Investors Must Keep Pressuring Oil Majors on Climate Risk

Annual general meetings at the world’s largest fossil fuel companies are usually a time for reflecting on strategies to increase revenues for the coming year, global energy outlooks, and governance. But last week’s annual meetings at ExxonMobil and Chevron were different. They represented a watershed moment in combating the threats posed by climate change. Resolutions were put before shareholders requesting that Exxon and Chevron stress test their capital spending and business strategies against low oil demand scenarios consistent with the Paris Climate Agreement goal of limiting global temperature increases to below two degrees Celsius. Investors in Chevron and Exxon backed these resolutions in record numbers: 41 percent and 38 percent, respectively. The Exxon result was especially impressive given the company’s initial efforts to kill the resolution and then, when that failed, trying to convince shareholders to vote against it. The votes send a powerful message that investors see climate change as a material financial risk that requires a rapid transition to a low-carbon future—a future that will invariably require far less use of fossil fuels. As one of Exxon’s competitors, France’s Total, said in its own analysis released one day before Exxon’s meeting, “The 2°C scenario highlights the fact that a part of the world’s fossil fuel resources cannot be developed. Total’s growth strategy takes this into account.” Support for these common sense resolutions was not surprising. The proxy advisory firms ISS and Glass Lewis announced recommendations favoring the resolutions at Exxon and Chevron and, this month, Occidental Petroleum and AES Energy announced the highest-ever US votes among shareholders in support of climate risk resolutions. Despite this groundswell, however, Exxon unsuccessfully petitioned the SEC to block the resolutions and attempted to convince shareholders to ignore every scientific and economic argument being made by analysts, academics, and even its peers. Take Statoil and ConocoPhillips, for example, which predict that under a two-degree scenario future oil demand will be in the range of 74-80 million barrels per day by mid-century. Exxon predicts consumption of 105 million barrels per day. Given that a mismatch between supply and demand of only a few million barrels per day caused the current price plunge, it’s clear Exxon is planning for a very different oil price future than its competitors—an assumption that puts shareholders at risk. Exxon executives have tried to paint the climate risk resolution as an initiative of activists or environmentalists, but that’s a clear misrepresentation. The effort was led by many of the world’s largest institutional investors, including the California Public Employees Retirement System (CalPERS), which owns more than US$1 billion worth of Exxon stock. Investors are simply asking Exxon and Chevron to put prudent risk management measures in place that will position them for the low-carbon energy transition. Of particular concern is continued capital spending on high-cost, high-carbon projects with long timelines for development that likely won’t go to market as global oil demand weakens. So what exactly do investors want from these two companies? Let’s take a look at changes that shareholders have helped achieve at ConocoPhillips and Total. ConocoPhillips now incorporates four different low-carbon scenarios into their planning and—just a few months after releasing those scenarios to investors—they decided to completely abandon deepwater drilling. This is significant from a risk-management perspective since deepwater drilling has hugely expensive up-front capital costs and long lead times. Last week Total released its own two-degree scenario trajectory, which resulted in a decision to end Arctic drilling. The company says it will no longer chase high-cost barrels of oil, but rather will focus on generating supply that meets demand for five to 10 years. The company, which is aiming to shift 20 percent of its portfolio to renewable energy, is also steering significant capital into a battery company and major ownership in a solar company. Part of what made the resolutions at Exxon and Chevron so successful was the close transatlantic partnership between sustainability nonprofits such as Ceres and IIGCC, and shareholders in Europe and the US, who demonstrated a strong commitment to achieve the Paris climate accord’s goals, and to forcing commensurate company action. Investors have learned through their engagements with the European oil majors that change is possible, and that it takes a long-term, concerted effort to change business practices that have been engrained for decades. While nobody expects fossil fuel companies to become clean energy companies overnight, they do need to make prudent spending decisions that recognize the impacts of the accelerating clean energy transition. Fossil fuel companies should not feel they are alone in being asked to confront these issues. Ceres is working across many sectors, encouraging companies to transition towards a low-carbon future, including electricity producers, automakers, even insurance companies. We’re at a unique moment where a wide range of groups are asking tough questions of the world’s most powerful companies, about their business models and their impact on the world. At Ceres, we have been making the business case about climate risk for the past two decades and it is exciting to see capital markets starting to shift. Last week’s progress at the Exxon and Chevron annual meetings is a great first step, but more substantive responses from this country’s two largest oil producers are clearly needed. Investors will continue pressuring them to take meaningful steps like their peers. Read the post at Huffington Post

