Investors recognize imperatives posed by climate change


The Providence Journal

May 11, 2007

SACRAMENTO -- A POPULAR COMMERCIAL asks, “Do you know what’s in your wallet?” A similar question should be asked of investors: Do you know what risks are lurking in your portfolio?

A growing community of institutional investors representing $4 trillion in assets has asked that question, and their answer may surprise you: Global climate change is near the top.

Climate change is real and rapidly occurring. No sector of the economy is immune from its effects. The most recent grim climate-change-impact report from the United Nations is only the latest reminder. Stronger hurricanes, prolonged heat waves and carbon-reducing regulations are just a few of the ways that climate change is already rippling across various business sectors, from insurance and agriculture, to electric power and tourism.

If asked what parts of the federal government need to step up to address climate change, you would probably think of Congress, the White House, the U.S. Environmental Protection Agency and the Federal Emergency Management Agency. But there is another agency that has a major role to play: the Securities and Exchange Commission (SEC).

Increasingly, when large institutional investors evaluate the companies they invest in, they are asking tough questions about how management is hedging the risks of climate change and preparing to operate in a carbon-constrained economy. These investors look for companies where the CEO, other top managers, and the board of directors, have made managing climate-change-risk a top priority. And they look for companies that are poised to seize the economic opportunities presented by climate change by leading the way in the development of clean technologies.

But individual investors rarely have the opportunity to ask such questions of management. Although existing securities law requires corporations to disclose material risks to potential investors in their regular reporting to shareholders, few do so on climate-related matters. A January 2007 study published by Ceres, a Boston-based coalition of investors and environmental groups working on climate change, and the Calvert Group, an asset-management firm, found that despite rising financial losses attributable to climate change, more than half of the country’s 500 largest publicly-traded companies are doing a poor job disclosing climate change risks to their investors.

That is why, last year, more than two dozen institutional investors managing more than $1 trillion in assets wrote SEC Chairman Christopher Cox urging that routine disclosure of those risks be required by the SEC. And in March of this year, an even larger group of investors representing $4 trillion in assets, including the California Controller’s Office and Ceres, were joined by two dozen CEOs from some of America’s leading companies, including DuPont, Alcoa and National Grid, to urge both a national policy on climate change that includes dramatic reductions in greenhouse-gas emissions and SEC action to require greater disclosure by U.S. companies of their climate risks.

SEC guidelines already require discussion of “specific known trends, events or uncertainties that are reasonably likely to have a material effect on a company’s financial condition or operating performance.” In our judgment, global warming and growing efforts to limit carbon-dioxide emissions are such “trends” and “uncertainties,” particularly with respect to large greenhouse-gas emitting companies such as those in the electric power, auto and oil sectors — and the SEC should issue guidelines that make this clear.

As Rob Feckner, chairman of the California Public Employees’ Retirement System (CalPERS), one of the nation’s largest institutional investors, said, “Investors are not receiving the climate-risk information from companies that is essential to their investment decision-making and the SEC needs to provide better interpretive guidance for companies clarifying the materiality of climate change in securities filings.”

The SEC does not require new legislation to take these steps. Existing law requiring disclosure of material risks gives the SEC the authority it needs to require climate-risk disclosure by publicly owned companies. Accordingly, the SEC should take these two steps immediately: recognize climate change as a material risk to the companies it regulates; and strengthen disclosure requirements and guidelines by requiring companies to provide the information investors such as CalPERS need to assess risks posed by climate change.

California Controller John Chiang serves on the boards of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. Mindy S. Lubber is president of Ceres and director of the Investor Network on Climate Risk (