reversal, with President Barack Obama here to underscore the US administration's commitment to tackling climate change. This sets the stage for a changing global regulatory environment that will benefit low-carbon investments.
The road ahead will be bumpy, however. In Copenhagen there have been heated debates on the legal outcome of two parallel negotiating paths: one under the Framework Convention on Climate Change, in which the US is a party; and one under the Kyoto Protocol, in which the US is an observer.
A bloc of Small Islands States led by Tuvalu has proposed developing a new negotiating group to work toward a binding treaty to succeed the Kyoto Protocol with even more ambitious targets. The U.S. regards this extension of Kyoto as a non-starter. Another proposal forged by the Mexican and Norwegian delegations would substantially increase the amount of predictable funding available for climate change actions in developing countries. However, beyond a commitment by the European Union to provide $10 billion annually in such funding as a down payment toward larger giving, the pledges have been few.
Significant Forest Protection Program
In any event, the forest protection program expected at Copenhagen (formally known as Reducing Emissions from Deforestation and Forest Degradation, or REDD) should not be overlooked for its significance.
Rainforest destruction and land conversion are responsible for about 20 percent of annual emissions that contribute to global warming. The REDD program puts financial incentives in place for developing countries to preserve these natural habitats effectively as a carbon-storing bank. Industrial countries would be able to purchase credits from this bank to offset emissions that exceed their own reduction targets.
The current U.S. legislative proposal as passed by the House of Representatives would allow up to one-quarter of the nation's emissions to be offset by such credits from international providers. REDD would help assure that a large bank of credits would be available at affordable prices, easing the pressure on domestic industries to achieve emissions cuts from their own operations.
REDD also could be a shot in the arm for the Clean Development Mechanism (CDM), a project-based source of carbon credits that can be used in emissions trading schemes established under the Kyoto Protocol. So far, the CDM has suffered from heavy bureaucratic oversight and limited geographic scope. However, new measures potentially could arise from talks seeking ways to lessen these drawbacks for CDM projects.
By virtue of the location of the world's rainforests, REDD could help disperse funding assistance across Asia, Latin America and Africa. Some representatives at Copenhagen are even lobbying to extend REDD's provisions to northern boreal forests, which also provide a substantial sink for carbon.
However the REDD program works out, it will be a while before the aid starts flowing. Details that remain to be worked out include setting exact targets and timetables for emissions reductions, and what systems should be used to measure and verify carbon storage of various habitats.
Climate Clock Keeps Ticking
Meanwhile, the climate clock keeps ticking. Scientists presenting at Copenhagen stressed the importance of bringing global emissions to a peak within the next decade and then starting a fast decline, led by a 25- to 40-percent reduction by industrial countries from 1990 levels by 2020. Each year of delay heightens the pace at which emissions reductions must be achieved thereafter.
United Nations Secretary General Ban Ki-moon admonished Copenhagen delegates in an address on Dec. 15 as they moved into their final days of negotiations. "We do not have another year to deliberate," he reminded them. "Nature does not negotiate."
Mario Lopez-Alcala is a member of RiskMetrics Group's Climate Risk Management team.
Shrinking the King Kong of Carbon Footprints: Empire State Building Shows Way for Global Property Sector
As part of RiskMetrics' involvement with the COP15 climate conference in Copenhagen, I spoke on a United Nations Environment Program Finance Initiative (UNEP FI) panel called "Construction Counts for Climate." I represented UNEP FI's Property Working Group (on which RMG's Mario Lopez-Alcala has served for two years), and was joined by the Finnish Minister of Housing and other UNEP representatives.
"Construction Counts," as the built environment is responsible for at least 40% of global CO2 emissions, according to the Intergovernmental Panel on Climate Change. This actually represents a great opportunity for emissions reduction, as buildings' emissions can be reduced drastically by making better use of existing technology. COP15 participant Jens Laustsen, senior energy policy analyst (buildings) at the International Energy Agency (IEA), estimates that 75% of the energy used in most buildings can be saved.
Today's Investments Embedded in Long-lived Buildings
Unfortunately, energy efficiency is not always a top priority for property owners, and current construction can embed wasteful practices for decades.
The UNEP FI Property Working Group believes that the building sector will only embrace efficiency with steady guidance from investors and regulators. The Group includes around 20 of the world's largest institutional real estate investors, including AXA, CalPERS, Sumitomo Trust, and UBS. In my presentation, I explained how more aggressive building codes, combined with investor interest due to global carbon pricing, would put needed pressure on property owners worldwide.
The Empire State Building: Once Again, the Latest Thing
Some governments have already acted, including New York City, which just passed one of the nation's most stringent efficiency standards. The most prominent example of its potential is the skyline's most famous landmark: the 78-year-old Empire State Building. Its recent $500 million renovation is a case study of how much can be achieved with current technology.
This renovation includes a package of 8 major programs including chiller replacement, tenant space redesign, new windows, and other projects. These investments resulted in a 38% reduction in CO2 emissions and a net present value savings of about $20 million over 15 years.
"Make No Little Plans"
These tangible, quantifiable returns are too big for investors to ignore. This explains why the 2009 Investor Statement on the Urgent Need for a Global Agreement on Climate Change has attracted support from 191 institutions representing $13 trillion in assets. The construction sector has also committed to efficiency through the World Business Council for Sustainable Development's Energy Efficiency in Buildings program.
Architect Daniel Burnham, leader of the early 20th century "City Beautiful" movement, famously said, "Make no little plans – they have no magic to stir men's' blood." If more governments follow New York's lead, then the Empire State Building could inspire builders to think green, as well as big.
Hewson Baltzell heads ESG product development at RiskMetrics Group. He is a co-founder of Innovest and was president of the firm before it became part of RiskMetrics in 2009. Prior to Innovest, Mr. Baltzell was a commercial and investment banker specializing in corporate finance and real estate.
The climate change scientists whose emails were recently hacked are living their worst nightmare. Like many of their colleagues, these scientists had long been frustrated by a handful of vocal global warming skeptics. The hacked emails gave skeptics a new opening to sow doubts about global warming, just as media attention turned to the Copenhagen climate summit.
These scientists spoke in some private emails of resisting Freedom of Information Act requests and boycotting journals that provide an ongoing platform for the skeptics' views. Neither the hacking nor the censorship should be condoned. But when this dust-up settles, these things will be certain:
- The evidence of human contributions to global warming is so overwhelming that this media sideshow will have no impact on the outcome of the Copenhagen meeting.
- The real issue to be addressed at Copenhagen is how to pay for the ballooning costs of climate change. These costs now include not only trillions of dollars of investments in carbon mitigation, but also spending on adaptation measures, to address warming that will continue throughout our lifetimes. By some estimates, these adaptation costs will rise above $100 billion a year.
The Impact of Dumping "Coal Mines into the Air"
Global warming is a scientific fact. The debate now is at the margins of just how fast and dangerous the warming will be.
Svante Arrhenius won a Nobel Prize in 1896 for his theory that "evaporating our coal mines into the air" would eventually double the atmospheric concentration of carbon dioxide and raise the Earth's temperature by 5 to 10 degrees Fahrenheit. That's still the basic forecast today, except what Arrhenius thought would take a thousand years could well happen in this century.
The World Meteorological Organization has reported that the first decade of the 21st century will be the warmest since modern temperature records began in 1861. The Earth's temperature has risen nearly 1.5 degrees F since then, with another 1 degree F of warming expected within the next 30 years as the warming trend accelerates. By 2100, the Earth could be as much as 8 degrees warmer - a level not seen since the Age of the Dinosaurs 65 million years ago.
While skeptics point out that the global temperature has not exceeded the peak set in 1998, this does not change the fact that the Earth has caught a fever and so far has done nothing to stop it. In fact, all of the years since 1998 rank among the warmest on record; 2009 is expected to go down as the fifth warmest year.
If one wants other physical evidence of this warming, look no further than the North Pole, where the Arctic Ice Cap–a permanent fixture of the Earth over the last 3 million years–is melting so fast that it could disappear entirely during summer months within the next five to 10 years.
Official Scientific and Governmental Consensus
Since 2000, many of the world's most reputable scientific organizations have issued reports or statements supporting the human link to global warming, and the dangers it poses:
- In 2001, the U.S. National Academy of Sciences issued a report at the request of the Bush administration that concluded rising global temperatures in recent decades were "likely mostly due to human activities" (and issued a much more strongly worded report in 2009).
- In 2003, the American Geophysical Union concurred, saying, "Scientific evidence strongly indicates that natural influences cannot explain the rapid increase in near-surface temperatures observed in the second half of the 20th century."
- In 2004, the American Meteorological Society issued its own warning, describing human-influenced climate change as "a global climate experiment, neither planned nor controlled."
- In 2007, the Intergovernmental Panel on Climate Change (IPCC) issued its fourth assessment since 1990 on the state of climate change science. It concluded that there is greater than 90 percent certainty that most of the warming over the past 50 years has been caused by human activities, and that 3.4 degrees F to 8.3 degrees F of warming is likely with a doubling of atmospheric CO2.
- In March 2009, the IPCC provided a disturbing update to its forecast, warning that "[r]ecent observations show that greenhouse gas emissions and many aspects of the climate are near the upper boundary of the IPCC range of projections." Simply put, "the worst-case IPCC scenario trajectories (or even worse) are being realized."
- And on Monday, the U.S. Environmental Protection Agency issued a final ruling that greenhouse gases are endangering the environment and human health, triggering the need for regulatory controls. This finding, too, was driven by the weight of scientific evidence that human activity is largely responsible for the warming taking place.
"We know that skeptics have and will continue to try to sow doubts about the science," remarked EPA administrator Lisa Jackson at the announcement. "It's no wonder that many people are confused. But raising doubts – even in the face of overwhelming evidence – is a tactic that has been used by defenders of the status quo for years."
That is why responsible climate scientists find it so frustrating that public doubts persist, even though the basic premise that human activity is contributing to climate change has not been seriously contested for years or even decades:
- One literature review of 928 peer-reviewed articles published in the 1990s and through 2002 found that 75 percent either explicitly or implicitly accepted the consensus view that human activity is contributing to global warming. The remaining 25 percent of these studies dealt with other facets of the climatological issue, stating no position on this key question, according to the review by the Program in Science Studies at the University of California.
- In another recent survey of more than 3,000 Earth scientists, 82 percent agreed that human activity is a "significant contributing factor" in changing global temperatures. Specialists in the field who actively publish on the issue were in almost total agreement: 75 of these 77 climate scientists–about 97 percent–agreed with the statement.
Fundamentally, responding to climate change is sound risk management. While the chance of our house burning down is highly remote, we still take the precaution of buying fire insurance. Why then would we not take out insurance when there is a greater than 90 percent chance that our world is catching fire?
That is what the Copenhagen summit is really about. The longer we postpone real action to bring down greenhouse gas emissions to address global warming, the higher our premium costs will go.
For another review of skeptics' claims and scientists' rebuttals, see this December 7th Wall Street Journal article: "What global warming? A look at the arguments the skeptics make–and how believers respond"
Doug Cogan is Director of Climate Risk Management for RiskMetrics Group. His 1992 book, The Greenhouse Gambit, was one of the first to address the business and investment implications of climate change. He has since written many other reports and articles on climate and energy topics and helped develop a Climate Change Governance Framework to analyze corporate and fund manager responses to this issue.
This week, world leaders meet in Copenhagen to coordinate their efforts to address global climate change. As summed up by a RiskMetrics fact sheet on the event, the summit's daunting goal is to set fair, achievable emissions reduction targets for both developed and developing nations.
The Financial Times' Martin Wolf has succinctly stated why this will be so difficult:
"…Where [greenhouse gas emissions] abatement occurs must be separated from who pays for it. Abatement needs to happen where it is most efficient. That is why emissions of developing countries must be included. But the cost should fall on the wealthy. This is as much because they can afford it as because they produced the bulk of past emissions."
Private Lenders and Investors in a "Pivotal Position"
How can the global economy equitably share the costs and benefits of climate-related adaptation? Parties to Copenhagen will tackle this problem – eventually – with regulation, taxation and subsidies for carbon-abating investment. Private investors, however, can act now to direct capital towards projects that will thrive in a carbon-constrained economy.
The financial sector will play a crucial role in putting developed-world wealth to work in emerging markets, according to Dr. Peter Thimme and Doug Cogan. In an October Responsible Investor op-ed, they explained why:
"To complete the transition to a low-carbon economy, up to $50 trillion in renewable energy and energy efficiency investments will be required over the next 40 years, mainly in emerging markets. This puts financial institutions in developing and transition economies in a pivotal position: either they find ways to gain from these climate-friendly investment opportunities or face growing adaptation costs that sap available returns."
Best Practices in Emerging Markets
Mr. Cogan, RiskMetrics Director of Climate Risk Management, authored "Addressing Climate Risk: Financial Institutions in Emerging Markets," commissioned by Dr. Thimme's firm, DEG, for shareholder coalition Ceres. As summed up in the RI piece, most of the 64 surveyed firms acknowledge the challenge of climate risk. Far fewer firms are factoring climate risk into their lending and investing.
Still, "Addressing Climate Risk" is subtitled "a best practices report," and it does present instructive examples of climate-focused lending and investing. These examples can be grouped in two broad categories:
1) Focused investment in "clean-tech" projects that reduce emissions, conserve energy, or replace carbon-heavy processes.