Recycled Water Key to California’s Water Security

Each day in California an estimated 1.5 billion gallons (5.7 billion liters) of treated water are dumped into the ocean - that's more than the amount of water needed to fill 2,270 Olympic-sized swimming pools. It's the water that's collected from the sinks, bathrooms and laundries in your home and delivered to municipal wastewater treatment facilities. But what if these billions of gallons of wastewater were further purified and put to use to help solve California's water woes? Last winter's rain and snow didn't come close to solving our water deficit, and we need to think outside the box. Ultra-purified wastewater is a resource we should be tapping. It's cleaner than you might think. The City of San Diego conducted a water purification test of highly treated wastewater in 2012 and found the treated water to be even cleaner than imported water. In fact, I drank a glass of this highly purified water on a visit to the West Basin Municipal Water District not too long ago. It tasted like, well, water. California has slowly but steadily increased its use of recycled water since it first passed the Water Recycling Act of 1991, which set a goal of recycling 1 million acre-feet (1.2 billion cubic meters) of water by 2010, with an interim goal of 700,000 acre-feet by 2000. State agencies spent the next decade trying to achieve that goal, but fell short, according to Alf Brandt, the senior counsel to California assembly speaker Anthony Rendon, who recently spoke on a Ceres webcast about the generation-long history of recycled water in California. By the 2005-06 legislative session, Brandt said, it had become clear that 1 million acre-feet by 2010 would not be achieved. The "next generation" of recycled water targets came in 2009 with the adoption of the State Resources Control Board's recycled water policy, which set a goal to increase annual use of recycled water over 2002 levels by at least 1 million acre-feet by 2020 and at least 2 million by 2030. I worked on the policy during my tenure at nonprofit organization Heal the Bay and it was seen as a huge step in the right direction that opened the door to increasing the sue of recycled water from municipal wastewater sources. But based on the last survey of water recycling conducted in 2009, we’ve only reached about 670,000 acre-feet, according to Karen Larsen, deputy director of the State Water Resources Control Board’s Division of Water Quality, who also spoke on the webcast. A new survey is expected early next year. It seems hard to imagine we’ll meet the 2020 goal, given our incremental progress over the last few decades – although recent drought conditions and new funding opportunities may have prompted a heightened interest in recycled water use. The legislature is making progress in overcoming some of the institutional obstacles to water recycling, even as the State Water Board tackles some of those obstacles by developing standards for potable water reuse for groundwater recharge, surface water augmentation and even direct potable reuse. The current drought has spurred closer attention to recycled water as an available resource, and the public seems more willing to accept its use according to a recent poll. In 2014, voters passed Proposition 1, which set aside $7.5 billion in funds for state water supply infrastructure projects, including $725 million devoted to water recycling. Recycled water currently makes up 7 percent of California’s annual water demand, according to Larsen, but the state can increase that. Businesses can also play a role in advancing water recycling. The biotechnology company Genentech far surpassed its 2009–14 water-efficiency goal – to reduce the water used per kilogram of product by 10 percent in five years – cutting water use by 87 percent in that time, according to Genentech’s sustainability manager Katie Excoffier. The dramatic increase in efficiency was partly driven by a project to capture reverse-osmosis reject water and to use it in a cooling tower. Now Genentech has its sights set on increasing recycled water use to help the company meet its 10-year goal of reducing, by 2020, total potable water use by 20 percent. Genentech currently uses recycled water in some of its cooling towers and is working on several fronts to expand the use of recycled water at its 60-building campus in south San Francisco. Purple pipes to carry recycled water are being installed as a part of all construction projects, including the new employee center set to open in the fall of 2016. “We’re making the business case for water recycling,” Excoffier explained on the webcast. Taking into account intangibles like resiliency, business risk and employees’ passion for water conservation, she said, water recycling becomes a more compelling sell for the company as a whole. To encourage greater use of recycled water by businesses and municipalities alike, Sen. Robert Hertzberg introduced S.B. 163 into the state Senate. This would amend California’s water code to define discharging treated wastewater into the ocean as water waste and to require treatment facilities to recycle at least 50 percent of water discharges by 2026 and 100 percent by 2036. The potential for savings is enormous. In the State Assembly, member Mike Gatto has continued his efforts to speed adoption of recycled water with A.B. 1463, which would allow residential and commercial buildings to use wastewater that has been treated on site in irrigation, landscaping, flushing toilets and cleaning. As we enter another year that will likely prolong our drought, we are encouraged to see these signs of progress, and encourage you to share your stories with us. Ceres’ Connect the Drops campaign spotlights the role that businesses can play in water conservation, reuse and management. Tell us your story at ceres.org/connectthedrops. Read the post at Water Deeply

