Advocating For Extending Clean Energy Tax Credits
July 29, 2008
In a letter organized by the Investor Network on Climate Risk (INCR) Trillium Asset Management Corporation has joined more than 40 asset managers, pension funds, state treasurers, endowments and foundations to urge Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell to pass legislation extending tax credit for clean energy. The extender legislation will help level the playing field with long-term subsidies and help prevent the cancellation of 42,000 MW of planned renewable energy development today in 45 states.
To view the entire letter, click here.
Sustainable Returns
How High Are Sustainable Financial Returns?
The investment ecosystem has reached a tipping point and the interest in responsible, sustainable investing is surging. Asset owners with over $10 trillion have signed up to the UN Principles for Responsible Investment. The Investor Network on Climate Risk now has over $5 trillion behind it. The leading investment consultant to Foundations will now provide Mission Related Investing services. More corporations are institutionalizing sustainability concepts into their organizations and business education is inching away from the blinkered study of money making toward imagining socially positive enterprises with multiple bottom lines. A recent online survey by Cone Inc. found that 79 percent of full-time workers under the age of 25 want to work for a company that cares about how it affects or contributes to society.
As the new players under this growing sustainability tent get to work, they will eventually pose the most fundamental of questions: what is the objective of investing? By custom, and at times by regulation, the answer has been: maximize risk-adjusted financial returns. With this narrow, short-term view, environmental and social considerations have been deemed in conflict with maximizing wealth. Yet, can we really thrive while ignoring the explicit bottom lines of environmental sustainability and social justice?
The easy-to-grab, low-hanging fruit in sustainable investing is being harvested with a single-bottom-line approach. Activities that reduce the use of fossil fuels enhance the financial bottom line. With $100 oil, the obvious win-win activity is energy efficiency. Wal-Mart has gone all-in for a definition of sustainability focused primarily on reducing energy use by the company, its suppliers and its customers. This is a wonderful development, but only the first of many toward a truly sustainable economy and financial system.
Here at Trillium Asset Management Corporation we are improving our own sustainability performance through an inspiring grassroots effort initiated by our newly formed Green Team. The Greens recently sat us down, vegetarian pizza in hand, as we watched the clever, concise and internet-delivered Story of Stuff. In 20 minutes the narrator, Annie Leonard, illustrates the social and environmental damage our current straight-line production system generates, from extraction to production, distribution to consumption and, finally, disposal to landfill. She ends with a vision of an alternative production system that is circular as opposed to linear, that recycles as opposed to exploits and that is cognizant at every juncture of the human impact of the material economy.
This kind of deep sustainability thinking prompts a recasting of the most fundamental investment questions. As investors and capitalists, we embrace investing for financial return. The evolved fiduciary question becomes: what is the best risk-adjusted, long-term financial return we can generate that is sustainable and restorative from both a human and planetary perspective? Going down this essential path means acknowledging that many legal investments are neither moral nor sustainable, damaging the soul as well as the environment and risky in the long run. Truly sustainable investing expands the definition of wealth generation, risk and return, illuminating the complex tradeoffs we all face as individuals and institutions.
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
Strategic View
Do Markets Need Government?
When I studied and taught economics 25 years ago, the basic model of efficient markets was straightforward. Investors and businesses maximize profit, consumers seek value for money, workers search for lucrative jobs. Competitive market forces were central, although market failures were acknowledged: the maldistribution of income and “externalities” such as pollution and crime that are not reflected in market prices. The role of government was to efficiently remediate these failures, to regulate, tax or otherwise “get the prices right.”
What happens, however, when self-interested capitalists understand that social inequities and externalities like pollution and nuclear proliferation do long term financial damage to their portfolios? Short term profit-driven activities (e.g., extracting oil) may turn out to be terrible long-term investments (rising sea levels threatening major cities and markets). What if markets begin to demand, either for altruistic or self-interested reasons, better performance from corporations on multiple bottom lines? In such a system, does the role of government diminish?
It is tempting to say yes. Institutions with long term horizons, such as foundations and public pension funds, are teaming up with social investors to address “extra-financial” market risks, taking action through the Investor Network on Climate Risk (or INCR, which represents $4 trillion in assets), signing the UN Principles for Responsible Investment (more than $10 trillion in assets), and insisting that companies report on extra-financial performance through the Global Reporting Initiative. These massive investor networks own large chunks of the global corporate sector. If they demand that corporations act responsibly, externalities should diminish, reducing the need for regulation.
In fact, these market forces are extremely useful and leading to meaningful change as companies respond accordingly. Carpet manufacturer Interface‘s vision is “to be the first company that, by its deeds, shows the entire industrial world what sustainability is in all its dimensions: people, process, product, place and profits – by 2020 – and in doing so …become restorative through the power of influence.” But not every company embraces such a deep vision, and systemic performance on social and environmental issues is simply not improving fast enough. Government remains the only actor that can ensure a price on externalities (through taxes and regulation), while requiring full disclosure of extra-financial information.
When government is needed most, it is too often seduced by lobbyists and beholden to corporate interests. This is an old problem, identified a century ago by Woodrow Wilson, who warned that “the government, which was designed for the people, has got into the hands of the bosses and their employers, the special interests. An invisible empire has been set up above the forms of democracy.” But wise investors and corporations understand government’s crucial role. That’s why members of INCR have been calling for the Securities and Exchange Commission to mandate environmental reporting, and employer coalitions are requesting that the government regulate carbon sooner rather than later.