2) Research and evaluation of the social and/or environmental impact of all projects seeking financing from the institution.
Examples of the first group include renewable energy investments in Kenya, Romania, and India, and an Argentine firm's conservation of 15,000 acres of forest to offset the impact of a paper mill.
Adding ESG Standards to Risk Management Systems
Beyond these clean-tech plays, there may be greater potential impact from the second approach to climate risk. While only five surveyed firms explicitly study climate risk, 53 of 64 have established a risk management system that addresses overall environmental, social and governance (ESG) risk factors.
"Addressing Climate Risk" presents more details on the risk management system of Mexico's Grupo Finterra, a firm focused on lending in the agribusiness sector. The firm acknowledges that this sector is especially vulnerable to climate change, and its risk rating system reflects this:
"…The rating system assigns clients a grade of A, B, C according to their compliance with a range of environmental and social standards [including climate change-related risks]. Ratings are tailored to the specific project and agricultural activity to capture key risks relevant to the client's business. The company also provides recommendations to help clients increase their scores and comply with the company's standards. These recommendations are tailored to address specific risks to a client's business activities."
Most importantly, the system has teeth: "Low-scoring clients will not receive financing unless these requirements are met," according to the study.
Forging the Missing Link
With an eye on Copenhagen, "Addressing Climate Risk" does assess respondents' involvement with the Clean Development Mechanism (CDM) established by the Kyoto Protocol. So far, trading of such credits has been dominated by developed-world brokerages. Even fewer of the emerging-market firms trade credits than measure climate risk. The prevalence of ESG risk management systems among lenders and investors, however, suggests that these firms already have the tools to account for such risks.
Dr. Thimme and Mr. Cogan believe that the private sector should capitalize on Copenhagen, even if governments fail to do so. As they wrote in RI, "Whatever else comes out of Copenhagen, financial partnerships must be forged to support the huge flow of investment capital intended for the developing world."
[Ed. Note: In preparation for the Copenhagen summit, the KLD Blog will present some perspectives on global climate policy. The following analysis of Australia's rejection of an emissions-credit trading scheme comes from RiskMetrics analyst Mark Barraclough. Mark is based in Sydney and researches Australian firms, with a focus on the energy and extractives sectors.
As the US and other developed-world democracies debate their own "cap and trade" schemes, the case of Australia's Carbon Pollution Reduction Scheme (CPRS) may prove instructive.]
Any chance of Australia taking a legislated emissions trading scheme to Copenhagen evaporated on Dec. 1 as the nation's opposition Liberal party voted down the Rudd government's Carbon Pollution Reduction Scheme (CPRS) for the second time. Earlier in the week, opposition leader Malcolm Turnbull was unceremoniously ousted for supporting an amended emissions trading scheme bill, and Tony Abbott emerged as the new Liberal leader.
The outspoken Mr. Abbott has previously described climate change as "crap" and stands firmly in the camp that Australia should do nothing until major emitters such as the U.S. and China have established their own schemes.
The Political Route Not Taken
As this is the second time the CPRS bill has been rejected in the Senate, the Rudd government had the option to dissolve both the House of Representatives and the entire Senate in what is known as a double dissolution. In essence, Kevin Rudd could break the stalemate and call the world's first election fought entirely over climate change.
With a significant group of Liberal parliamentarians publicly skeptical that climate change is occurring as a result of human activity, and given that the Labor government is already well ahead in opinion polls, a double dissolution election could deliver Labor the balance of power in the Senate. Even were it not to succeed in doing so, the government would still be able to call a joint sitting of both houses of parliament to break the deadlock and push through its CPRS bill.
However, the government's acting Prime Minister, Julia Gillard, has announced that the government is intending to reintroduce the same amended CPRS bill on the first sitting day in late February next year. Mr. Abbott has promptly responded that his party will vote it down again.
The Politics Behind the Impasse
Why didn't the Australian government take advantage of this opportunity? The answer lies in the effect a double dissolution could have on the timing of Senate elections. A double dissolution before July 2010 would put future Senate elections out of sync with the House of Representatives. Such an outcome could shorten the Rudd government's second term in office to two years, due to the way a sitting government will generally choose to put the Senate election cycle back in sync with the House, to avoid exposure to a protest vote via the Senate elections.
Essentially, it makes more political sense for the government to hold off and trigger a double dissolution in the second half of 2010 because this will keep Senate elections in step with the House.
There is also the possibility that an election now could potentially see the Greens win seats from Labor. The government has just negotiated an amended CPRS bill which includes substantial subsidies for coal-fired power generators and other big polluters. A portion of those people who voted for Labor over its climate change policy at the last election could switch to the Greens out of disappointment over this compromise with business interests.
Greens leader Bob Brown has said that the government should "have been negotiating with the Greens for a scheme based on cuts of 25 to 40 percent below 1990 levels by 2020."
The problem for the government has been that any scheme that appeases the Greens would be vigorously opposed by business leaders representing energy-intensive industries, with whom the government has taken nearly two years to reach a fragile agreement.
Implications for Business
Mining companies, which for the most part were not destined to receive significant subsidies under the proposed scheme, may find some relief in this delay. For its part, the peak mining industry association (the Minerals Council of Australia) urged a fundamental re-think of climate change policy this week. But the current policy proposal has found support in the aluminium and petroleum exploration and production industry associations, which see it as the best deal on industry assistance they are likely to achieve.
If the legislation is not passed in the new year, owners of Australian brown coal-fired power generators such as International Power PLC and CLP Holdings are likely to wish they had the proposal's AUD 7.3 billion in electricity sector adjustment subsidies (over 10 years), as debts are up for refinancing.
With carbon regulation still a threat over the medium term, natural gas producers and utilities focused on natural gas power generation may stand to benefit in the policy vacuum. As coal power plants age and no new coal power capacity is added, lower emission natural gas offers the least risk and lowest capex solution. Australian participants in the space include Origin Energy, AGL Limited, Santos, and Arrow Energy.
While these companies may benefit from continued uncertainty over carbon regulation, the effects of the political failure this week are likely to be felt over the longer term, should Australian business lag other nations in developing a lower-carbon economy.
[For more on this topic, see the Climate Change Resource Center.]
This week, Congress and the Obama Administration are discussing the future of American energy policy. The outcome of these efforts is unknown, but forward-thinking investors already expect big changes in the energy sector. The markets' preparation for a less-polluting future includes the October announcement that First Solar, a solar-power technology firm, will soon join the benchmark Standard & Poor's 500 index.
Investors expect a bright future for First Solar, a FTSE KLD Index constituent since 2007, partly because they assume that governments will eventually tax carbon emissions. If the carbon output of producers and consumers is taxed, then the relative cost-efficiency of solar and other renewable energy sources will increase.
Dirty Fuels Are Expensive, Even Without a Carbon Tax
To tax carbon, or not to tax? Is that the question?
It's not the only question to ask about our fuel mix. The status quo may be economically unsustainable even before we put a price on carbon: New government research finds that non-carbon emissions annually impose over $100 billion in unaccounted-for costs on our economy.
Keith Johnson of the Wall Street Journal has written about a massive federal study of the unpriced costs, or externalities, of American energy. "Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use" is a 374-page inquiry into this issue by the National Academy of Sciences.
Mr. Johnson writes that while the Academy quantified the impact of particulate and other emissions, they declined to assign a price to carbon. Investors and policymakers should note that, even if we assume that carbon emissions are "free," fossil fuel consumption is not:
"America's current energy mix carries a 'hidden cost' of about $120 billion a year, the report found. And that number doesn't include any tally for the cost of greenhouse-gas emissions or climate change–estimates for climate costs range from $1 to $100 a ton of carbon dioxide emissions, but are so variable the report didn't quantify them. … "The $120 billion figure boils down to coal and cars. Transport costs the country $56 billion. Coal-fired electricity costs the country $62 billion per year, largely in health impacts from particulate matter. Natural gas for power generation, in contrast, adds about $740 million a year in hidden costs. "Looked at another way, coal's hidden price tag adds up to 3.2 cents per kilowatt hour. Compare that to the 2 cents per kilowatt hour that wind power gets from the government–that's less a subsidy than a partial attempt to level the playing field."
The Price of Particulates, SO2, and NOx
"Hidden Costs" lists the pollutants accounted for by the 3.2 cents per kilowatt hour price:
"Regarding Comparisons Among Fuels for Electricity Generation: In 2005 damages per kWh from SO2, NOx, and PM (particulate) emissions were an order of magnitude higher for coal than for natural gas plants: on average, approximately 3.2 cents per kWh for coal and 0.16 cents per kWh for natural gas (2007 USD). SO2, NOx, and PM emissions per kWh were virtually nil for electricity generation from nuclear, wind, and solar plants and not calculated for plants using biomass for fuel."
The Academy also admits that current research does not sufficiently account for environmental impacts beyond combustion emissions:
"Continued improvement is necessary of methods to quantify and monetize ecological impacts of all stages of the life cycle of electricity generation, especially of fuel extraction, emission of pollutants, and land-use changes. Similar needs exist for other types of energy production and use. "For fossil fuel options, more research is needed to quantify and monetize the ecological and socio-economic impacts of fuel extraction, e.g., of mountaintop mining/valley fill."
Coal is Costly, Believe in Climate Change or Not
The Academy concedes that the study hasn't revealed all the "Hidden Costs" of the American energy sector. Still, their work is a valuable policy tool. By reaffirming that carbon isn't the only costly externality of fossil fuels, "Hidden Costs" could support a more productive discussion of our energy future. Even those who don't believe in man-made climate change would concede that $120 billion is a lot of money to send up in smoke every year.
As KLD President Peter Kinder told an investors' forum on energy last spring, "We should be careful not to let 'carbon' become a proxy for 'environment.' Carbon is only one part of the case for change."
Still Fighting the Last War: US Chamber of Commerce Responds to "Normal Adversaries" on Climate Change
As corporations have come to recognize growing interest in their environmental impact, most firms have chosen to constructively engage with the public. The "greenest" companies have reduced their energy use and the impact of their products and operations, and many others have at least claimed to do so.
Such "greenwashing" is a concern of investors who consider environmental, social and governance (ESG) factors in their evaluations of corporate sustainability. But even as major firms have chosen, perhaps grudgingly, to work with their ESG stakeholders, at least one business lobby has taken a different tack.
Emily Stone of Green Century Capital Management has shared a telling letter on the climate change debate from David Chavern, Chief Operating Officer of the US Chamber of Commerce, which is reprinted in full below.
The letter's combative tone is certainly a change from most environment-related public statements in 2009. In response to high-profile defections from the Chamber, Mr. Chavern suggests that businesses face a "campaign against us being carried out by our normal adversaries -- trial lawyers, activist unions, environmental extremists, etc."
Ms. Stone has noted, in a message to the Social Investment Forum listserv, that investors are missing from this pejorative collection of bogeymen. In fact, 43 investor groups, representing billions in holdings, have together asked many firms to distance themselves from the Chamber's position. So far, Exelon, PG&E, Nike, and others have done so.
Mr. Chavern's letter calls for businesses to present a unified front against "interest groups [that] are looking for public leverage to force us to do things against the best interests of the business community."
Policy conflicts between interest groups are a natural part of democracy, and the Chamber of Commerce is right to fight for its members' objectives. Still, regarding environmental policy, it seems to have drawn inaccurate battle lines. The threat of climate change has already changed the economic and political climate, and this has helped forge new alliances among many erstwhile "adversaries." The New York Times reports that it has also fractured "once-monolithic" lobbies like the oil and gas industry.
Are these renegade firms in the thrall of lawyers, unions and extremists? Or are they simply responding to business risks that the Chamber is neglecting to acknowledge?
In an October 15 release, Green Century and Walden Asset Management quoted Bruce F. Freed, President of the Center for Political Accountability, about the risks of "misalignment" between businesses and their advocates:
"Climate change is one of those major issues where misalignment between companies and trade associations carries serious bottom line risks for companies. Good corporate governance should lead companies to assure that their trade associations do not engage in activities and use their funds in ways that may damage the company's reputation or be at odds with its stated public policy and business objectives."
In this fight, perhaps the Chamber should reconsider its strategy. If so many shareowners and members are its "adversaries," for whom is it working?
[The full text of David Chavern's letter follows.]
Special Message from David Chavern, Chief Operating Officer, U.S. Chamber of Commerce October 16, 2009 We understand that you may have received e-mails, letters and others communications from various groups asking your organization to end its association with the U.S. Chamber. Please note that these calls against the Chamber are part of a broad-based, multi-source campaign against us being carried out by our normal adversaries -- trial lawyers, activist unions, environmental extremists, etc. It is a "corporate campaign" in the classic sense, where interest groups are looking for public leverage to force us to do things against the best interests of the business community. (In fact, we are going to be sending you some additional information in the near future about the scope and objectives of this campaign.) Frankly, these efforts are simply the result of how effective we have been in opposing Card Check, as well as aspects of proposed healthcare, capital market and climate change legislation that we believe would be onerous to business and impede job creation. Our efforts to fix these key pieces of legislation are not going to stop -- business needs health care reform that focuses on reducing costs, we need (as our Capital Markets Commission Report over two years ago called for) modernization of financial regulation across-the-board, and we need and continue to call for comprehensive climate change legislation. The Chamber staff will continue to work day in and day out to ensure the best possible outcomes for the economy and job creation. And we intend to continue being successful, so we expect the negative messages to your organization may continue. In all circumstances, I and other Chamber staff are available to provide you with more background on our policy positions, along with help in any responses that might be warranted. I do apologize, though, for any annoyance and inconvenience these efforts against us might cause you. Thank you very much for your continued support. Please let Tom Donohue or me know if you have any questions or comments. Many thanks, David Chavern Chief Operating Officer
Businesses Break Ranks Over Climate Change: David Vidal on How Public Pressure Can Change Corporate Culture
This week, in a statement cited at Green Inc., Nike said that it "fundamentally disagrees" with the US Chamber of Commerce's position on climate policy. The shoe giant joins three major utilities in opposing the Chamber's recent lobbying efforts, which include a call for a "Scopes monkey trial of the 21st century" regarding man-made climate change.