The Reality Behind Exxon's Claims on Item 12

The following is a point-by-point response to a shareholder letter sent by ExxonMobil's Vice President of Investor Relations and Secretary, Jeffrey J. Woodbury. Exxon Mobil Corporation 5959 Las Colinas Boulevard Irving, Texas 75039-2298 May 16, 2016 Dear ExxonMobil Shareholders: To address comments and questions raised by some shareholders regarding Item 12 - Report on Impacts of Climate Change Policies in ExxonMobil’s Proxy Statement, we would like to emphasize the following: 1.  ExxonMobil’s Outlook for Energy, available at www.exxonmobil.com/energyoutlook, is not a “business as usual” forecast of global energy supply/demand. It includes impacts from anticipated government policies to reduce greenhouse gas emissions that are consistent with the nationally determined contributions under the Paris Agreement, and in fact anticipates further government actions beyond those committed under the Paris Agreement. In other words, the Company’s Outlook, which is reviewed and updated annually, does encompass the results of COP 21 in its planning basis. ExxonMobil’s projected energy demand and sources of supply as detailed in the Outlook are generally consistent with other third-party forecasting organizations, such as the International Energy Agency (IEA) as well as published reports by industry peers. Ceres Response: Exxon’s most recent Outlook for Energy does not include a scenario consistent with the Paris Agreement. The Paris Agreement established a commitment from all 195 nations to keep global average temperature rise to well below 2 degrees. This simple chart shows that Exxon’s forecasted demand for oil is far in excess of the projections by other reputable sources for demand for oil under a 2 degree scenario. 2. ExxonMobil has already reported on the potential impact of a “low carbon scenario” (representative of a 2 degree Celsius scenario as requested by proponents) in its 2014 published white paper, entitled Energy and Carbon – Managing the Risks (http://corporate.exxonmobil.com/en/current-issues/climate-policy/climate-perspectives/engagement-to-address-climate-change). As that paper shows (Page 11), even in IEA’s 450 scenario, which represents an energy pathway consistent with 2 degree Celsius, significant hydrocarbon investment will be necessary to meet demand requirements. Ceres Response: Exxon made this claim when it asked the Securities and Exchange Commission to allow it to exclude Item 12 from the proxy statement. The Securities and Exchange Commission rejected this argument out of hand, explaining: “[I]t does not appear that ExxonMobil’s public disclosures compare favorably with the guidelines of the proposal.” The mere fact that some level of oil and gas will be needed under a 2 degree scenario does not provide any indication of whether ExxonMobil’s supply will be economically competitive. Given recent changes in market strategies by Saudi Arabia, Iran, and Russia, investors need to know how ExxonMobil’s portfolio of resources and planned projects would compete against other market players in a lower demand scenario. The full text of the correspondence with the SEC, ExxonMobil, and the filers is available here. 3. Our investments are “stress tested” across a broad range of economic variables, not just a single scenario, to help ensure economic viability, resilience, and long-term value creation. Ceres Response: We are glad to see ExxonMobil acknowledge that “stress testing” such as that requested by the shareholder proposal is an important part of capital planning. Investors are simply asking that ExxonMobil provide them with a public report of such stress testing including decision-useful information about the impacts on ExxonMobil’s portfolio so that investors can assess ExxonMobil’s business strategy and capital planning. ExxonMobil’s peers, including Shell, BP, Statoil, Total, ConocoPhillips, and BHP Billiton have all begun to provide some level of reporting on such stress testing to investors to assure them that they are preparing for the energy transition. 4. ExxonMobil actively participates in a coalition of oil and gas producers, the International Petroleum Industry Environmental Conservation Association (IPIECA). IPIECA addresses the pathway to a low carbon emissions future in its Paris Puzzle publication (www.ipieca.org/paris-puzzle), publicly addressing the same topic as the Oil and Gas Climate Initiative (OGCI) but through a structured, long-established organization that has standing with the United Nations and whose members provide close to 60% of the world’s energy. Ceres Response: ExxonMobil has not provided any indication that it is positively engaging with trade associations, governments, or the United Nations to support policies that limit global average temperature rise to less than 2 degrees. Rather, ExxonMobil publicly refused to join the OGCI’s calls for carbon pricing and support for the 2 degree target ahead of the Paris Conference. 5. ExxonMobil maintains committed research in low carbon emission technologies including algae and carbon capture and sequestration. More information can be found at www.exxonmobil.com/technology. Ceres Response: While we are pleased to see ExxonMobil investing in low-carbon R&D, the company does not provide any details on how much of its spending is devoted to low-carbon initiatives, making it impossible for investors to assess their significance. In summary, we believe that ExxonMobil’s current processes sufficiently test the portfolio to ensure long-term shareholder value and resilience, and we remain confident in the commercial viability of our portfolio. For further discussion on this proposal and other important items, please review our proxy materials at www.exxonmobil.com/proxymaterials. Ceres Response: ISS and Glass Lewis, the major proxy advisory firms, have both recommended that investors vote in favor of Item 12, and investors representing $10T in assets have also come out publicly in favor of the proposal. ExxonMobil’s current processes do not allow shareholders to engage with its board nor do those processes provide any details regarding the company’s commercial viability under scenarios other than the one laid out in its annual energy outlook. For more information please view the proxy memos prepared by the Church of England, the Vermont Pension Investment Committee and CalPERS. Thank you for your continued support. Sincerely, Jeffrey J. Woodbury

