Investor Coalition Finds U.S. Corporations Face Multi-Billion Dollar Risk from Climate Change, Risk Not Adequately Assessed by Boards and Investors
There is mounting evidence that failure to respond to the risks posed by climate change could result in multi-billion dollar losses for U.S. businesses and investment portfolios, and this failure could represent a breach of fiduciary duty on the part of corporate directors and investment decision-makers, according to a report released today.
The report, Value at Risk: Climate Change and the Future of Governance, was released today by Ceres, a coalition of investor and environmental groups that works with over 70 companies on corporate environmental responsibility. Investor members represent more than $300 billion in assets. The report was written for Ceres by Innovest Strategic Value Advisors, an investment research and advisory firm. The report is one of the first to make a direct link among climate change, fiduciary responsibility, and shareholder value.
"Because climate change will have an impact on all economic sectors, climate risk is now embedded, to some degree, in every business and investment portfolio in the United States," said Robert Massie, Executive Director of Ceres. "The risks are two-fold: first, the economic/financial risk from the damages due to climate change itself, and second, exposure to the cost of greenhouse gas emissions from climate change regulation and potential litigation. This is another case of an 'off balance sheet' risk that is not being reported to shareholders."
At the same time, Massie explained, "proactive action on climate change presents opportunities for new and expanded business activity, reduced costs, and increased shareholder value that will produce a net economic benefit."
Corporate directors should require company executives to assess current and probable risk exposure, disclose company emissions and climate risk exposure to shareholders, benchmark the company against industry peers, announce and implement a strategy to reduce greenhouse gas emissions on a clear timetable, and link executive compensation to the company's performance on that strategy.
Institutional investors should conduct a portfolio-wide assessment of climate risk exposure, incorporate climate change considerations into investment strategies, require disclosure of climate change-related information from portfolio companies, increase investment into energy efficiency and clean energy opportunities, and promote the adoption of the Greenhouse Gas Protocol and the Global Reporting Initiative.
James Martin, Chairman of Innovest and former Chief Investment Officer for TIAA-CREF, one of the largest pension funds in the United States, explained why climate change is a serious concern for companies and their investors.
"The evidence is increasingly compelling that companies' performance on environmental issues does indeed affect their competitiveness, profitability, and share price performance," Martin said. "Since climate change is arguably the world's most pressing environmental issue, it follows logically that companies' response to the threats and opportunities of climate change-or their lack of response-could have a material bearing on their financial performance and therefore on shareholder value."
The report documents the risks of climate change for a wide array of industrial sectors. "One of our main conclusions is that climate risk is not limited to any one sector," Robert Massie said. "As this report demonstrates, it is now difficult to identify a sector of the economy that would not be affected in some way by climate change. The question is not longer whether any given portfolio contains climate risk, but how much."
Sectors covered in the report include: electric utilities, petroleum, gas, agriculture, manufacturing, tourism, water, forestry, electronics, building construction and real estate, insurance, among others.
Massie continued: "We intend for this report to challenge the leaders of our corporations, institutional investors, and governments to stop ignoring the potentially disastrous financial consequences of climate change and to take clear, measurable actions that will insure that we are not putting the long-term prosperity of our economy and our planet at risk."
The report heralds the launch of the Sustainable Governance Project, a new initiative of Ceres designed to improve corporate and investment decision-making on climate change and other social and environmental issues.