Why are some corporations so eager "to boost their green credentials," in the words of Ann Fifield of the Financial Times? Perhaps these firms would rather defy their peers than alienate their customers – or their Senators.
"Social movements shape political power," David Vidal told me last week. Mr. Vidal is Global Corporate Citizenship Research Director at The Conference Board, an independent organization working in the public interest to help businesses strengthen their performance and better serve society. He is also a member of the Newsweek Green Rankings advisory panel. He said his perspective is drawn from personal and professional experience, since the Board takes no official positions on legislation.
Mr. Vidal believes that concerned citizens, supported by empirical tools like the Green Rankings, can move even the most entrenched corporate and political interests.
Will "Coal States" Always Vote for Coal Senators?
While utilities such as PG&E and Exelon have broken with the Chamber of Commerce, others, including American Electric Power (AEP), have not. In my conversation with Mr. Vidal, I relayed a statement made by the head of AEP at a KLD forum last winter. I had found it interesting that CEO Mike Morris, in explaining why coal would continue to power the US economy, justified his position in political terms.
"We have 25 'coal states'," Mr. Morris said. "That's 50 Senators whose states depend on this [coal-friendly] economy."
Mr. Vidal took issue with this calculus:
"The coal industry, and the wealth it represents, doesn't hold those Senators as tightly as it thinks.
"Think of it this way: Before the Civil War, slaves were the single biggest 'asset class' in the American economy. History shows us that the power of wealth, of ownership, can be trumped by the power of social and political change.
"Coal is a big part of the economy, but do the coal interests really hold the constituents of 'coal state' Senators? Public views on the environment, and the urgency of environmental issues, have changed fast. Younger voters have been recycling since kindergarten. They've been hearing about climate change for almost as long. Coal has a negative connotation for many people, even in 'coal states' – think of the Tennessee ash spill last year.
"Will the public continue to vote for Senators who just do what a few companies expect them to do?"
Green Rankings give "Ethical Context"
The Green Rankings, in Mr. Vidal's view, can amplify the voices of citizens and companies that take a longer view of sustainability. He believes that the financial markets have failed to do this:
"Let's stop fooling ourselves. There is no financial incentive, in the current capital markets, for firms to act for systemic benefit – even if it's in their own self-interest. The financial markets have given us the results of this short-term thinking, in the form of the worst economic crisis since the Depression.
"What the Rankings measure are the costs to the community, to society, of a company's operations. This is not morally neutral. The Rankings are creating an ethical context in which to judge a company."
New Language for a New Corporate Culture
The Conference Board, through its engagement with executives and directors, seeks similar goals at the corporate level.
"There is an existing culture of governance, and there is a sustainability culture emerging. These two cultures are seeking common language, but they don't have it yet.
"For the Green Rankings project, we worked to develop terminology that businesses, consumers and policymakers can all use. The bridges between these groups are being reimagined and rebuilt. The language of engaged citizens, investors and managers can supplant financial language as the sole means of describing a corporation's worth."
As noted in a previous KLD Blog post, the Green Rankings encompass qualitative evaluations of corporate culture and reputation. Mr. Vidal sees a company's cultural shift – as we may be seeing at Nike, PG&E, and other firms – as an important measure of success.
"Culture is what you do in the absence of specific external requirements," he said. "You can't measure culture the way you measure carbon emissions, but so what? To rely just on quantitative metrics is to miss the point. As consumers and citizens, we need to ask: Does this company empower smart people to go above and beyond what's expected?
"We aim to shift the center of reference beyond what can be easily quantified. We need a broader measure of what each company demands from the environment, and from the community. These costs may not show up on the bottom line, so we have to find a way to expense them for society."
For more on the Chamber of Commerce dispute, see this article by Pete Altman at the National Resource Defense Council. NRDC research finds that "only 23 members of the U.S. Chamber's board have a publicly stated position on climate change and more than 80 percent [19 members] are not on board" with the Chamber's official position.
Of the other 4 Chamber board members, 3 are coal companies. (Thanks to Scott Stapf for sharing the NRDC story with the Social Investment Forum listserv.)
"We Need Green Companies, Not Just Green Products" ClimateCounts.org's Wood Turner on the Newsweek Green Rankings
On September 21, Newsweek introduced its landmark Green Rankings of the 500 largest publicly-traded US companies. This project, for which KLD was the lead research partner, was guided by an advisory panelof academic and non-profit policy leaders, including Wood Turner of ClimateCounts.org.
The Green Rankings are a recognition that public interest is the key to better corporate environmental practices.
"Without pressure from customers, corporations cannot make the business case for difficult changes to the status quo," Mr. Turner told me last week. He believes that the Newsweek Green Rankings complement his organization's work by spurring consumers to recognize green companies, not just green products.
Building the Business Case
ClimateCounts.org was initially funded by a grant from Stonyfield Farm, and continues to receive support from that climate-focused company. The organization evaluates corporations' commitments to reduce their carbon footprints, and publishes a Company Scorecard that enables consumers to make "climate-conscious purchasing and investing choices." Mr. Turner is a credentialed environmental planner, an experienced advocate for better environmental practices, and a seasoned brand strategist.
He explained how ClimateCounts.org balances its work with companies with outreach to consumers:
"We, as an organization, talk about the dance we do. One day we're working to engage executives on a complete business approach to carbon management. Then we try to motivate consumers with our Scorecard, which is a kind of shorthand description of how well businesses are actually doing. We move back and forth between trying to persuade the business community to take carbon seriously, and trying to raise consumers' expectations.
"Companies need to learn how to measure their carbon output, and that won't happen overnight. Clear, universal accounting standards are essential, and that must extend to the supply chain, where most of the climate impacts from large companies lie. The standards-making process has taken years, and we're still not there.
"This process is certainly a vital part of the dance, but some companies will look at both reporting protocol delays and even policy delays as a time when they can basically do nothing."
"No Sustained Interest from Consumers" - Yet
"This is why our other work, on the consumer side, is so important," Mr. Turner said. "If companies feel pressure from their customers, they won't wait for standards – they'll scramble to find some way to act now."
Mr. Turner is an energetic advocate, and an optimist. I quoted a portion of the ClimateCounts.org site stating that they don't practice "doom-and-gloom" environmental reporting, and he laughed, but his voice rose with some frustration at the pace of change:
"Regardless of what we, as activists, do to make management pay attention to climate change, there's really been no sustained interest from consumers. We've all been distracted by what I think is a less-substantive conversation about 'green products.' That's diverted consumer focus away from whether companies are true environmental leaders in all that they do."
"That's why the Newsweek Green Rankings are important. Many companies have said to me, 'We're trying to sell products, not to be a poster child for an issue.' But if they begin to see that a poor ranking hurts the bottom line, they'll take climate action more seriously."
Spurring Corporate Green Envy
I asked Mr. Turner for his thoughts on the Green Rankings methodology, and on some of the issues the advisory panel grappled with:
"The biggest question is weighting: the quantitative data on carbon output (called the Environmental Impact Score) is balanced by qualitative analysis of policies, practices, and history (the Green Policies Score). This is not just about today's emissions levels – it's about a commitment, about having a structure in place for long-term progress.
"The Reputation Score is also important, because every company is concerned about how it's perceived. A lot of companies have come to ClimateCounts, asking to be benchmarked. They want to beat their rivals, or know how much catching up they have to do."
The Most-Admired Brands may not be the Greenest
Can a company maintain a strong brand without strong environmental performance? Mr. Turner notes that plenty of popular brands belong to companies who lag behind their peers on the Newsweek Green list.
"Until brand rankings mirror green rankings, we have more work to do. Apple, for example, is one of BusinessWeek's "100 Best Global Brands", but their Green Ranking (and their ClimateCounts score) is below that of many of their sector peers.
"I think this is a missed opportunity. I've argued before that consumers are much more responsive to well-known CEOs, to a Jobs or a Gates, than they are to most politicians. I know it seems a little crass, but I think we identify more as consumers than we do as voters. We also respond to signals from the marketplace, and a rock-star CEO can send especially strong signals.
"I'd like to see more of those signals focus on climate action and why it will ultimately be good for the 'best global brands.'"
In an interesting coincidence, Apple announced a major environmental initiative last week.
How the Green Rankings Complement the Work of ClimateCounts
Mr. Turner described the Newsweek Green Rankings as "a natural extension of what we're trying to do."
"Green rankings and scoring are a way to move sustainability from the back room to the boardroom. When executives see their environmental practices on the pages of Newsweek, it motivates real interest.
"There are two things that top managers understand well: reputation management and market segmentation. An annual cover story in Newsweek means that corporations' environmental performance will affect their reputations; our job now is to expand green consumers' share of their markets."
A new study of water companies' ESG disclosure finds that, with some exceptions, utilities in developing nations "disclose far more performance data" than their EU and US counterparts. The Interfaith Center on Corporate Responsibility (ICCR) reviewed water suppliers' reporting of environmental, social, and governance (ESG) metrics. "Liquid Assets: Responsible Investment in Water Services" also surveyed a representative sample of 12 major global water utilities, scoring them on 21 "key disclosure issues."
In the report's executive summary, ICCR notes that control of the global water supply is a sensitive topic, but also says that "it is not the purpose of this report to debate the merits of public versus private ownership." Instead, "Liquid Assets" explores how well utilities – whether investor- or government-owned – communicate with stakeholders. In calling for better disclosure of comparative ESG data, ICCR says:
"Creation of a 'data commons' is essential for protection of the water commons."
The Law is Not Enough
How do we know our water is safe? In most nations, the answer is that the law requires it to be. "Liquid Assets" argues that this is not enough. Chapter 5, "Benchmarking ESG Performance," explains that government regulators cannot always find hard data on service levels, water quality and costs – and neither can citizens or investors.
While utilities in New York City and New South Wales, Australia scored well on ICCR's tests, developed nations actually lag emerging markets in the overall quality of their water firms' ESG reporting. ICCR cites World Bank standards as a crucial factor in this disparity:
"Public and private water services utilities in most developing countries and emerging market nations disclose far more performance data via the World Bank's International Benchmarking Network on Water and Sanitation Utilities (IBNET) than do the utilities operating in OECD countries. … "The reports from the large utility companies surveyed indicate that their ESG disclosures are driven by regulatory, rather than corporate mandates."
Corporate Reporting May Not Describe Local Conditions
The Global Reporting Initiative (GRI) is a multi-stakeholder effort to improve sustainability reporting by corporations worldwide. GRI disseminates reporting guidelines to support the "transparent and reliable exchange of sustainability information," according to their website.
"Liquid Assets" explains why a firm's GRI-compliant reporting may not reveal the true state of its water-related holdings:
"The principal problem with use of the GRI by the water services sector is that the data are aggregated and reported globally, whereas water resources must be managed locally or regionally within a given watershed. Globally aggregated information about water supply, for example, is of little use to investors seeking how to understand how well a utility in a water-stressed area is managing supply risk."
The ICCR authors note that GRI guidelines call for reporting companies to disaggregate some data, but that none of the surveyed water utilities did so.
What Should Water Utilities Tell Us?
On behalf of investors, ICCR says that adequate disclosure would show that:
"Management systems are in place to capture data needed for protection of water supply, maintenance of infrastructure, and early identification of ESG risks; appropriate risk management policies exist and are being followed; and data are being used to monitor trends and progress in attaining benchmarks for continuous improvement. "This is critical information that should inform investment decisions by governments as well as private investors. It is a failing that must be cured."
Environmental Leader, along with most major news outlets, reports that Walmart is preparing to develop a sustainability index for its suppliers and products. The index will try to account for the environmental, social and governance (ESG) performance of Walmart suppliers "in such a way that consumers [can] easily discern the sustainability of one product over another." Marc Gunther at The Big Money writes: "For the [Walmart] index to work, consumer-goods makers will need to understand the origins of everything they put into their products."
Recent news about the global supply chain has made me think about my own origins.
I don't usually refer to myself on the KLD Blog, but on this topic, I'll make an exception. I was fortunate enough to attend Carnegie Mellon University in Pittsburgh, Pennsylvania – an industrial town, and a school founded by an industrialist and a financier. I was able to do so because my father, a manufacturer's representative, had a productive understanding of the 1980s market for truck equipment in the Northeastern US.
College's big ideas and relationships (including my marriage) were, in a sense, brought to me by a stream of dump bodies and liftgates from a plant in Council Bluffs, Iowa.