A 2020 Roadmap for Corporate Sustainability

Plotting a company’s future is never a static process. Circumstances shift. Technologies change. Trends accelerate. This is surely the case as global businesses grapple with sustainability pressures like climate change, water risks and human rights challenges. Just as the urgency and complexity of these threats are increasing, operating environments for businesses are also changing dramatically. From the historic climate agreement forged by 195 countries in Paris to the international community’s endorsement of the Guiding Principles on Business and Human Rights, governments worldwide are now unified on the urgency for realizing a low-carbon future and providing decent work and economic growth for all. Today’s world is markedly different from 2010, when we launched our Ceres Roadmap for Sustainability, with 20 specific expectations for sustainable corporations in the 21 st century. That’s why we — at our annual conference in Boston earlier this month — announced updated Ceres Roadmap expectations calling for accelerated action on key issues, including climate and clean energy, natural resource protections and fair, safe and equitable workplaces. For example, we are now calling for companies to secure not just 30 percent of their energy from renewable sources by 2020, but to shoot for as high as 100 percent by 2030, as 50-plus companies participating in the RE100 initiative have already done. We are also calling on companies to look beyond their direct operations, by including their vast supply chains, in protecting scarce water resources and human rights. Time and time again at our two-day conference, I was reminded of why these expectations are both urgently necessary and achievable. I heard countless examples of powerful business and industry-wide responses that are putting the world on a new, more hopeful path. Disruption in the electric power and transportation sectors, for example, is breathtaking. On the clean transportation front, electric vehicle sales are surging as battery prices drop, vehicle-driving ranges increase and sticker prices fall. Sales jumped by 60 percent last year, with the biggest growth being in China. Bloomberg New Energy Finance recently predicted that by 2040, plug-in vehicles would make up about 35 percent of cars on the road. “Look at your business, look at your household and think about why an electric vehicle makes sense,” Britta Gross, director of advanced vehicle commercialization policy at General Motors, told more than 550 attendees on the first day of the conference. “There’s no good reason why there isn’t a plug-in vehicle in every driveway in this country right now.” Our updated Ceres Roadmap expectations call on companies to prioritize electric vehicles in their logistics and fleets, and to provide employees with the infrastructure needed to charge their vehicles at work. I also heard about food companies upping their ambitions on climate and water issues, including General Mills, which is devoting far more attention these days to reducing water and carbon footprints in its vast supply chains compared to five years ago. “Focusing just on our (direct) operations wasn’t enough,” John Church, executive vice president of supply chain, at General Mills, told a packed crowd. We also heard about technological disruptions that are knocking down some of our biggest roadblocks to a sustainable future. The once-sacred idea of car ownership, for example, is losing its luster as ride-sharing options such as Uber take hold in places like China. “Our business has grown a ton,” Uber China’s expansion manager Candice Lo said, outlining benefits such as reduced pollution and traffic congestion and less parking pressure in the world’s populous country. But perhaps the most encouraging message that I heard was the critical need for companies to systematically integrate sustainability into their core business. Harmit Singh, chief financial officer at Levi Strauss & Co., and Mehmood Kahn, chief scientific officer at PepsiCo, both underscored the importance of considering environmental and social issues for their businesses in the short and long-term. They also emphasized the critical role the C-suite, including corporate directors, must play to drive sustainability into strategies and day-to- day decision-making. So how can your business hasten its journey toward a more sustainable future? Well, there’s a map for that. Read the post at GreenBiz.com

Can California Make Saving Water a Way of Life?

After a winter of barely average rainfall and snowfall, there’s a growing awareness in some quarters that California is not out of the drought. Indeed, we may never be out of the drought. But state leaders are sending mixed messages that may slow our progress on building a sustainable water infrastructure and encouraging a culture of water conservation across the state. In response to the fact that more than 95 percent of the state is in some form of drought, Gov. Jerry Brown this week took steps to make some of the emergency water-conservation measures permanent. His executive order [PDF] requires the Department of Water Resources and the State Water Resources Board to develop new water use targets that will be part of a permanent framework, and to prohibit water-wasting practices including hosing clean sidewalks and driveways, using non-recirculated water in fountains and more. But at the same time the State Water Resources Control Board issued a proposal to eliminate the mandatory water-conservation targets that have been imposed on every region since last year, allowing local water agencies to set their own conservation targetsuntil the permanent targets are in place. While it’s great that we have a governor who is taking action on the state’s critical water crisis, and that some of these new rules are permanent, in the interim his State Water Board’s proposed order could reinforce the sense that it’s okay to let our hard-earned conservation successes backslide. Felicia Marcus, chair of the State Water Resources Control Board, said as much to reporters this week, “This is not a time to start using water like it’s 1999; we need to keep conserving all we can, whenever we can.” To be sure, these changes are in some ways logical: Water is a local issue, and a one-size-fits-all approach doesn’t always make sense. Different water agencies have different mixes of water supply, some more resilient than others. Moreover, some areas of the state such as Northern California received more rain this winter than Southern California and other parts of the state, and thus should have the flexibility to manage local water supplies differently. Of note, the State Water Board addressed some of these site-specific conditions in the last update of the emergency regulations this past February. But when water agencies like the East Bay Municipal Utility District so quickly begin “declaring the drought emergency over” andending fines for excessive water users, it raises a red flag for future water conservation. It’s a big contradiction for the state to say that we are still in a drought, but Californians can still have lush, green lawns. Although many Californians bristled at the mandatory water restrictions, the past year has shown that they worked: The state saved previously unimaginable amounts of water starting in June 2015, and those savings continued even through an occasionally wet winter. And suggesting that the problem is solved will mean we quickly lose those gains. Already, public surveys find concern about the drought slipping dramatically between last fall and this spring. Climate change is the new normal. Gov. Brown acknowledges this truth in his executive order. We need strong policies and regulations to help us maximize our local water supplies – we need to prepare for the droughts still to come. At the California Water Policy Conference, held in April in Davis, Marcus acknowledged as much: “We have a lot to do collectively in front of us, and I don’t mean just in water, I mean in everything, given climate change and what it’s going to wreak while we’re all still here,” Marcus said. “It’s not just an issue for future generations – everyone sitting in this room is seeing and will see the accelerating impacts of that and the disruption of it across every sector of the environment, public health and the economy.” I am as pleased as anyone that California finally received a wet winter, but it’s not time to relax our efforts to save the water we have. Rather than require mandatory watering, as the East Bay community of Blackhawk has just done, now is the time to acknowledge that brown lawns – or no lawns – are a way of life, and start uncovering the many areas in which we can save water every day. Read the post at Water Deeply

