“Sustainability Issues Are Economic Issues” - An Interview with Mindy Lubber
Fresh from a whirlwind tour of non-stop meetings at the World Economic Forum in Davos and a U.N. investor summit on climate risk attended by George Soros, Al Gore, and 500 of the world's most powerful institutional and private investors, Mindy Lubber has a full plate.
Running around the globe promoting the cause of Ceres, she calls for corporations and financial communities to address the world's environmental and social challenges.
A leading nonprofit coalition of investors, environmental groups, and other public interest organisations, Ceres focuses on advancing sustainability and understanding of global climate change in capital markets.
Ceres also directs the Investor Network on Climate Risk, a network of over 80 institutional investors with collective assets of more than eight trillion dollars, who are dedicated to understanding the financial risks of climate change.
Earlier this month, a long-awaited victory: The U.S. Securities and Exchange Commission (SEC) took a significant step in a 3-to-2 vote calling for companies to reveal the implications of climate change on their firms.
The approved guidelines call for companies to consider the impact of climate change laws and regulations when deciding the type of information to reveal in corporate filings.
While the agency has called for environmental concerns to be disclosed to investors in the past, this is the first time that climate change was formally articulated as a risk by the SEC.
The SEC ruling was a response to investors who said that there was not enough information given by companies on the risks to their profits.
Speaking from her office in Boston, Lubber said that the ruling was many years in the making. Excerpts from the interview follow.
Q: Please explain the significance of the SEC decision to require corporate disclosure on climate change risks and opportunities.
A: The SEC ruling affirms that climate change is a material risk that companies need to pay attention to. In many ways nobody was asking for new rules or laws but an affirmation by the SEC.
This is really part of a big picture. For years there was an idea that environment was a boutique issue, and economic issues were the big ones. But now things are becoming different and there is a coming to grips that sustainability issues are economic issues.
For example, think about water shortages. There is not enough water to feed plants, but also to run business systems. We are 6.2 billion people on this planet - we are in a deficit related to our natural resources. We do not have resources for the eventual 9.0 billion people - people with cars and dishwashers. We cannot build a middle class around the world this way.
We have to look at how to build an economy with limited resources. The conversation in total has changed. It is about integrating sustainability into capital markets. How do you make it into reality? One way is to change the way companies do business and the way investors evaluate.
One way to drive that is if there is a material risk, and something has an impact on the strength of a company, then it has to be disclosed in the financial statements. For example, if a product uses uranium but there is a strike of miners in Nicaragua, then the company should know. Legal filings are needed.
Q: What kind of work did it involve to have this adopted?
A: More than a dozen investors managing over a trillion dollars in assets requested formal guidance in a 90-page petition filed [with] the SEC in 2007, and supported by supplemental petitions filed in 2008 and 2009. The SEC brought investors who handle four trillion dollars in to see them.
The commissioners were open to engaging people of all opinions. We know that they talked to others who said climate change wasn't a material risk. They read the petition, and invited us in with other investors and after a year of deliberations they determined this was an issue that investors had a right to understand. They agreed to act on it. It took years of educating and working with investors.
Along with investors' petitions, in the past year we got real traction rather than deafening silence. We published studies along the way - lengthy 100-page studies - and looked at all the filings at the SEC and not shockingly we found that some companies did or did not look at climate risk. There was a need for consistency.
Q: Why is this decision ground-breaking, and what do you say to critics who have said it is not remarkable?
A: It depends on how you look at it. In some ways it is no big deal in that the SEC exists to protect investors. They said that material risks needed to be pointed out and that the world has changed, and there are material risks and companies have to note it.
In some ways it is business as usual, and one should look at the definition of material risks. From another viewpoint, it is at least coming to reckoning that water shortages and trees and natural resources have moved off the balance sheet to on balance sheets.
Q: Have any corporations, prior to the SEC decision, voluntarily disclosed climate-related impacts on their business to investors?
A: A lot of companies do, probably 30 to 40 percent. It is not the most radical thing to be involved. Some companies are disclosing it - in the same sector, one company may do it, another one currently may not.
This impacts investors in different ways. For example, if one is an investor in an insurance company that has huge real estate on a shore, investors should know the implications of sea level rise and disruption to real estate.
Clearly, it is up to smart money managers to provide information to investors so they know how to make decisions on data. And they can only make those decisions when they have clear, comparable, consistently disclosed information to use.
Q: What do you see as being the most important result of the new requirements?
A: It gives investors appropriate information about risks and protects them. The value is that accurate and timely information creates a smarter investment community. In our experience, the little silly "what gets measured gets managed" is true.
When companies have to measure whether their investment risk is greater from climate change and drought or whether there will be impact on their output, for example if they are an agricultural company, it forces them to account.