The power of the industrial supply chain is both personal, and profound. Perhaps this is why I found this New York Times report, on the roots of recent violence between ethnic Uighurs and Han in China, especially painful. Andrew Jacobs describes a hellish brawl, and also the stage for this tragedy:
"During a four-hour melee in a walkway between factory dormitories, Han and Uighur workers bludgeoned one another with fire extinguishers, paving stones and lengths of steel shorn from bed frames. … "Li Qiang, the executive director of China Labor Watch, an advocacy group based in New York that has studied the Shaoguan toy factory, has a different view [of the cause of Uighur/Han violence]. He said the stress of low pay, long hours and numbingly repetitive work exacerbated deeply held mistrust between the Han and the Muslim Uighurs, a Turkic-speaking minority that has long resented Chinese rule."
The setting for this madness was a toy factory. All this suffering is at the front of a supply chain that leads to me, and my kids' allowance money.
Labor activists might scold me for needing to be reminded of this, and a new book will make more Americans less comfortable with all our cheap stuff. In "Cheap: The High Cost of Discount Culture," Ellen Ruppel Shell considers our culture's "insidious human costs," in the words of Salon reviewer Stephanie Zacharek.
Accounting for such costs, Ms. Zacharek writes, is "impossible" without China, but she also points out that "China isn't the source of the 'cheap goods' problem":
"[Author Ellen Ruppel Shell] quotes Mark Barenberg, a professor of law at Columbia University and an expert on international labor law: 'The severe exploitation of China's factory workers and the contraction of the American middle class are two sides of the same coin.'… "In other words, employers in the United States can easily use the threat of downsizing and outsourcing to gain more power over, and squeeze more juice out of, their employees -- who, in turn, enjoy increasingly less protection from unions."
"Cheap" author Shell explores the role of retailers like IKEA in maintaining "discount culture." Ms. Zacharek makes an example of IKEA's purchases of timber. While the firm is the third-largest buyer of wood in the world, it employs only 11 forestry experts to monitor its suppliers. Many of them harvest in remote regions where wages are low, working conditions are poor, and "half of all logging is illegal."
Ms. Zacharek asks the question that Walmart is now attempting to answer:
"Would enlightened consumers pay a little more, maybe, to buy products made from wood that had been, unquestionably, legally harvested? Maybe -- but it's not the consumer's choice to make, at least not right now. And if there's one thing that makes reading this eye-opening book an ultimately frustrating experience, it's that Shell can't offer many helpful solutions to this tangle of economic and moral problems, aside from urging us to be more aware as consumers."
I would argue that, rather than becoming "more aware as consumers," we should remember that there is no such animal as a "consumer." Each of us produces, consumes, and benefits from the work of others – past and present. The money I spend at IKEA, like my education and my career, came from the labor of my Dad, and also people in Council Bluffs and Shaoguan.
My life's good fortune was brought to me by a certain sort of economy; the world's supply chain makes our lives, not just our stuff.
As the Senate deliberates over the House's Waxman-Markey cap-and-trade bill, Politico has presented a debate on the bill's potential impact on the US economy. Mindy S. Lubber, of the environmental coalition Ceres, argues that Waxman-Markey "deserves our support." In response, William L. Kovacs of the US Chamber of Commerce tells why he believes the economy will be harmed by the bill's provisions.
Their discussion is a useful summary of pro- and anti-Waxman-Markey arguments. It also shows that a productive public policy debate depends on data. While both sides marshal projections and estimates to make their case, neither can present hard numbers on the cost of carbon emissions by American business. Many companies disclose some data, but without standardized, economy-wide reporting, no one can know the real costs or benefits of a cap-and-trade scheme.
To fill this void, Federal regulators are considering a plan to force "public companies to report the dangers they face from releasing carbon dioxide and its warming aftermath," according to Evan Lehmann in the New York Times. He cites Ceres research that found "76 percent of Standard & Poor's 500 companies failed to mention climate change in their annual reports to the [Securities and Exchange] Commission last year."
Mandatory, comparative reporting is essential to the business case for – or against – Waxman-Markey, or any future attempt to set a price for carbon emissions.
The Business Case, Pro and Con
In their arguments, both Ms. Lubber and Mr. Kovacs focus on the societal cost of carbon pricing. Ms. Lubber cites a Congressional Budget Office estimate that the direct costs of Waxman-Markey will "average about $175 annually per family by 2020." She argues that this cost would be justified by the growth of a "clean energy economy," and that opponents are discounting "the costs of doing nothing":
"Perhaps the most maddening aspect of debate over the Waxman/Markey bill has been the consistent omission by opponents of the costs of doing nothing -- the enormously high and disruptive price science tells us we'll pay if we don't act now. Disrupted agricultural patterns, more and stronger storms, rising sea levels, a scramble for dwindling resources -- all propelling population shifts and requiring massive emergency spending as we try to cope."
Mr. Kovacs, representing the US Chamber of Commerce, accepts that "a feasible cap-and trade system might work." His rebuttal focuses on the flaws he sees in this particular bill, arguing that it will create unfair burdens on consumers and businesses. "Carbon-based fuels are and will remain for decades the backbone of the U.S. energy system," he says, and he believes that carbon caps would hurt US competitiveness:
"Imposing limits on our own energy use and driving up our own costs – while developing nations like China and India pollute with abandon – will neither reduce global greenhouse emissions nor improve America's competitive position. … "Now, regarding the cost, let's go to the CBO pricing mentioned: 'The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap.' … In other words the $175 figure is merely a fraction of the cost, as it does not include economic impact."
The Hidden Costs of the Status Quo
Ms. Lubber takes issue with many of these contentions. She also says that not assigning a price to carbon distorts our analysis of its cost:
"This bill, even in its present form, is not about distorting the workings of the carbon market, as Mr. Kovacs says. In fact, it's very much about correcting a massive existing distortion long-embedded in our current market system -- the fact that the price of emitting global warming pollution has been zero. "Why doesn't a business group see this distortion? Once polluting costs are honestly counted we'll innovate our way to less polluting – transparency and honest accounting make markets work."
The Investors' Case for "Honest Accounting"
Evan Lehmann, in explaining why the SEC is taking a "a very serious look" at mandatory disclosure of exposure to climate-related risk, sums up investors' concerns:
"Institutional investment groups with trillions of dollars in assets could use the disclosures as the basis for withdrawing money from companies they consider unprepared for rising risk related to regulation and climatic convulsions. " 'It's reasonable to expect that companies would fail to focus on long-term risk posed by climate change, and more forced disclosure would correct a potential market failure,' said John Echeverria, executive director of Georgetown University's Environmental Law and Policy Institute. 'That seems like incredibly important information that investors might have.'"
Argue from the Facts
The Chamber's essay suggests that business presents a unified opposition to Waxman-Markey, but the Wall Street Journal has reported that some companies have charted their own path. Mindy Lubber notes that many major firms support "carbon reduction targets, carbon caps and immediate steps to improve energy efficiency." Also, while Ceres and many environmental groups support Waxman-Markey in its current form, Friends of the Earth, Greenpeace, and Public Citizen oppose the bill for not being strong enough.
This diversity of opinion is welcome, especially if all sides can agree on the terms of debate. In moving to require uniform disclosure of climate risk, the SEC recognizes that sound investment – like productive policy debate – is founded on facts. Mindy Lubber quotes the late Senator Patrick Moynihan: "While people are entitled to their own opinions, they're not entitled to their own set of facts."
For more on this topic, see The Risks of Climate Change are Already Material: New Ceres/EDF Study Calls for SEC to Mandate Better Disclosure
The Risks of Climate Change are Already Material: New Ceres/EDF Study Calls for SEC to Mandate Better Disclosure
As the Obama Administration seeks to overhaul financial regulation, a multi-trillion-dollar coalition of investors has argued that the government should require corporate disclosure of climate change-related risks. Climate Risk Disclosure in SEC Filings – a deceptively modest title – calls for replacing the current hodgepodge of voluntary disclosure with a federally mandated reporting regime.
Ceres, the Environmental Defense Fund, and other sponsors of this Corporate Library-produced study formally presented their findings to the Securities and Exchange Commission (SEC) in a June 12 letter.
Perhaps the most provocative assertion in Climate Risk Disclosure is that voluntary disclosure, much like the "self-policing" practices that have supplanted direct regulation in many industries, is inadequate to its task.
"Climate change is for many companies a material risk," the authors write. They argue that the SEC, in its role as guarantor of the transparency of American securities markets, is already obligated to demand broad, uniform reporting of corporate climate-related risk exposure.
What are the Risks?
Climate Risk Disclosure authors Beth Young, Celine Suarez, and Kimberly Gladman sum up the risks that corporations should prepare to face:
- Physical risk from climate change
- Regulatory risks and opportunities related to existing or proposed GHG [greenhouse gas] emissions limits
- Indirect regulatory risks and opportunities related to products or services from high emitting companies
- Litigation risks for emitters of greenhouse gases
Broad Exposure, Limited Disclosure
Most companies, even those from the sectors that emit the most GHG, do not do enough to inform shareholders of how climate change threatens their business models. The report's authors reviewed climate risk disclosure in SEC filings from Q1 2008:
"[The study] evaluates the current state of climate risk disclosure by 100 global companies in five sectors that have a strong stake in preparing for a low carbon future: electric utilities, coal, oil and gas, transportation and insurance…. "Fifty-nine companies made no mention of their greenhouse gas emissions or their position on climate change, 28 had no discussion of climate risks they face, and 52 failed to disclose actions to address climate change. Even more telling, the very best of disclosure for any of the companies could only be described as 'Fair'–and only a handful of companies achieved this ranking."
It is significant that Climate Risk Disclosure looks at the insurance sector, along with industrial sectors that directly produce and consume large quantities of fossil fuels. Assessing, pricing and managing risk is what insurers do, yet US firms made little mention of their exposure to their customers' climate change risks:
"Eighteen out of 27 [researched insurance] companies (67%) had no mention of climate change or related risks anywhere in their SEC filings. Twenty-three out of 27 companies (85%) failed to disclose their emissions or a statement on climate change, while 24 out of 27 companies (89%) omitted disclosure on actions to address climate change, despite the wide range of opportunities for new, climate-related insurance products."
Climate Risk Disclosure notes that non-US insurers like Swiss Re, Munich Re and Zurich Financial did a better job.
Why are US firms lagging? The Ceres/EDF study suggests a simple answer: European companies face climate change in a more demanding regulatory climate.
What does Voluntary Disclosure Hide?
Climate Risk Disclosure provides a useful summary of why voluntary disclosure, like other forms of "self-regulation," tends to fall short of its promises:
"First, because it is voluntary, companies without a positive story to tell can simply decide not to disclose. In this way, disclosure will be skewed toward companies that are better positioned to address the risks and opportunities presented by climate change. … "Second, voluntary disclosure tends to focus on opportunities related to climate change while omitting or downplaying the risks. [A] 2007 KPMG/GRI study found that in sustainability reports, 'companies reported far more on potential opportunities than financial risks for their companies from climate change.'… "Third, voluntary disclosure is not uniform, frustrating efforts to benchmark companies against one another. … "Fourth, companies making voluntary disclosure tend not to quantify the financial impact of risks and opportunities. … "Finally, voluntary disclosure lacks the enforcement mechanism that comes with mandatory disclosure requirements."
Largest Investors Must Prepare for the Broadest Risks
In a preface to Climate Risk Disclosure, Anne Stausball of the California Public Employees' Retirement System (CalPERS) writes:
"CalPERS has a widely diversified portfolio that is impacted by all segments of the economy. The fund also has a long-term perspective, since it must meet beneficiaries' retirement needs now, and long into the future. As such, we must be aware of shifting conditions and liabilities affecting companies in our portfolio."
CalPERS is a leading member of the Ceres-led Investor Network on Climate Risk (INCR), a coalition of investors managing around $7 trillion of assets. Ms. Stausball notes that in 2007, CalPERS and the INCR petitioned the SEC "to ensure that publicly traded companies disclose material financial risks from global warming in securities filings, as required under existing securities law." [Emphasis added.]
The new Ceres/EDF research supports this contention: the SEC is already obligated, by the terms of existing rules, to require mandatory disclosure.
Item 303 and the Materiality of Climate Risk
Climate Risk Disclosure explores the various regulations that define what all publicly-traded companies must tell their shareholders, including "Item 303." The report says that the obligations of this rule, according to SEC statements, "encompass both financial and non-financial factors that may influence the business, either directly or indirectly." In summing up the implications of Item 303, the authors issue an unequivocal challenge to the SEC:
"The risks and opportunities created by climate change clearly fit within the range of factors to which Item 303 applies. The scientific consensus and improved ability for scientists to quantify likely climate change impacts preclude an argument that climate change is not a 'known' trend or uncertainty. The rapidly changing [environmental] regulatory environment introduces the possibility that past financial results will not be indicative of future results, and the effect is certainly material for many companies."
Also see these related KLD Blog articles:
Miller-McCune is a new magazine whose tagline is "Turning Research into Solutions." On its website, it reports on a 30-year study of green attitudes among adolescents. The results are sobering.