Ethiopia, Where the Paris Climate Agreement Gets Real

The same day global leaders were gathering at the United Nations in New York to sign a historic climate agreement, my family and I stood in front of a tiny solar-powered trailer on the side of a dusty, dirt-packed road in southern Ethiopia. The tiny SolarKiosk, nestled near traditional thatched huts and surrounded by cows and goats, sells different-sized solar lanterns, as well as power for mobile phones and bottles of Fanta. The people we met here were not thinking about global climate deals brokered in Paris. But villages, such as Bulbula, and countries, such as Ethiopia, are surely in the minds of government leaders assembling at the UN to ink a 32-page document that is our last great hope for curbing global carbon pollution at the levels needed to avoid dangerous climate change. The Paris agreement is undoubtedly big on ambition; more than 170 countries signed the accord last week and most, including Ethiopia, have also committed to their own carbon pollution reduction plans. The big question is whether countries such as Ethiopia, India, China and even the U.S. can deliver on their promises so that the agreement can achieve its ultimate goal of limiting global temperature rise to well below two degrees Celsius. While Ethiopia’s current carbon footprint is tiny compared to developed countries, what happens down the road, as its economy grows, is a big question. The country’s commitment—to be carbon neutral, even as its lifts 25 million people out of poverty, by 2025—is wildly ambitious. The fact that its population is soaring and that most rural communities still lack electricity—and need it—only adds to the challenge. Six days of dusty, bumpy driving in southern Ethiopia makes clear that the country’s economy is booming. Construction is everywhere: most of it in the form of partially built paved roads and concrete building shells with the ubiquitous eucalyptus-tree scaffolding. Further back from the roads, there are dozens of vast flower greenhouses and garment factories—key reasons why exports and the overall economy are growing at double-digit rates every year. But it wasn’t until day seven, roughly 1,200 kilometers in our trip, that we saw our first sign ofclean energy. Just north of Lake Langano we came across the SolarKiosk. Within seconds of pulling over, we were surrounded by dozens of villagers who were eager to talk about the solar shop’s offerings, especially its portable lanterns that have transformed their lives. The solar-powered kiosk, operated by a German firm and one of 31 in Ethiopia, provides power for solar lighting, mobile phones, batteries and even computers. It also sells a few varieties of solar lanterns, starting as low as $12 (basic lamp) and $25 (a lantern with a USB charger) up to as high as $150. Most villagers are using the small lamps, with a hand-sized solar panel, which provides six hours of light after every charge. Midhasso Hordofa, a subsistence farmer, has been using a small lamp for the past two years and the biggest benefit he mentions is charging his mobile phone. Alima Badhsoo, whose husband runs the kiosk, has two lamps and she cites wide-ranging perks, including nighttime light so her oldest son can study and being able to “chase away hyenas” when they get too close. The kiosk was the first in what is now more than 150 solar stands SolarKiosk is operating across Africa, most of them in rural areas where electric grids do not exist, says the company’s general manager Roger Sobotker. “We’re playing a crucial role in addressing energy challenges in off-grid areas,” said Sobotker, in an email exchange. “We’re also replacing the existing use of unclean fuels.” While Sobotker could not cite exact sales figures in Africa, he says the response has been strong, with many customers “graduating” to bigger solar systems which can charge even computers and TVs. “We bring a bouquet of services—entertainment, access to the Internet, new products—which undoubtedly assist in arresting the migration of people to the city,” he said. SolarKiosks are an important contribution, for sure, but larger-scale solutions will obviously be needed, too, for Ethiopia to achieve its carbon-neutral commitment. Indeed, utility-scale projects—especially hydroelectricity and geothermal—are taking hold in many parts of the country—the most noteworthy being the Grand Renaissance Dam and hydro project near the headwaters of the Blue Nile River which flows to Egypt. Slated for completion next year, it will be Africa’s largest hydro project, providing 6,000 megawatts. During the time of our visit, in fact, an Icelandic company announced an MOU with the Ethiopian government to generate 1,000 megawatts from geothermal reserves near the southern Ethiopian town of Shashemene. The developer, Reykjavic Geothermal, plans to invest $4 billion in the project and signed the first power purchasing agreement in Ethiopia’s history. The agreement was made possible by a new—and hugely important—national law allowing private developers to generate and sell power to Ethiopian electric utilities. We can only hope to see progress on more of these projects the next time we visit Ethiopia. Read the post at EcoWatch

