Spotlight on Your Portfolio: Carbon Footprinting Your Investment
You hear a lot of talk from Wall Street these days about how climate change presents “unprecedented business risks and opportunities.” While investment action doesn’t yet fully match this rhetoric, many major firms are establishing research shops focused on the investment implications of climate change. Some of the early (and quite excellent) work has been focused on the likelihood that the U.S. will pass legislation regulating carbon emissions in the next two years.
It’s been decades since we’ve seen this kind of sweeping environmental regulation in the U.S. Carbon regulation on its own – as well as other climate change impacts such as changing weather patterns and rising sea levels – will present big investment risks and opportunities for industries across the economy.
Carbon regulation will involve a “cap and trade” program similar to that now in place for sulfur dioxide emissions under the Clean Air Act. There are different proposed cap and trade models, with varying economic implications, but each would attach a financial cost to carbon emissions where there is none now. Conversely, there will be new financial incentives for reducing carbon emissions and for creating carbon offsets through renewable energy, energy efficiency, and other projects. Globally, cap and trade programs like the European Union’s “European Trading Scheme” have recently started operating as Kyoto Protocol signatory countries work to meet greenhouse gas reduction targets set for the 2008-2012 period.
U.S. carbon regulation has the potential to materially change the economic landscape. There will be winners and losers, determined in part by what type of legislation is passed. Large investors are increasingly concerned with the impact of carbon regulation on the playing field, and in the interest of reducing uncertainty, are advocating for public policy changes sooner rather than later. The Investor Network on Climate Risk is a coalition of 60 institutional investors (including many state pension plans and Trillium Asset Management Corporation) with a combined $4 trillion in assets. It has partnered with major corporations to call on Congress to enact federal legislation to curb greenhouse gas emissions, and also asked the Securities and Exchange Commission to oversee corporate disclosure on climate change. This is a rare situation indeed, where both corporations and investors are calling for more government regulation, not less.
Meanwhile, emerging research is indicating that carbon exposure is much more broadly and unevenly distributed than previously thought, both across and within industries. Sustainability-focused research firm Innovest reports, for example, that electric utilities face among the highest carbon-related costs of any industry, as you might expect, while within the industry, the expected cost of carbon regulation varies widely across companies largely according to their level of dependence on coal. The pharmaceutical industry, on the other hand, as a whole registers relatively low carbon-related costs. But again we see wide differences within an industry. Some of the carbon laggards among pharmaceuticals are actually projected to be more negatively affected by carbon regulation than some of the better-positioned electric utilities. This level of differentiation appears to exist across economic sectors, heightening the risks and opportunities for investors in the face of coming carbon regulation.
Some investors, including ourselves, are working to take an early start positioning investment portfolios for the changes U.S. carbon regulation might bring. We’re digging into industry-level carbon exposures, assessing company-specific commitments to reducing carbon emissions and looking for investment opportunities in renewable energy, efficiency enhancements and new technologies – in short, measuring and managing the carbon footprint of our portfolios. If carbon regulation legislation passes as predicted in 2009-2010, it will trigger economic impacts over the next decade, and the carbon footprint of investments will become an important new indicator of both financial and environmental sustainability
From the President
One of the most amazing days of my professional life was the day more than a decade ago that I spent as keynote speaker for a conference of the people in charge of General Motors’ environmental policies and procedures in plants around North America. There were hundreds of them, many of whom had Ph.D.’s. They were very interested and supportive when faced with an unedited speaker advocating stronger environmental policies and complete disclosure of results. On another day, a visit with the General Motors’ crash test dummies, watching steering wheel columns hurtle into the surrogate humans in car seats at various speeds, became a memorable experience. It was pretty ugly and very sobering. Those of us on the Ceres dialogue team probably all changed our driving habits that day.
In dealing with General Motors through Ceres, the people we met were often second or third-generation, really terrific, farsighted GM people who would retire from the company on what used to be generous benefits.
But I have also watched the top management of this giant company veer from one policy to another, clumsily, in an effort to survive the serious global transportation and energy questions that seemed to surprise many of them. Their reactions have often seemed primitive and shortsighted or even, at times, mean-spirited. General Motors is a company of contradictions.
The latest weird, attention-getting gaffe came from one Robert Lutz, Vice Chairman of Global Product Development, who recently called climate change a “crock of shit.” He has had a reputation of ignoring environmental concerns; years ago, at the 2004 Detroit Auto Show, Lutz had said that the hybrid did not “make environmental or economic sense.” In the past few days, the company has attempted to paper over these statements through an aggressive campaign claiming that Lutz’s opinion about climate change “doesn’t count” and, from his own blog, “my goal is to take the automotive industry out of the debate entirely. GM is working on just that – and we’re going to keep working on it – via E85, hybrids, hydrogen, and fuel cells, and the electrification of the automobile.”
But piling right on this annoying verbosity from Lutz was the announcement that GM is rearranging the duties of the three top managers in part to give CEO Rick Wagoner more time for “environmental lobbying,” which would include defeating clean air legislation. Wagoner was quoted in the Wall Street Journal last week as saying there’s more “advocacy work” to be done with regard to California’s attempt to implement its own tough tailpipe emissions rules.
GM lost their place as the number one automobile manufacturer in the world to Toyota in 2007. Toyota is no angel company (see Susan Baker Martin’s cover story), with a fleet that includes some huge cars, but they scored with the Prius and helped move the public to accept hybrid cars on the road. I have no idea, after years of working around General Motors, what makes them tick – or not tick! I know one thing, though. I hope the smart women and men with imagination and foresight at GM prevail because I don’t want to see this company disappear.
Adam Seitchik authors report: Climate Change From the Investor’s Perspective
Adam Seitchik, Ph.D., CFA, Executive Vice President of Trillium Asset Management Corporation, recently authored Climate Change From the Investor’s Perspective. This is part of the “Growing The Economy through Global Warming Solutions” series of reports developed by the Civil Society Institute (www.civilsocietyinstitute.org), a non-profit organization dedicated to finding solutions to our most pressing challenges.
Global warming is one of the most urgent problems of our time. The good news is that many of the solutions to this extraordinary problem are within reach. Many of the solutions to global warming are not only feasible, they are economically and socially beneficial. Growing the Economy through Global Warming Solutions is a series of papers written by experts in the fields of economics, public policy, energy policy, architecture, insurance, investment and transportation.
It details the solutions that can be taken off the shelf today to curtail global warming, the governance models needed to encourage such a transition, and the economic benefits of doing so.
While there is no single silver bullet for addressing global warming, there are a wide variety of solutions that, taken together, will lead to a reduction of carbon dioxide emissions, the key to stopping global warming. These promising solutions must be phased in as we phase out our outmoded reliance on foreign oil and coal. The series sets out important next steps that can and should be taken in the near and medium term to ensure that we do everything possible to address the challenges of global warming. By taking these steps as soon as possible, we not only will minimize the grave risks of global warming, we will position the United States as the leader in the clean industries and technologies that are emerging as the key growth engine of the Twenty-First Century.
Download a pdf of Climate Change From the Investor’s Perspective. For more information on the Civil Society Institute or to download other reports in the series, please visit www.civilsocietyinstitute.org.