"A research team led by Laura Wray-Lake of the Pennsylvania State University's Department of Human Development and Family Studies examined data from the 'Monitoring the Future' study, a sophisticated survey of the beliefs and behaviors of American secondary school students. The scholars mapped trends in a variety of environment-related areas, including conservation-conscious behaviors, feelings of responsibility for the environment and faith in technology. "'We found a precipitous decline in high school seniors' reports of conservation behaviors across the three decades,' they report. 'These trends clearly indicate that youth in the past two decades were not as willing to endorse conservation behaviors of cutting down on heat, electricity, driving and using bikes or mass transit as were young people in the 1970s.'"
After a blip of environmental consciousness in the 1970s, awareness crashed over the next 30 years.
"'Clearly, the average high school student across the past three decades has not viewed himself or herself as the first line of defense in protecting the environment,' the scholars conclude. "They add that the high school seniors surveyed 'tended to see government, and people in general, as more responsible for environmental problems than they themselves felt.'"
We have our work cut out for us.
Disclose Carbon Emissions by Companies, Not Just Facilities: Social Investment Forum on new EPA Disclosure Rules
In May, the Obama Administration announced new fuel economy standards for cars sold in the US. According to activist Daniel Becker, as quoted in the New York Times, "This is the single biggest step the American government has ever taken to cut greenhouse gas emissions."
More big steps are to come. The EPA has been soliciting public comments for "the first comprehensive national system for reporting emissions of carbon dioxide and other greenhouse gases (GHG) produced by major sources in the United States."
The Social Investment Forum (SIF) has developed a comment letter on the proposed rules. Reporting rules may not seem as momentous as anti-gas-guzzler laws, but the EPA's proposal could remake the energy policies of every industry. By helping investors account for corporations' carbon-related liabilities, SIF argues that disclosure will enhance the "pricing [of] such risks into the valuation of securities."
SIF does note one potential obstacle to this process: While the EPA calls for reporting of emissions by major carbon-emitting facilities, it does not require every corporation to disclose company-wide emissions. This could complicate the work of shareholders, who seek to make informed judgments about corporate exposure to emission-related risks.
90% of Greenhouse Gas Emissions to be Reported
According to an EPA fact sheet:
"The proposed rule calls for suppliers of fossil fuels or industrial greenhouse gases, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more of GHG emissions per year to submit annual reports to EPA…. "85-90% of total national U.S. GHG emissions, from approximately 13,000 facilities, would be covered by the proposed rule. Most small businesses would fall below the 25,000 metric ton threshold and would not be required to report GHG emissions to EPA."
EPA addresses the question of facility vs. company-wide reporting as part of an FAQ on the proposed rule:
"Q: Would EPA collect data at the unit-, facility-, or corporate-wide level? "A: For the majority of reporters, EPA would collect data at the facility level. There are a few exceptions where there would be reporting at the corporate level. The exceptions are vehicle and engine manufacturers, fossil fuel importers and exporters, and local gas distribution companies."
Disclosure Itself is a Regulatory Tool
SIF is careful to note that the "EPA has not proposed to establish a regime that would result in a carbon price." Government-mandated disclosure can still serve a regulatory purpose, however.
Emissions data enable investors to make "distinctions between relative security valuations based on companies' liabilities and regulatory risks," in SIF's words. Relatively high carbon output may indicate that a company is unprepared for a future "cap-and-trade" regime, or for potential spikes in fossil fuel prices.
Investors Buy Companies, Not Facilities
SIF offers a glimpse of how this process works, and why company-wide emissions reporting is important:
"When investors buy equities, they are investing in companies, not facilities. Facility-specific datasets, such as those proposed in this Rule, must have readily identifiable information that allows investors and their research providers to link facilities to the ultimate parent company (the investable entity). With such linkages, investors are able to aggregate information from multiple facilities to represent the company with a single GHG emissions number. …"
If investors could compare equities with a "single GHG emissions number," then the market could more readily price carbon-related risks into current share values. As SIF explains, disclosure could help long-term risk exposure have an immediate material impact:
"Most discussions of materiality, like most things in finance, tend to focus more attention on the short term, and, because of this ingrained myopia, longer-term or persistent issues tend to disappear from view in securities law enforcement and legal proceedings. But habit is not a good reason to perpetuate the situation. We believe that EPA's proposed rule on disclosure of greenhouse gas emissions is a very positive step in the right direction."
For more information, please see:
EPA's presentation (pdf) to SIF on the proposed rule
On May 26, Responsible Investor reported on a new study calling for pension funds to better prepare for climate change. Pension trustees may even have a fiduciary duty to account for climate-related risk, according to study authors Craig Mackenzie and Francisco Ascui of the University of Edinburgh Business School.
Investor Leadership on Climate Change, written on behalf of the United Nations Principles for Responsible Investment (PRI), explores the role of investors in reducing global carbon emissions. As reported by RI's Hugh Wheelan, the study finds that this role will be immense:
"$10 trillion in capital, much of it expected to be private, will be required by 2030 to maintain carbon dioxide emission levels at a stable 450 parts per million in the atmosphere."The authors of Investor Leadership on Climate Change argue that this is achievable, but add an important caveat:
"The good news is that even such large sums of money are within the long-term capacity of the financial sector, as long as the appropriate public policy incentives are in place."In "The Long-Term Investment Case," a preamble to their study, Mackenzie and Ascui explain why trustees must prepare for climate change, and why their preparedness depends on government action. A Universal Risk for "Universal Investors" Why must pension funds, in particular, confront climate change? The authors argue that these funds' long-term perspective exposes them to "systemic risks":
"[Climate change risks] will have impacts across the entire economy. This will make them difficult to hedge or avoid…. "Pension funds, particularly large pension funds, are universal investors, and they are so large that they tend to have long-term investment exposure to the whole economy…. Prudent pension funds have good reason to pursue cost-effective strategies to support climate change mitigation and adaptation."Neither the Public nor Private Sector Can Go it Alone Mackenzie and Ascui confront the argument that climate change and carbon regulation are beyond the ken of fund trustees. They describe the assumptions behind "business as usual":
- "['Business as usual'] assumes policy-makers will deliver the appropriate carbon pricing regimes....
- It assumes capital markets will be efficient at pricing risk and allocating capital....
- It forgets that equity investors are not merely providers of capital – they are shareholders and therefore owners of companies. …They have a unique position of leverage over the entities that, in one way or another, are accountable for most of our carbon emissions."
Investor Leadership on Climate Change explores the risks inherent in these assumptions, and how investors such as CalPERS are actively preparing for such risks. This preparation necessarily includes support for national and global carbon-pricing schemes. As Hugh Wheelan wrote, "Investors need to collectively influence public policy to correct what [the PRI report] says is an inability of markets to properly price climate change-related systemic risk."
For more information, see Investor Leadership on Climate Change at the PRI site.
Only 24% of voters know that "cap and trade" describes an environmental policy proposal, according to a new Rasmussen poll. Matthew Yglesias at ThinkProgress cited the results this week, and also noted that 46% of respondents guessed that cap and trade involves Wall Street regulation or health care.
The KLD Blog is not typically concerned with opinion polls, but this survey hits close to home. As stated on our "About" page, "KLD analysts stay apprised of economic, financial and political developments worldwide, and the KLD Blog shares our expertise with you."
Why do we do this? Because KLD's business of environmental, social and governance (ESG) research serves informed, engaged investors. The practice of sustainable investment can't be separated from the major public policy questions of our time.
A global commitment to regulate carbon emissions – by direct government restriction (the "cap") and the pricing and "trade" of the right to emit – could remake the oil- and coal-powered global economy. Some of the world's largest publicly-traded companies have a stake in the outcome, and so does everyone else.
The public's shaky grasp on cap and trade may have major policy implications, Rasmussen writes:
The New York Times reports that Rep. Henry Waxman, the California Democrat who is pushing cap-and-trade legislation, is now facing challenges from within his own party on the issue and that many want to "turn the Energy and Commerce Committee's attention over to health care." That is clearly the direction most American voters would like to go. Sixty-nine percent (69%) say health care issues are more important while just 15% say global warming is a higher priority.
Leave aside, for now, the false dichotomy between "health care issues" and "global warming." Instead, consider how policy debates may be driven not by informed public opinion, but by the public's unfamiliarity with the subject matter.
As sustainable investors discuss cap and trade - or heath care policy, or a hundred other topics - we should remember the importance of explaining our work to the public. Our success depends on ordinary people who share our understanding of ESG issues.
In his commentary, Mr. Yglesias wrote, "Polls that attempt to directly probe the public's views about cap and trade wind up measuring a lot of pseudo-opinion."
The KLD Blog promotes no one position on major policy questions, but we do try to lessen the sway of pseudo-opinion.
To learn more about the debate over cap and trade, please see the KLD Blog articles listed below.
The British journal Responsible Investor has published an interview with Gro Nystuen, chair of the Norwegian state investment fund's Council of Ethics. Norway's government is a leading advocate and practitioner of sustainable/socially responsible investing (SRI).
Ms. Nystuen speaks frankly about how the Norwegian state pension fund puts its good intentions into practice. "The Council consists of five persons who are all experts in the different areas covered by our guidelines," she says. "This expertise means that we know what we are talking about. It is not a 'prominent-persons-have-been-politicians' kind of council, as it could easily have been."
I was intrigued by her explanation of how the Council defines standards for corporations' environmental, social, and governance (ESG) performance. Norway excludes companies from its fund if they violate certain laws and treaties, but the Council also considers corporate actions that may not be illegal.
For Norway, as for many sustainable/SRI investors, conforming to laws is only part of the obligation of companies – and shareholders.
Ms. Nystuen points out that the world's patchwork of governments can never sufficiently define what constitutes ethical corporate behavior. She illustrates how the fund's environmental standards, among others, cannot simply follow the letter of the law:
"…The third point [of research] concerns environmental damage. The environmental criteria are absolutely not attached to any treaty, because if they were, they would be very narrow. For example there is no international prohibition against cutting down every tree in Norway, although it would be clearly bad to do it. [Emphasis added.]"
This applies equally to human rights, governance, and every other aspect of business: laws and treaties can proscribe certain actions, but they cannot anticipate everything a company might do, nor can governments conclusively establish what ethical business practice is.
The law's arm is even shorter when companies and investors cross national borders. Ms. Nystuen cites the example of child labor, which is not universally illegal. She notes that India "has very good general legislation on child labor, but implementing it is difficult in many areas. We have to be specific about who is responsible and who has obligations…"
It is this specificity, this establishment of practical, consistent ground rules, that ESG research helps to achieve. This process depends on a commitment from investors. Ms. Nystuen is emphatic about shareholders' obligations:
"If you asked anybody on the street if they were for or against child labour in India, they would obviously answer that they were against it. "Even if you asked them directly whether they would be willing to have their governments use tax money to prevent child labour, they would still agree because they think that child labour is a very bad thing. They would not hesitate, even if it were to cost them something. "But the problem is they are not asked directly!"
Growing interest in ESG research, in Norway and elsewhere, proves that shareholders will take responsibility – if they're asked.
The mining and refining of metal is an industry with ancient roots, and it remains essential to the global economy. Even supposedly "clean" industries like electronics depend on mining and smelting, as gold, tin and other metals are found in cell phones, computers and other ubiquitous consumer products.
Industrial mining can have a dramatic impact on the environment, and metals profits also help finance violent unrest in poor nations like the Democratic Republic of Congo (DRC). Developing nations such as Indonesia, Colombia, and the DRC bear the brunt of mining's costs, yet downstream consumers – and investors – share responsibility for industry practices.
To better assess these practices, the Global Reporting Initiative (GRI) recently solicited comments for its Mining and Metals Sector Supplement (MMSS). The MMSS will support better environmental, social and governance (ESG) disclosure by mining companies and metal processors.
GRI recognizes that the global economy's appetite for metal has overwhelmed many efforts to protect workers and the environment, and that the relationship of metal producers and consumers must change.
Even Responsible Mining Scars Land, and People
In a recent sector report, KLD Analyst Lesley Fleischman notes that even relatively well-run mining operations still have an impact:
"There are mining companies who operate some of the most sophisticated environmental and community programs of any of the companies I've researched. Many follow high standards for waste disposal, operate programs to hire indigenous people, and provide education and health service to communities. "But even relatively well-run mining operations can have severe environmental consequences, and many miners' communities see only a fraction of the income from their work."
Congo's "Blood Minerals"
The Democratic Republic of Congo (DRC) is a tragic example of what "blood mineral" wealth can do to a society. KLD Analyst Benson Hyde, who has studied the DRC, writes:
"'Blood minerals' include not only gold for jewelry, but also tin for electronics; tantalum, used to store electricity in cameras, phones, and other devices; and tungsten, which helps make cell phones vibrate. "The same Congolese groups are responsible for both the mineral trade and violence in the DRC. Mining operations generate hundreds of millions of dollars each year. Armed groups profit both from forcibly controlling the mines and by demanding bribes from traders, shippers, and border guards. "The regions where these minerals are mined have the world's highest rate of sexual violence, which is often used to control inhabitants. Children are also forced to work in mines and join the militants."
Mixed Messages from Developed Nations
Sustainable and socially responsible investors (SRI) have sought to hold metals companies accountable for their ESG practices worldwide. This week, Canada's Ethical Funds Company announced that it has secured nearly 20% shareholder support for an independent ESG audit of Barrick Gold. Ethical Funds says that Norway's pension fund has already divested from Barrick, "citing concerns with human rights violations and community unrest at operations."