Warren Buffett's Mixed Signals on Climate Risk and Insurance

When it comes to addressing climate change impacts to Berkshire Hathaway’s insurance business, Warren Buffett paints a somewhat misleading picture that minimizes the business risks posed by a demonstrably changing climate.  In doing so, Buffett begs serious questions about his company’s planning for climate impacts and undermines confidence in the insurance division’s climate resilience. In a letter to Berkshire Hathaway shareholders ahead of the company’s annual meeting April 30 in Omaha, Buffett denies the impact of climate change on insurable weather-related events, despite scientists increasingly linking hurricanes and extreme weather to climate change.  He notes that, due to the recent decline in super-catastrophe (“super-cat”) events in the United States, “super-cat rates have fallen steadily in recent years, which is why [Berkshire has] backed away from that business,” ignoring that this very volatility in business outlook is at least partly tied to increasingly unpredictable weather patterns. Buffett also unrealistically suggests that the company can annually adjust its rates in response to changing climate exposures, seemingly without regard for potential rate shocks that could be triggered by such a reactive posture.  Last but not least, Buffett argues that if major climate catastrophes become more frequent, the “likely… effect on Berkshire’s insurance business would be to make it larger and more profitable.” This latter argument ignores the checks and balances of both insurance regulation and market competition that protect consumers from such a “bring it on” mentality. Buffett’s comments, prompted by a shareholder resolution requesting a report on the Berkshire insurance division’s responses to climate change risks, ought to cause a broad range of stakeholders to sit up and take notice.  Shareholders and others who have a stake in the company’s resilience and long-term value, as well as regulators who are focused on ensuring that customers have access to reliable, affordable insurance products, have vested interests in Berkshire’s climate risk management approach. Hurricanes, extreme weather and related risks on the rise While it is true that the United States has not been struck by a major hurricane since 2005, hurricane expert Phil Klotzbach attributes this recent good fortune largely to luck, given that 27 major hurricanes in a row have not made landfall.  Notably, even as the continental United States has been lucky in terms of the lack of seriously damaging hurricane activity in recent years, the Pacific Basin has not.  Klotzbach notes that the Northern Hemisphere broke records in 2015 as El Nino’s warm waters (possibly influenced by global warming) drove major tropical cyclone formations to a record-high 27, almost entirely in the Pacific.  In February 2016, Tropical Cyclone Winston struck Fiji with 185 mph winds, the strongest Southern Hemisphere cyclone on record.  Last October, Hurricane Patricia formed over super-heated ocean waters off the coast of Mexico, becoming the strongest hurricane ever recorded with peak wind speeds over 210 mph.  In 2013, Supertyphoon Haiyan struck the Philippines with 196 mph winds, killing thousands and devastating the country.  These figures are astonishing and alarming in and of themselves, let alone as portents of future catastrophic events. While hurricane experts are careful to avoid conclusively linking a particular cyclone to climate change, MIT’s Kerry Emanuel does conclude that the strongest tropical cyclones “have no doubt been influenced by natural and anthropogenic climate change.”  What happens when the United States’ luck runs out and we are confronted by major hurricane impacts again?  Are Berkshire’s insurance businesses taking those possibilities into account?  Buffett’s recent rhetoric provides little confidence. Climate change attribution science advancing Aside from hurricanes, Buffett claims that climate change has not affected other weather-related events covered by insurance, a position that puts him at odds with a growing body of science and demonstrated on-the-ground impacts.  A recent report from the National Academy of Sciences addresses the topic of whether a particular weather event was “caused by climate change” by refocusing the question as “to what extent was the event intensified or weakened because of climate change?” The report finds that for individual weather events, scientists have the highest confidence attributing a climate change signal in heat and cold waves, like the record Pacific Northwestheat last June that fed $100 million in wildfire losses in Washington State, and Boston’s record cold and snowy winter of 2015 that contributed to $2.1 billion in Northeastern insured winter storm losses.  Scientists also see a climate signal in droughts, like the four-year-old drought that continues in California, and heavy precipitation, such as South Carolina’s “once-in-a-thousand year” extreme rainfall-driven flooding last October. Contrary to Buffett’s claims, the question scientists are currently addressing is not whether climate change is affecting global weather, but how much of an effect climate change is having?  Are Berkshire’s insurance leaders considering their companies’ exposures in light of these extreme weather trends? Again, leadership from the top seems to be demonstrably absent on these critical, evolving trends. Troubling claims about climate change and insurance Buffett’s cavalier assertion of the company’s supposed nimble ability to re-price products when the need arises also ignores regulatory and economic realities – with seemingly complete disregard for potential rate shocks – not to mention the sheer operational inefficiencies of a reactive approach to growing volatility in the external environment as a result of climate change. In the U.S., state insurance regulators have the authority to approve or deny rate increases, changes to insurance products and coverages, and an insurer’s desire to exit a market.  Regulatory oversight is stringently enforced for personal lines insurance, such as auto and homeowners, which, through Berkshire’s auto insurance giant GEICO is a major business line.  If Berkshire seeks higher rates (or limits coverage), then the company would need to justify those changes to regulators, who could deny the requests.  If denied, Berkshire would have to decide whether to accept lower rates than it would like, or seek to withdraw from a line of business or region no longer deemed attractive.  Market withdrawal encompasses substantial costs for an insurer, however, including writing-off sunk operational costs, employee termination expenses and reputational damage – not to mention lost market share. Thus, Buffett’s claim that there is a “prompt translation” of increased possibilities of loss into increased premiums is not grounded in the reality of the checks and balances that protect the interests of customers and maintain competitive insurance markets. Missed public engagement and investment opportunity Rather than relying on reactive measures, Berkshire’s insurance groups could assume a leadership role within the U.S. insurance sector by engaging policymakers and the public on climate risks.  Berkshire could leverage its expertise and brand to advocate for more actuarially sound pricing in vulnerable regions along with calling for and financing smart, climate resilient infrastructure investments to reduce society’s vulnerability to climate impacts while promoting the resilience of Berkshire Hathaway’s own operations and bottom line.  In this respect, the company should take a page from the cautionary tale of Superstorm Sandy and its wholly owned subsidiary GEICO. When Superstorm Sandy pummeled the East Coast with massive storm surges, GEICO took record losses of nearly $500 million on 47,000 auto claims due to its exposure in the New York City region, including flood losses covered under GEICO’s comprehensive auto insurance policies.  With the largest auto market share in New York, Florida and New Jersey, three of the states most exposed to sea level-rise enhanced storm surge, GEICO could benefit from engaging with policymakers to advocate for smart flood protection policies and infrastructure spending to reduce inundation risks. The bottom line Buffett’s comments on climate change and insurance reflect an unwillingness to confront the reality of the potential negative financial implications of climate change on Berkshire Hathaway’s insurance operations.  Indeed, his rhetoric raises more questions than answers for its customers and shareholders alike regarding missed opportunities to promote resilience in the face of a rapidly changing climate.