Developed-world governments are also concerned with mining companies, but they may not share ESG/SRI priorities. Canada's Embassy magazine reports:
"The Conservative government has rejected joint civil society-private sector calls to tie diplomatic and economic support for Canadian oil, gas and mining companies operating in developing countries to socially responsible conduct abroad. "As a result, there are charges the government–allegedly influenced by mining giant Barrick Gold and the Canadian Chamber of Commerce–has given the green light for misbehavior abroad, and killed the temporary peace between NGOs and mining companies."
The article describes how, over the objections of NGOs and activists, the Canadian government reduced the power of a proposed "extractive sector CSR counselor."
Embassy quotes Karyn Keenan, of activist coalition the Halifax Initiative: "The response basically perpetuates the status quo. There's no incentive for corporations to change their behavior."
Rich Nations Buy Gold – and Sell Mercury
Part of the metal supply chain's status quo is for developed-world corporations to source raw material in poorer nations. Trade is not a one-way street, however. Miners in Indonesia import illicit mercury for gold mining use – and the US and Europe are major sources for this toxic material.
The Jakarta Post reports:
"The use of mercury in gold mining is illegal in Indonesia because it is toxic to both human health and the environment. But the price of gold has tripled since 2001, and mercury is the easiest way to extract it… "Despite the hazards, buying mercury at gold mining sites is as easy as purchasing toothpaste. The international trade in mercury is largely unregulated. And most of the 55 countries where small-scale gold mining is rife lack the political will or capacity to prevent the toxic metal from falling into the hands of 10 to 15 million poor miners."
KLD's Lesley Fleischman explains that while large mining companies don't use mercury to extract gold, they do play a role in creating demand for the chemical. "Typically, the small-scale miners who buy mercury illegally are former farmers whose land has been ruined by large-scale mining."
Millions of Miners, Billions of Consumers
To their credit, the GRI does not shy away from the geopolitical complexity of this sector. As defined by their guidelines, three of the sector's "main contextual issues" are explicitly political:
- The control, use, and management of land
- The contribution to national economic and social development
- Community and stakeholder engagement
- Labor relations
- Environmental management
- Relationships with artisanal and small-scale mining
- An integrated approach to minerals use
The last-listed issue may have the broadest implications for investors and consumers in the developed world. Individuals' demand for useful and attractive products is already "integrated" into the world economy; can their concern for human rights and the environment also shape the metals sector?
The Jakarta Post notes that the US, UN, and EU have all committed to banning mercury exports. Sustainable/SRI investors, in concert with independent observers like the GRI, can also help guide the practices of both buyers and sellers of metal.
Resisting the Rare and the Beautiful
Still, the struggle for sustainable use of metals is a struggle against consumerism itself. The difficulty of tempering human appetites – of persuading people to pay more, or use less – is an issue that goes beyond jewelry or iPods.
For a poignant expression of what we're up against, here is a consideration of a consumer good seemingly unrelated to metal: fresh, store-bought food.
Jon Garvie, writing in the Times of London, reviews Susanne Freidberg's Fresh: A Perishable History, a social history of consumers' demand for "permanent global summertime." Mr. Garvie emphasizes the part of Ms. Freidberg's story where a desire for social justice collides with baser appetites:
"…[Companies] envelop their activities within promises of corporate social responsibility and greater self-regulation. But the consequences of this attention are as nothing compared to international consumer demand for 'permanent global summertime' in which all fruits and vegetables are made available all of the time. The universal impulse to fetishize the (increasingly) rare and the beautiful leads back unerringly to inequity and despoliation. [Emphasis added]"
Whether it delivers something permanent as metal or as ephemeral as food, the supply chain's reform must begin with the buyer.
Carbon Counts USA, a new report from research firm (and KLD partner) Trucost, studies the "carbon intensity" of 91 major mutual funds. Trucost found wide variation in funds' carbon footprint, as the highest-carbon fund they studied was 38 times as carbon-intensive as the best performer.
Perhaps due to the Obama Administration's stated commitment to a national carbon emissions market, Carbon Counts USA (available here) has attracted attention from the business press. Dow Jones' Daisy Maxey writes that major fund managers are "responding cautiously" to the implication that they should consider companies' carbon footprints:
"In carefully worded statements, some companies shied away from ideas like explicit environmental screening but contended that, to the extent that carbon emissions are affecting a company's profits, it would be included in a fund manager's evaluation."What about investors who embrace "explicit environmental screening"? Carbon Counts USA studied 16 funds that incorporate environmental, social, and governance (ESG) factors into their strategies:
"Of the 91 analyzed funds, 16 include sustainability or socially responsible investing (SRI)considerations. These 16 funds comprise holdings valued at over $24 billion and have the smallest aggregated carbon footprint [of any researched fund style]..."While the overall carbon efficiency of SRI funds is welcome news, Trucost found some notable outliers:
"…Sustainability/SRI funds have the smallest carbon footprint. However, within this category, carbon efficiency varies widely – some of the largest SRI funds are more carbon intensive than the S&P 500."Why do some funds that seek to hold strong environmental performers actually deliver worse-than-average carbon efficiency? To understand this, consider how Trucost constructed its study, and also note that there is more than one way for investors to support lower global carbon emissions. Some companies' products and services may reduce their customers' carbon output – but not their own. How Trucost Measures Carbon Intensity Carbon Counts USA presents a concise summary of Trucost's methodology:
"The equity fund carbon footprint is calculated by measuring each constituent company's GHG emissions. Quantities of each GHG are converted into their carbon dioxide-equivalent (CO2-e) emissions. CO2-e emissions associated with a company are allocated to the fund in proportion to ownership. The carbon footprint is expressed as metric tons of CO2-e emitted by the companies within each fund per million dollars of revenue."By this measure, a fund's carbon intensity reflects the business models of its constituents. Trucost notes that the five most carbon-efficient funds all avoid energy-intensive businesses like mining, energy generation and food production:
- "Four of the funds do not invest in the Basic Resources sector.
- The top three do not invest in the carbon-intensive Utilities and Oil & Gas sectors, and have 80%+ invested in low-carbon sectors such as Financial Services, Banks, and Healthcare.
- Three of the funds are underweight in Food & Beverage companies relative to the S&P 500; the other two do not invest in the sector."
Portfolio Footprint vs. the Economy's Footprint
To their credit, Trucost acknowledges that its carbon intensity metrics may not account for the ancillary benefits of a "dirty" company's work:
"Where climate change criteria are included in stock selections, managers may focus on clean technology or renewable energy developers rather than carbon performance from operations. Since operations to develop environmental 'solutions' generate greenhouse gas emissions, these production processes are exposed to carbon costs which are likely to apply across industrial sectors and energy users. [emphasis added]…"
KLD Senior Analyst Andrew Brengle cites the Global Climate 100 index as an example of a solution-driven environmental investment strategy:
"The GC100 is not a carbon-intensity index. Its objective is not to seek out a 100-constituent group with the smallest carbon footprint. Instead, it identifies companies that are pushing the global economy toward a less carbon-intensive state.
"It certainly includes companies with small carbon footprints. But it also includes those with large footprints who are leading the way in carbon intensive industries, such as utilities who have committed to wind and solar power.
"These 'big-footed' companies make a big impact, because they offer leadership where it's needed most."
Investors Look to Government
While some investors already seek to reduce our economy's carbon intensity, many more are concerned with emissions' potential impact on the bottom line.
In assigning a dollar value to companies' carbon output, Trucost assumed a price of $28.24 for each metric ton of greenhouse gas emissions. This cost is, in the US in 2009, purely hypothetical. A national carbon emissions market will make the need for proper accounting more acute.
Though major carbon producers remain politically powerful, the Obama Administration has reaffirmed its commitment to a "gradual, market-based cap on carbon pollution." Even though Congress has blocked the President's attempt to include cap-and-trade in the budget, he continues to promote the idea. Here, thanks to Chris Fox of Ceres, is a portion of the President's April 14 address:
"Some have argued that we shouldn't attempt such a transition until the economy recovers, and they are right that we have to take the costs of transition into account. But we can no longer delay putting a framework for a clean energy economy in place. If businesses and entrepreneurs know today that we are closing this carbon pollution loophole, they will start investing in clean energy now."
Investors Join State, Federal Push for Cleaner Cars: Ceres Publishes New Emissions Reporting Guidelines
Ceres, the Boston-based activist investor group, has joined governments, trade organizations and global investors in calling for automakers to measure and disclose their products' greenhouse gas (GHG) output. Autos account for 10% of global carbon emissions, according to International Energy Agency figures cited by Ceres. Despite this, "it is extremely difficult for investors to assess properly the risks and opportunities posed by climate change policy to individual companies," according to Ceres' new report.
Shareholder and environmental advocacy groups have long called for better transparency and more disclosure of environmental, social, and governance (ESG) performance. Now state and federal governments are poised to require automakers and other industries to report their GHG emissions. Environmental Leader reports that a new EPA rule will affect 13,000 industrial facilities, including chemical plants, utilities and the paper industry, as well as automakers. According to the EPA, these sources account for as much as 90 percent of greenhouse gases emitted nationwide.
The Ceres report, "Global Climate Disclosure Framework for Automotive Companies," provides guidelines for automakers' reporting efforts. (KLD's Elizabeth Horan Edgerly and Alex Lamb reviewed and commented on a pre-release draft of the report.) It sums up the limitations of current reporting by the auto industry:
" - Information provided is unrelated to core business aspects (e.g. disclosure that focuses on greenhouse gas emissions from company operations as opposed to vehicle usage). - Lack of quantitative or comparable data. - Company strategy and technology choices are unclear. "As a result, it is extremely difficult for investors to assess properly the risks and opportunities posed by climate change policy to individual companies, and to understand the manner in which auto companies have structured their business strategies and R&D plans to reduce greenhouse gas emissions from their vehicles."
Global trends heighten the urgency of building cleaner cars. "The world's car fleet is expected to triple by 2050 with 80 percent of this growth in developing economies," according to Achim Steiner, executive director of the U.N. Environment Program, as quoted by James Kanter in the New York Times. In recognition of the worldwide scope of the problem, Ceres developed its guidelines in conjunction with investors' organizations in Europe and Australia/New Zealand. Together, these organizations represent investors with trillions of dollars in funds under management.
Despite this, the US auto industry and its supporters are engaged in a more parochial fight over states' right to regulate auto emissions. "Global warming is not unique to California," said Michigan Senator Carl Levin, as he argued for Congress to deny states the power to set their own GHG emissions rules. California has indicated that it would accept this, but only if federal standards are as stringent as those proposed by state regulators.
The Los Angeles Times notes that struggling General Motors, which actively fought emissions regulations in the past but has recently requested billions from taxpayers, has now "taken a quieter role in the debate." As the industry faces a more-active EPA and an uncertain future, downstream stakeholders like states – and shareholders – could drive a more active response to the challenge of climate change.
Also see this EPA report on US automotive fuel efficiency trends from 1975 to 2008.
On February 11, a team from American Electric Power (AEP), including CEO Mike Morris, spoke to KLD about its preparations for a carbon-constrained US economy. The KLD Blog article "Coal is Still King, For Now" presented an overview of AEP's presentation, including the company's positions on utilities regulation, carbon credits trading, and the prospects for "clean coal" technology.
As Alan Petrillo wrote in "Part One":
AEP's multibillion-dollar cleaner energy initiatives show that the company takes sustainability seriously, as does its willingness to engage stakeholders such as Ceres, KLD and our clients. AEP's ongoing commitment to coal, however, is a bet on future technological and political developments that are by no means certain."
This article will consider AEP's positions in the context of a broader political perspective. While the regulatory environment in AEP's service area has been favorable for coal interests, the industry's future may hinge on federal policies, and federal tax dollars.
Coal States, Coal-Friendly Regulation
The Obama Administration plans to set national goals for reducing carbon emissions, but the states have been in charge of emission reduction programs thus far. The Pew Center on Global Climate Change reports that as of January 2009, 35 states had developed climate action plans. As of February 2009, 21 states had set specific targets to reduce emissions.
Mike Morris told the KLD forum that AEP offers "zero resistance to the idea of state-by-state renewable energy standards."
Mr. Morris's support for this approach is understandable. While many states pursue aggressive carbon dioxide (CO2) reductions and renewable portfolio standards (RPS), the states in which AEP operates are not among them. Of the 11 states in AEP's service area, only Michigan, Ohio, Texas, and Virginia currently have any RPS. Only Virginia has set specific emissions reduction targets.
Protecting the Status Quo, 1: AEP's Position on Cap and Trade
President Obama proposes more stringent federal standards. He has stated plans to increase the US market share of renewable energy to 10% by 2012 and 25% by 2025. Obama's plan also calls for a reduction of greenhouse gas (GHG) emissions to 1990 levels by 2020.
To meet its ambitious goals, the Obama Administration seeks to expand the market for carbon emissions credits. The President calls for a cap-and-trade system to support an 80% reduction in GHG emissions by 2050.
Mr. Morris told his KLD audience that "I'm not against a carbon cap," but he does have reservations about the auction of carbon credits. "An auction would be a massive revenue machine," Mr. Morris said, and he fears that the government will misallocate this revenue.
AEP would prefer an allowance-based system that would distribute carbon credits, free of charge. More credits would be granted to companies that have greater current carbon emissions. As AEP is one of the nation's top emitters of carbon, allowances would sustain both AEP and the nation's coal-burning status quo.