Statement on the AES Shareholder Vote

As over 160 nations gather to sign the most far-reaching climate agreement in history, a coalition of global investors sent a clear message to fossil fuel companies: the time to adapt for the energy transition is now. Yesterday at the annual meeting of utility AES, shareholders had their first chance to vote on a resolution asking a U.S. based company to stress test its investments against the low carbon future that the Paris agreement will help bring about. The resolution received support from 42% of investors, the highest vote ever for a 2 degree stress testing resolution in the U.S. “Investors recognize that the Paris Agreement marked a turning point, and we need to know how companies are planning to succeed and create opportunities to provide clean energy in this new environment,” said Pat Zerega of Mercy Investment Services, the filer of the resolution. "We’re looking forward to working with AES on this important issue.” This proxy season, shareholder proposals on climate risk are being propelled by a powerful set of tailwinds: an historic climate accord, rapidly changing market forces, and unprecedented shareholder collaboration. Some of the most powerful voices in the fossil fuel industry, including the Saudi Oil Minister Ali Al-Naimi, are convinced the sector is facing an existential threat. The Secretary General of OPEC is advising its members to look for opportunities to diversify their economies and move away from reliance on oil revenues. In this context, one would assume that western energy companies would be taking aggressive steps to ensure their economic viability in a rapidly decarbonizing world. Now is the time for their boards and executives to chart a path forward for resilience to a future where temperature rise is limited to well below 2 degrees Celsius, as the rest of the world envisions. Similar resolutions are slated for votes in the coming weeks at Noble Energy, Occidental Petroleum, Anadarko, First Energy, Chevron, ExxonMobil, and Southern Company. Investors around the world have pledged their support of carbon asset risk resolutions at these companies, and if the vote at AES is any indication, momentum is growing rapidly. Learn more and pledge your support at http://www.ceres.org/issues/carbon-asset-risk/investor-support-of-portfolio-resilience-resolutions.

While the SEC Ignores Climate Change Risks, Others Step Up

In 2010, the Securities and Exchange Commission took one giant step towards acknowledging climate change as a financial risk and opportunity for markets, and not simply the major environmental threat of our time. The SEC’s formal guidance on climate risk disclosure, issued in response to an investor petition, details how material climate risks must be disclosed by companies in their financial filings. The guidance discusses climate risks related to the oil and gas, electric power, insurance, agriculture and other industries, how these issues could be material, and how they should be disclosed. Six years later, the SEC under Mary Jo White’s leadership has done almost nothing to enforce that guidance. The SEC sends thousands of “comment letters“ each year to corporations about improving their financial reporting on a variety of topics, but climate change is barely mentioned. In fact, since Chair White started her term in April 2013, the SEC has issued just eight comment letters mentioning the term “climate change.” None have gone to the large companies facing the biggest climate risks and none have been released since November 2014. And the SEC’s enforcement division has not conducted any investigations into possible violations of the securities laws from inadequate climate risk disclosure. A recent Government Accountability Office report, responding to a request from Congressman Matt Cartwright, (D-PA) to review the management of climate-related risks to supply chains, found that the SEC had no immediate plans beyond the 2010 guidance to determine whether actions to improve climate-related disclosures are required, and no plans to develop subject matter expertise in reviewing the adequacy of climate-related disclosures. Contrast this with the 49 climate-related comment letters the SEC issued in 2010 and 2011, and with the New York Attorney General’s investigations and settlements with companies like coal giant Peabody and power giant AES regarding inadequate disclosure of climate risk information. Because the SEC hasn’t acted, others have stepped up: The G20 nations asked the Financial Stability Board (FSB), which was set up in 2009 to strengthen financial systems and increase the stability of international financial markets, to develop recommendations for improving climate risk disclosure in financial filings worldwide. The FSB responded by setting up its Task Force on Climate-related Financial Disclosures, chaired by Michael Bloomberg with guidance from former SEC Chair Mary Schapiro, which will release guidance for improving climate disclosure in financial filings by the end of this year. US Senator Jack Reed, D-RI, and Rep. Matt Cartwright introduced identical bills that would require the SEC to improve climate risk reporting by oil and gas and mining companies. The California and New York Attorneys General are investigating many years’ worth of ExxonMobil’s records and financial disclosures to see if the company committed fraud by misleading investors about climate risks, including business impacts from carbon-reducing regulations that are spreading globally. In late March, 17 state attorneys general announced an unprecedented effort to work together on climate change-related initiatives, such as “ongoing and potential investigations into whether fossil fuel companies misled investors and the public on the impact of climate change on their businesses.”   In the meantime, more companies are disclosing climate-related responses in their annual SEC filings. Coca-Cola recently disclosed its commitment to “‘reduce the absolute carbon footprint of our core business operations by 50 percent’ by 2020.” Engine manufacturer and power generation company Cummins adopted its first comprehensive sustainability plan in 2014, including initial goals to “reduce energy use and greenhouse gas emissions [in its facilities] by 25 percent and 27 percent, respectively, by 2015 against a 2005 baseline.” Other companies, however, are still disclosing unhelpful generic information about climate risks, or no information at all. And some of the worst performers in this regard are U.S. companies facing the biggest risks— fossil fuel and insurance companies. Incredibly, Warren Buffett claims in his annual letter to shareholders that while “it seems highly likely to me that climate change poses a major problem for the planet, . . . as a shareholder of a major insurer, climate change should not be on your list of worries.” Only SEC action can raise the baseline of climate reporting to protect investors, and prevent laggards like Buffett’s Berkshire Hathaway from claiming—with little evidence to back up their claims—that they do not face climate risks. No more delays or excuses. The time for SEC action on climate risk disclosure is now. Read the post at Huffington Post

Big Oil Gearing Up to Battle Electric Vehicles

Last week Tesla unveiled the Model 3, a mass market, affordable electric vehicle with a starting price of $35,000 and a two hundred mile range. In just over five days, more than 276,000 people put down $1,000 to reserve their own Model 3, signaling that American appetite for electric vehicles (EVs) is on the rise. That’s good news because greenhouse gas emissions from transportation are growing faster than in any other sector in the U.S. and account for about 30 percent of the total. A major shift to electrified vehicles in the transportation sector is necessary to give us a fighting chance to meet our climate goals. Yet, just as EVs are poised for growth, oil industry interests are sharpening their knives. Energy companies, including Koch Industries, are increasing their public opposition to electric vehicles because they are realizing the significant potential impacts of EVs on oil demand. Recently, for example, Jim Mahoney, board member of Koch Industries, penned an oped in Fortune about opposing government subsidies that favor one form of energy over another. “Koch opposes all market-distorting policies, including subsidies and mandates—even if they may benefit the company,” he wrote. What Mahoney was really taking aim at were incentives offered to the small but growing electric vehicle market in the U.S. His op-ed was mum on fossil fuel subsidies—which the International Monetary Fund pegs at $5.3 trillion. And he certainly didn’t mention the 11 fossil fuel federal tax subsidies identified by the Department of Treasury that cost U.S. taxpayers $4.7 billion per year—some of which have been in place for more than 100 years. Or the numerous public lands leasing and royalty breaks for oil and gas production. Mahoney singles out the electric vehicle tax credit because electric vehicles are a threat to oil, which is mainly used for transportation and his op-ed is part of a broader attempt to roll back tax credits that support advanced vehicles. If you doubt that the tiny but growing electric vehicle market could threaten big oil, consider this: Bloomberg New Energy Finance (BNEF) projects that oil displacement as a result of increased electric vehicle deployment could lead to an oil crash by 2023. BNEF flags battery prices and strong policies as important drivers of EV growth. In fact, battery costs have dropped dramatically—falling by 65 percent since 2010. By 2030 they are estimated to fall from $350 per kilowatt-hour (kWh) to below $120 per kWh. To-date, oil producers have underestimated the competitiveness of electric vehicles, but they are seeing the threat to their market share and are taking aim at the EV industry. Because they can’t do much to improve the environmental profile of their own core products, we can expect a growing effort by the oil industry to undermine the electric vehicle sector. It’s no surprise that Koch Industries is leading the way. To thwart electric vehicle progress, Mahoney’s op-ed trots out tired arguments against clean energy subsidies, even though the Department of Energy Loan Guarantee Program has earned American taxpayers a net of $30 million as of 2014. He further claims that EV tax incentives are “welfare for the wealthy,” because—as he would have it—only rich people buy electric cars. This may have been true in the past, but not now. He conveniently fails to mention the forthcoming affordable long range EVs like the Chevy Bolt, which will drive 200 miles on a single charge and sell for about $30,000 (after using the $7500 federal tax credit) or Tesla’s new Model 3, which will sell below the average price that Americans are paying for new cars. Indeed, the sticker price of many other electric vehicles before government incentives is at or under the average new car price—like the Chevy Spark EV at $25,750 or the Nissan Leaf at $29,000. And of course the sticker price doesn’t take into account the much lower fuel and maintenance costs of EVs. Beyond cutting transportation emissions, a shift to vehicle electrification will also promote grid reliability and renewable energy generation by providing flexible storage options. The past several years have seen profound shifts in the electricity sector fuel mix, smart grid and storage technologies, as well as comprehensive federal regulations to aggressively reduce emissions—making EVs even cleaner. While the U.S. Environmental Protection Agency has promulgated greenhouse gas and fuel economy rules for cars, the current federal rules don’t anticipate more than 2 percent penetration of EVs. In order to realize the many benefits of electrification of the transportation sector, we need to provide critical early support, such as through tax incentives and efforts to build out charging infrastructure. We should also recognize that while the EV sector shows promise, the playing field is still tilted towards traditional gas-fueled vehicles. It’s critical that we simultaneously preserve policies like the federal fuel economy standards, which make all vehicles more fuel efficient, as well as those that promote EVs, while opposing self-serving efforts to maximize polluter profits. Mahoney of course never once mentions the central reason that this conversation matters: pollution. And given the chance, Americans will always choose, clean air, clean water and a healthy world for their children over a world fouled by unnecessary and unwanted pollution. EVs have the potential to advance all of these objectives as part of a clean energy future. Read the post at EcoWatch