Protecting the Status Quo, 2: AEP on Federal Emissions Standards
If new federal emissions standards supersede states' rules, AEP would seek exemptions that would effectively maintain the current regulatory patchwork.
Mr. Morris stated, "If the federal standard is 20% [of total energy use coming from renewable sources] by 2020, okay. But if West Virginia can't hit 20% because of its particular circumstances, then there shouldn't be any penalties. I don't want to see my customers pay a fee, really a tax, for something they can't do. … Paying a fee because we can't hit an unrealistic target is unfair to our customers."
AEP's position, then, is that federal regulation is acceptable if it still permits states to set their own standards. Mr. Morris's "particular circumstances" would seem to undermine national targets with piecemeal, state-by-state exemptions. Interstate utilities would still be able to pursue a kind of regulatory and legislative arbitrage, ensuring that states whose economies depend on coal mining and burning – like West Virginia – could deviate from federal rules without sanction.
It's Still Coal
AEP's public statements indicate that the company believes that human activity contributes to climate change and that GHG emissions must decline. Carbon capture and sequestration (CCS) and other clean coal technologies would protect AEP's investments – and AEP itself. But is what's good for AEP good for America?
Clean coal is still coal. Compare the CO2 emissions of a clean coal plant to those of a wind farm or solar array. We also must account for the coal plant's sulfur dioxide (SO2), nitrous oxide (NOx), particulate matter, and mercury emissions. Finally, consider the ecological impact of mountaintop coal removal, ash disposal and other ancillary costs of coal-powered utilities.
For an integrated utility like AEP – one whose entire business model has been built around generating and transmitting coal power – these are costs that governments, companies and citizens must share. Stakeholders outside the "coal states" cited by Mr. Morris, however, might prefer to direct scarce resources elsewhere.
To take only one dramatic example, General Electric claims that the entire energy demand of the U.S. could be satisfied by covering 7% of Arizona with solar panels. Also, there is great untapped potential in the "fifth fuel" – energy efficiency. A McKinsey study has shown that if the entire US used electricity as efficiently as California already does, 40% of US electricity demand could simply vanish.
These measures would be expensive, and their practical application would be a daunting task. But even AEP acknowledges that clean coal initiatives like FutureGen would also require massive federal investment.
Power: Electrical and Political
As citizens – and investors – consider the prospects for clean coal, they should keep in mind that the question is as political as it is technological. AEP concedes this. For example, here is a public statement on the potential for market-based carbon pricing:
"…Our stakeholders are divided on having a price ceiling, or "safety valve," in the [carbon pricing] legislation. The Environmental Defense Fund, for example, strongly opposes a safety valve and has urged us to abandon our support for that provision. Our customers, however, could be severely affected by escalating energy rates if carbon prices were entirely market-based, and would pay more for their energy, through no fault of their own, than customers of utilities that derive less of their power from coal." [emphasis added]
It follows from this position that if AEP's customers are not ultimately responsible for reducing carbon emissions, then neither is AEP. The cost of coal power, however, is not only borne by AEP's customers. Coal-burning utilities concede that their future depends on friendly federal regulation – and federal subsidy. In evaluating the prospects for these companies, investors should note that the industry's fate may be out of the coal states' hands.
Is the recently-passed economic stimulus bill a down payment on a greener economy, or does it reaffirm the carbon-centric status quo? The answer, as could be expected from a $787 billion omnibus bill, is "both."
The New York Times, BusinessWeek, and ProPublica have posted surveys of the stimulus, whose potential impact could be felt for generations to come. It could also take a generation to determine the bill's ultimate winners and losers, but some trends are apparent. The table below compares ProPublica's House, Senate and final numbers for initiatives that could have a significant environmental impact.
Positive signs include:
- Support for battery and "smart grid" research and development.
- A commitment to energy efficiency, both in the private sector and in government-owned facilities.
- Increased funding for freight railroads, which move goods more efficiently than trucks.
Other commitments in the bill seem likely to ensure that carbon-heavy fossil fuels will retain their importance to the US economy. The final bill includes billions for fossil fuel energy research, which could include clean coal initiatives such as carbon capture and sequestration (CCS). While these programs could reduce the atmospheric impact of coal-burning, they also reinforce a long-term commitment to this "dirtiest" fossil fuel.
Also, funding for mass transit, clean water initiatives, and renewable energy research and loans all declined in the final compromise. For more details, please see the ProPublica site and Kate Sheppard in Grist.
Data Source: http://www.propublica.org/special/the-stimulus-deal
Change We Can Believe In, for Now: Will Government, Corporations Sustain their Concern for ESG Risks?
In his first week in office, President Obama proposed major overhauls of environmental and financial regulations. These changes have long been championed by investors concerned with companies' environmental, social and governance (ESG) performance, and few were surprised that a new regime has brought a new policy agenda.
In this time of recession and scandal, however, some familiar faces in American business – including former SEC Chairman Harvey Pitt and Wal-Mart's Lee Scott – are also setting a different tone. Mr. Pitt has announced ten lessons that investors should learn from the current crisis, while Mr. Scott has committed the world's largest retailer to "a sustainability program to remake the entire company." These are welcome moves, but ESG investors should ask whether this new attitude will outlast today's crisis mentality.
"A Friend in Need is a Pest"
In his presentation to the third annual "Distressed Investing Conference" in Las Vegas, Mr. Pitt invoked terms that will be familiar to the sustainable and socially responsible investment (SRI) community. His ten lessons mentioned "transparency," "due diligence," "trust" and "risk management." These themes are in tune with members of the Social Investment Forum and mission-driven advisors like Gary Moore, but Mr. Pitt's eighth lesson may hit a false note:
"8. If you don't speak up, no one will hear you. There will be a window that will strongly influence the outcome of the regulatory landscape and what it should look like at the end of the process. A friend in need is a pest, like a wedding crasher. Get to know regulators and legislators before you need them."
This seems to suggest that regulatory capture is part of the cure, at a moment when it seems like more of the disease. Among those not attending the "Distressed Investing Conference," there is broad support for stronger regulation. Investors should remain wary, however, of how "friendly" regulators and regulated may become.
In this context, the Wall Street Journal's Kara Scannell notes that as new SEC Chair Mary Schapiro was sworn in Tuesday, "the Senate Banking Committee probed the role of her former organization, the Financial Industry Regulatory Authority, in missing Bernard Madoff's multibillion-dollar scandal."
The Social Responsibility of Wal-Mart
"As businesses, we have a responsibility to society. Let me be clear about this point. There is no conflict between delivering value to shareholders, and helping solve bigger societal problems."
This affirmation of corporate social responsibility (CSR) is not a quote from Timberland's Jeffrey Swartz, or Van Jones of Green for All. Surprisingly enough, this rejection of Milton Friedman's limited view of CSR comes from Lee Scott, the CEO of Wal-Mart, the world's largest retailer. The New York Times reports that under Mr. Scott, Wal-Mart "has begun to democratize environmental sustainability."
Reporters Stephanie Rosenbloom and Michael Barbaro detail Wal-Mart's commitment to greener practices in its stores and throughout its supply chain. They also emphasize that Wal-Mart does not consider this effort to be an act of altruism. Increased energy efficiency and less wasteful packaging reduce overhead, and perhaps more importantly for Wal-Mart, they also reduce "headline risk."
Bad publicity for Wal-Mart's labor and environmental policies had turned customers and community leaders against the company, according to a 2004 study done for the firm. This realization helped motivate a crucial shift in corporate culture: Wal-Mart has committed to engaging outsiders, from climate scientists to its Chinese suppliers.
This spirit of engagement is encouraging, but as with the investment world's embrace of transparency and risk management, it is important to note what hasn't changed. The Times piece notes that labor leaders are still critical of Wal-Mart's compensation and health care practices.
It also describes a more subtle parallel with Harvey Pitt's call to "get to know regulators and legislators before you need them":
"[Mr. Scott] … intends to increase the retailer's lobbying muscle in Washington, especially regarding health care, energy and sustainability."
In other words, ESG policy discussions among investors, companies and governments will - and should - continue. Changes at agencies like the SEC and companies like Wal-Mart are welcome, but investors' commitment to research, engagement and accountability remains vital, no matter how green corporations get – or who's in the White House.
Time for Financial Markets to Tell the Truth about the Real Economy: A Review of "Sustainable Investing" by Cary Krosinsky and Nick Robins
Sustainable Investing: The Art of Long-Term Performance, a collection of articles from 22 contributors including co-editors Cary Krosinsky and Nick Robins, was released in the fall of 2008. SI challenges investors to look beyond what contributor Steven Lydenberg calls "the fast-paced speculative nature of today's financial markets." Socially responsible investors (SRI) have been striving to meet this challenge for decades, and now current events have exposed the financial system's myopia as an urgent global crisis.
If it had been released last year, this book would have been a valuable primer on how some investors integrate environmental, social and governance (ESG) factors into their strategies. In the winter of 2009, however, Sustainable Investing now offers answers to questions the whole world is asking. Consider this diagnosis from a January 3 New York Times article by Michael Lewis and David Einhorn:
"Our financial catastrophe, like Bernard Madoff's pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today's financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that's the problem: there is no longer any serious pressure from outside the market." [Emphasis added]
Outside the Market, Inside the Real Economy
Mr. Krosinsky and Mr. Robins, their authors, and the SRI/sustainable investment sector worldwide could reply: We are the pressure from outside the market.
"Outside the market" is the real economy of workers, customers, communities and the natural environment. Sustainable investors balance the short-term demands of capital markets with the long-term needs of society itself.
Cary Krosinsky is vice president at Trucost PLC, and Nick Robins is head of the HSBC Climate Change Centre of Excellence. The editors and their contributors are industry insiders, but their view beyond quarterly returns, and beyond those Warren Buffett called "geeks bearing formulas" – reintroduces "outside" global concerns to finance. (For more about the editors, see the end of this article.)
What Share Prices Don't Tell Us
Defenders of the "efficiency" of modern capital markets might argue that the information embedded in a share price tells the outside world all it should know about a stock, or a company. In "The Emergence of Sustainable Investing," Nick Robins presents statistics that say otherwise.
In 1986, investors held a London Stock Exchange-listed share for an average of nine years. In 2006, the average stock was held for only eleven months. How much can a share price convey about a corporation's long-term value when stockholders, as Mr. Robins writes, "cannot wait between one annual report and another before trading"?
Another number offers a clue about who really benefits from the computerized churning of modern capital markets. In 1981, the US finance sector earned 14% of total corporate profits. In 2001, its share had grown to 39%. "A growing share of global output is taken by the finance sector and its employees," Mr. Robins notes.
SI contributor Steve Waygood, in his article "Civil Society and Capital Markets," acknowledges that markets "hold the scorecard, allocate and price capital, and provide risk coverage and price risks." Unfortunately, he argues, their "current structure undermines long-term sustainable development goals."
Sustainable Investing argues that the inequities generated by a myopic, ever-expanding finance sector are not only unfair – they're unsustainable. SI's contributors explain why, and they also outline a model for the integration of ESG factors into investment decisions.
How Sustainable Investors Help Prices Tell the Truth
When investors incorporate ESG factors into their analyses, they introduce new information into capital markets. Corporate environmental practices (such as energy consumption or carbon emissions), social policies (including employee benefits and customer relations) and governance (such as executive pay and responsiveness to shareholders) may be "outside the market" concerns, but they matter to governments, investors and ordinary citizens.
"SRI is a form of consumerism, which resonates with global common values that anywhere from 5 to 20 percent of every nation cares about," explains Tessa Tennant in "The Global Agenda." Such percentages may not add up to a political majority, but they do represent millions of people and billions of dollars of investment, labor and consumption.
Investment analysis cannot afford to ignore these global common values. Such ignorance distorts capital markets and may be a risk to the market system itself. To dramatize this risk, Nick Robins quotes Ernst Von Weizsacker: "The system of bureaucratic socialism can be said to have collapsed because it did not allow prices to tell the economic truth."
Prices in a capitalist system may also obscure the truth, if buyers or sellers neglect to measure and disclose relevant information. ESG factors represent relevant risks and opportunities for corporations, and quarterly statements and share prices may not account for these risks. For example, over the past three years, some US utilities with otherwise strong financials have been forced to cancel new coal-fired power plants. These setbacks – driven by political concern about carbon emissions, which is a key ESG metric – demonstrate the market risk of external societal forces.
Sustainable investors help equity markets tell the economic, political and ecological truth.
Sustainable Investing: Two Conflicts in Focus
SI is organized into four distinct sections. Parts I and II present the past and present of sustainable investing, and Part IV considers future trends. Part III is an intriguing look at asset classes beyond the publicly-traded equity markets. Each section could be the subject of its own review, but SI's treatment of two particular sources of tension is especially relevant to the current economic situation.
First, SI's authors, especially Cary Krosinsky and Julie Fox Gorte, distinguish between "socially responsible" and "sustainable" investing. Their work suggests that while both approaches rely on the sort of ESG research that KLD (and Trucost) provide, sustainable investors may use somewhat different methods than traditional SRI investors.
Second, SI considers the global forces that promote sustainable investing, and also the persistent obstacles to its broader mainstream acceptance. While public concern about issues like climate change has made sustainability a buzzword, Steve Lydenberg (among other contributors) finds reason to "wonder how real these changes are, how deep their roots."
SI complements high-level macroeconomic thinking with pragmatism. For example, contributors Valery Lucas-Leclin and Sarbjit Nahal, in "Sustainability Analysis," tackle the practical problem of creating price signals to incorporate ESG factors into mainstream quantitative analysis. Other contributors also consider integration's impact on real-world problems and processes.
Mr. Krosinsky and Mr. Robins conclude their book with a qualified endorsement of sustainable investing's – and the economy's – future.
On the Sustainable and the Socially Responsible
When mainstream academics and journalists consider ESG investing, they typically ask a variation on one simple question: "Will it hurt returns?" Some observers are certain that it will, while other studies have found that investment returns may even benefit from ESG integration. Cary Krosinsky – both in his GreenBiz blog and his contributions to SI – emphatically promotes sustainable investing as a "market-beating strategy."
In "Investors: A Force for Sustainability," Julie Fox Gorte argues that sustainable investing can outperform the market through "fidelity to long-term drivers of…superior sustainability." She writes:
"…Sustainable investing is defined positively by seeking to invest in companies whose practices and policies include sustainability goals, where classic SRI was often defined negatively by what industries or companies were excluded."
Long-time practitioners of SRI could argue that exclusions of cigarette manufacturers, for example, also serve the goal of sustainability. From this perspective, smoking's externalized costs to society, when considered over a longer time horizon, would outweigh any short-term financial returns.
In their introduction, the editors help explain why they believe that any tension between these perspectives is outweighed by their shared priorities:
"Sustainable investing…provides an agenda for action for purely financially motivated investors eager to mitigate risk and benefit from upside opportunities, as well as for civil society organizations [or individuals] aiming to achieve social and environmental progress."
Sustainable Investing's Growth Drivers
SI's authors are an impressively multinational group, and their breadth of perspective reinforces the sense of global momentum for ESG integration. They consider sustainable investing's growth drivers in depth:
Political and Regulatory Pressure – Abyd Karmali, in "Observations from the Carbon Emissions Markets," studies the European Union's carbon-credit trading scheme, and in "Carbon Exposure," Matthias Kopp and Bjorn Tore Urdal model the future impact of emissions reduction regulations on German utilities. Both analyses offer insight on how global business could respond to public impetus for a more sustainable economy.
New Asset Classes – In "Fixed Income and Microfinance," Ivo Knopfel and Gordon Hagart describe how institutional investors' increased appetite for bonds – combined with public pressure on investors like colleges and governments to invest sustainably – will shape the strategies of fixed-income managers worldwide. Other Part III articles consider sustainable property investing, "social businesses" and private equity investment. The private equity article, by Ritu Kumar, illustrates the potential for this sector with case studies of firms that already focus on clean tech, clean energy and emerging markets.
New Markets – China and India, as emerging economic superpowers, each merit articles in SI's section on future trends. Ray Cheung explains how the environmental impact of China's rapid growth has finally drawn a government response. He focuses on the huge potential that new Chinese regulations offer for clean tech suppliers and investors. India faces similar ESG problems – including not only labor and environmental concerns but also relationships with regimes that violate human rights, such as Burma and Sudan. As Dan Siddy describes in his piece on India, these issues may not have concerned investors in the past, but they will in the future:
"ESG problems related to Indian, Chinese, and other emerging-market companies are likely to become more frequent, more acute, more visible and more frequently associated with shareholder value destruction."
Obstacles to Sustainable Investing's Growth
Overall, SI makes the case that sustainable investing can, and should, redefine the practice of investment itself. As the editors write in their conclusion, "The challenge…is not to become like today's mainstream, but, rather, to replace it." But to the credit of the editors and their contributors, SI also describes the ongoing resistance to ESG integration.
Political and Regulatory Pressure – The same force that encourages better Chinese environmental practices – the power of an authoritarian government – is also a threat to the human rights that are of equal importance to traditional social investors. Ray Cheung explains:
"…[As] with everything in China, the buyer must beware. … Given the country's one-party political system, Chinese and international firms must be willing to make dubious compromises with authorities; for example, Google censored a local Chinese search engine, and Yahoo! turned over to police email records of a Chinese journalist, leading to his arrest."
This case may seem unique to China, but political considerations may inhibit sustainable investment in democracies, as well. Even regimes that support better environmental practices are subject to pressure from political blocs, such as fossil fuel producers, who support the status quo. As a result, the case for sustainable investing depends on political action from individuals and interest groups.
In "Civil Society and Capital Markets," Steve Waygood explains how non-government organizations (NGOs) play an important role in both mobilizing political pressure and helping companies implement divestiture campaigns and other initiatives. However, he writes, "To date, capital market campaigning has mainly targeted investors as a way of influencing corporations rather than attempting to change the structure of the capital market itself."
This may be changing. Government complicity in the current banking crisis – or, at least, the public perception of such complicity – has already motivated some sustainable investors to direct more effort towards regulatory reform.
Limited Thinking – Since sustainable/SRI investing first emerged, its skeptics have questioned its value. Nick Robins sums up the stock objection from adherents of "conventional financial theory":
"The assumption is that the introduction of non-financial factors will harm diversification and thereby incur penalties in terms of risk returns."
Mr. Robins explains that while not every ESG factor has an immediate impact on a company's bottom line, "investments selected on the basis of identifiable ESG factors…do tend to outperform." Each of SI's contributors presents evidence of the opportunities represented by ESG integration, or of the risks of neglecting these factors.
Still, conventional wisdom persists. Stephen Viederman confronts a still-strong redoubt of anti-SRI bias in "Fiduciary Duty." He cites the example of ExxonMobil, which acknowledges the reality of climate change but "refused to respond to a shareholder proxy resolution asking the company to 'adopt a policy on renewable energy research, development and sourcing.'"
How should investors – especially trustees who are bound by fiduciary obligations – respond to this recalcitrance? "Conventional financial theory" would suggest that a trustee who sold ExxonMobil stock because it wasn't prepared for climate change has violated his fiduciary duty. After all, the company's share price is steady and its record of dividends is strong.
Mr. Viederman proposes a contrary understanding of fiduciary duty. He asks:
"Although highly profitable now, are ExxonMobil's profits going to be sustainable, and is ExxonMobil in its pursuit of profit now limiting options for future generations?"
Until a critical mass of investors agrees with Mr. Viederman – that "advancing social, environmental, and financial benefits is the new fiduciary duty" – then their limited thinking will continue to limit the growth of sustainable investing.
Limited Resources – This obstacle to sustainable investing is rooted in a concept that its adherents are already familiar with: wealth, both human and natural, is finite. Most of SI's contributors convey at least some optimism about humanity's future, but Julie Fox Gorte concludes her piece by sizing up the task ahead of us.
"In order to stabilize the climate…emissions must be reduced 70 per cent below the levels of 1990 – a profoundly greater step than the 5 to 8 percent reductions called for [by]…the first Kyoto Protocol."
What tools can we use to accomplish this task? Ms. Gorte presents the conundrum of an extractive, industrial, corporate civilization choosing, perhaps, to stifle the source of its power. Hers is a sobering but necessary perspective:
"…For decades, the average profit margin in the US hovered around 8 percent. The simple arithmetic of this is that the amount corporations and investors have to spend on saving the planet is less than 10 per cent of what they spend to get that power, which is largely responsible for creating the problems in the first place. …We are accustomed to thinking…that our transformations…make things better for us. But we are at the threshold of a transformation that makes things profoundly worse, at least for the two or three generations whose faces we will see during our allotted spans."
Conclusion: The Sustainability Moment
In the face of such an awesome task, Sustainable Investing's editors and contributors offer no easy answers. Instead, they describe the steps that have been made towards a sustainable economy, propose further steps, and perhaps most importantly, they confront the objections of a still-skeptical world.
Mr. Krosinsky and Mr. Robins conclude by acknowledging that the recession has "put sustainability concerns on the back burner" for many leaders, citizens and investors. They describe this mentality as one that sees sustainable investing as a fad, as "merely a cyclical bull market phenomenon." Sustainable Investing is a thorough, much-needed refutation of this mistaken belief.
As the editors explain:
"This [belief that sustainability is a fad], however, is not just a misreading of history, but a strategic misinterpretation of the structural, secular nature of the sustainable investing phenomenon. ... Not only is the investor case [now] much better understood and embedded among the world's leading institutions, but sustainable investing strategies are increasingly seen as essential to the recovery itself."
As the UN proposes a "Green New Deal," and old economic assumptions fade throughout the world, this could be the moment when the mainstream becomes sustainable.
About the Editors:
Cary Krosinsky joined Trucost as Vice President in 2008 to help represent Trucost in North America. He was previously a member of CapitalBridge's Operations Committee, providing leadership on data and analytics. He maintained many of the largest banking and corporate relationships for the company in the US, Europe and Asia. He has also been a member of the 70 person Expert Group that led the creation of the United Nations Principles for Responsible Investment (PRI).
Nick Robins is head of the HSBC Climate Change Centre of Excellence. He has 20 years experience of promoting sustainability in business practice, financial markets and public policy. He joined HSBC in October 2007 from Henderson Global Investors, where he was Head of SRI Funds. During his time at Henderson, he helped to design and launch its pioneering "Industries for the Future" fund, and is a member of the UK Government's Sustainable Development Panel.
At BusinessGreen, Danny Bradbury reports that even as Apple launches new "green" products, the company is resisting shareholder requests for better sustainability reporting. Apple's board has asked its shareholders to vote against a resolution calling for the company to measure and disclose its environmental impact in a formal corporate social responsibility (CSR) report. The resolution is proposed by environmental advocacy group As You Sow, who also called on Apple to design its computers for end-of-use recycling in 2007. Mr. Bradbury writes:
"The [current] resolution would require the company to publish a CSR report detailing its approach to greenhouse gas emissions, toxics and recycling by July this year. The report would also require Apple to define 'sustainability,' and would include a company-wide review of policies contributing to sustainable operations. "As You Sow claimed in the resolution that there were strong commercial reasons for Apple to produce such a report, arguing that over 2,700 companies now produce formal CSR reports, including many direct competitors such as Dell, IBM and HP."
As You Sow's work is a reminder that even well-respected companies may not meet the reporting standards of the Global Reporting Initiative or other CSR guidelines. A 2008 SIRAN/KLD study found that while 86 of the largest 100 US companies addressed sustainability on their websites, only 49 produced complete sustainability reports for 2007.
While this represents considerable progress, it highlights a gap between US companies and their peers in Europe, where many governments require CSR reporting. As noted by Boston College Professor Sandra Waddock in her January 9 presentation to KLD, companies in France, Sweden and other nations must formally disclose their social and/or environmental performance.
While new taxes are always a difficult sell, a carbon tax program that disbursed some income to utility customers could be politically palatable. Entrepreneur Peter Barnes proposed such a "cap and dividend" program to Congress in September, and the stalled economy has increased the appeal of any plan to send cash directly to struggling voters.
The cap and dividend concept combines a tax on carbon producers with tangible benefits for utility customers. The program would tax fuel producers if the carbon released from the use of their product exceeded a defined limit. If a coal mine's carbon output exceeded this limit–the "cap"–its taxes would go up. The producer would then pass along its increased costs to coal-burning utilities, encouraging those companies to develop alternatives. The customer rebate–the "dividend"–is a recognition that raising the price of fossil-fuel power would raise the retail price of all power, at least until new sources come on line. (The Carbon Tax Center provides a helpful FAQ on the concept.)
While this makes sense in theory, there are high hurdles for any program that could be blamed for raising the cost of energy–especially when memories of $4-per-gallon gas are still fresh.
For any carbon tax plan to succeed, the public must accept both climate change and the immediate costs of mitigating its impact. Surveys in the US and Europe reveal that this acceptance is incomplete. "There is a clear gap between what citizens are saying and what they are doing on climate change," EU Environment Commissioner Stavros Dimas told Reuters, in response to a 2008 poll of 30,000 people in 30 countries.
In the US, a 2008 ABC News poll found that a majority acknowledge that climate change is real. Unfortunately, our desire to do something about it collides with our attachment to the status quo, as detailed by the poll results:
"Majorities…support oil drilling in protected coastal and wilderness areas. … "64 percent now rate 'finding new energy sources' as more important than improving conservation–up 9 points since 2001. … "There's also an 8-point drop [from 2006 to 2007] in this poll, to 33 percent, in the number who think rising temperatures are caused mainly by things people do, rather than natural causes or both about equally."
The public's conflicting beliefs have real political consequences. If Congress or the President proposed a cap and dividend program, we could expect carbon producers to launch a PR campaign calling carbon taxes an unacceptable burden on a weak economy. The fight would mobilize voters and political leaders from oil- and coal-producing states and exacerbate tensions between producers and consumers. Tax rebates could be a popular cause, but politically, the threat of job losses is a powerful counter-argument.
Still, there is some cause for hope. Even as the public seems unwilling to fight climate change, we look to government for leadership–61 percent in the ABC poll said that our leaders can do more. If the President-elect's picks for energy and environmental leadership live up to their promise, there is the potential for a productive discussion of cap and dividend and other policy options. A little honesty–or at least honest debate–among those who pull the levers of power could help set the table for smart but difficult decisions.
To meet the climate challenge, we are going to have to confront some hard truths, including our own denial.