Climate Change
Investor Summit Assesses Risks and Opportunities
By Amir A. Dossal and Mindy S. Lubber
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Leading United States and European institutional investors, collectively managing more than $5 trillion in assets, gathered for a day-long summit at UN Headquarters in New York on 10 May 2005 to explore the financial risks and opportunities of global climate change and to develop responses. At the proceedings’ conclusion, summit participants, including an unprecedented grouping of major pension funds, investment firms, State treasurers and foundations, joined the United Nations to back a new call for urgent action by the global investment community to tackle the threat of climate change.
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| UNFIP photo |
Having made significant progress since the first summit in November 2003 in increasing investors’ awareness about the financial impact of climate change and in improving corporate disclosures of the risks, the group turned their attention to defining the next round of needed initiatives. With the entry into force of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), there was a greater sense of urgency at the 2005 summit to learn more about the impact of a carbon-constrained economy on investors’ portfolios and the investment potential for a new generation of clean energy technologies. “The Kyoto Protocol has come into force. ... But Kyoto is only a first step”, said Secretary-General Kofi Annan in a video message opening the second Institutional Investor Summit on Climate Risk, co-organized by the United Nations Foundation (UNF), the United Nations Fund for International Partnerships (UNFIP), Ceres (Coalition for Environmentally Responsible Economies), the United Nations Environment Programme (UNEP) and the Investor Network on Climate Risk. “We need a framework for the years beyond 2012 that embraces all countries and makes full use of new technologies”, Mr. Annan said. “Your choices and pronouncements can make decision makers in government and industry take climate change seriously. And your investments can point the way toward smart policies and breakthrough technologies for energy and transport.” He encouraged summit participants to think “big” and “long term”.
Senator Timothy E. Wirth, Summit Co-chairman and UNF President, framed the links between energy policy, global climate change, national security and development. “We should be focusing on the opportunities that will come from developing an energy policy that addresses global climate change and, in doing so, enhances our national security and affords the world’s poorest people a chance to participate in the modern economy. At the UN Foundation, we view energy and climate policy not as hand-wringing problems but rather as enormous opportunities for transforming the world’s economies and making us all more secure.” That view was equally emphasized by the Summit Co-chair, Connecticut State Treasurer Denise L. Nappier. “Corporate and financial leaders need to look strategically at climate change and how it will impact the long-term health of businesses, industries and our economy. Institutional investors are interested in sound, long-term value, but our ability to make solid investment decisions depends on a thorough evaluation and full disclosure of risk.” Investors can also benefit from the enormous opportunities that are arising as greenhouse gas limits are enacted more widely around the world. “The risks are real, but so too are the opportunities”, she said.
Global temperatures are rising due to the concentration of carbon dioxide (CO2) and other greenhouse gas emissions, according to Harvard University Professor John Holdren. As a result, we will see more erratic patterns in the weather, including waves, storms, floods, droughts and wildfires within the next 25 years. “Evidence is mounting that climate change is well underway, as indicated by the rapidly shrinking coverage of ice in Antarctica and Greenland. The average temperature of the earth’s surface is 0.8 degrees Celsius above the average. “A mere 1.5 degrees Celsius above pre-industrial levels will mean the end of polar bears and corals reefs”, Mr. Holdren said. Three choices confront the international community: reduce CO2 emissions; “scrub” the atmosphere; and “engineer the climate” to counter the heat-trapping properties of CO2 emissions by injecting particles that would reflect sunlight back into the universe. Such emission reduction, he suggested, is the most viable option. The United States must join the rest of the world in addressing this challenge, imposing, for example, a carbon emissions cap and using tradable permits. Its active participation in the UNFCCC process is also needed to “help devise an adequate, affordable and equitable global framework for reducing climate-change risks” (see box).
Former United States Treasury Secretary Paul O’Neill offered his experience as Chief Executive Officer (CEO) of Alcoa from 1987 to 1999, when he led the company’s efforts to reduce greenhouse gas emissions while boosting efficiency and productivity. When he learned that aluminium manufacturing caused 3,000 times more pollution and harm to the ozone layer than carbon dioxide, he hired scientists and engineers to educate the company about the issue and find cleaner production methods. He encouraged CEOs to examine the impact of their companies’ activities on sustainability and submit their findings in a freestanding report that they provide to shareholders, rather than disclosing such information in the “impenetrable” 10-K. The United States Securities and Exchange Commission requires public companies to file and distribute 10-K forms, which is similar to an annual report, except that it contains more detailed information about the company’s business, finances and management.
Ted Turner, UNF Chairman, emphasized the enormous threat that global climate change will pose to the earth’s life-sustaining habitat if “very little or nothing” is done. He vowed to do everything he could to fight for a “better world for our children and grandchildren”. Noting historical experiences when American industry shifted its emphasis quickly, such as from civil to military production in 1942 after going to war against Germany, he said the world could and must start immediately to produce “clean, alternative, locally produced energy”. Leadership is needed to help unite the world in addressing climate change.
Klaus Toepfer, UNEP Executive Director, stressed that work must begin to further reduce carbon emissions limits in the Kyoto Protocol. “It is vital that we look ahead, beyond the first commitment period, and bring greater policy certainty post-2012.” Providing this “certainty” will create the investment climate and liquidity needed to make carbon markets thrive, he said. “Once they have greater certainty, they can bring the innovation that delivers new financial products and services to manage climate risk more effectively.” He announced a three-step post-summit collaboration plan that Ceres, UNEP, UNF and UNFIP would pursue.
The first step is a “Climate Risk Disclosure Initiative” aimed at enhancing the corporations’ disclosure, in collaboration with and building upon existing efforts on disclosure of risks and opportunities from climate change. It will focus on corporate emissions, climate actions, scenario and strategic analyses, and plans to address climate risks and opportunities. The second step is an initiative of UNEP and the UN Global Compact, working with the institutional investment community to develop “Principles for Responsible Investment”, which will define the basis for a new type of responsible capital that will align the long-term goals of sustainable development with the obligations of institutional investors, especially pension funds. Third, the establishment of a “New Forum for International Investor Cooperation in Addressing Climate Risk” will promote collaboration and information-sharing among investors about actions to address the financial risks and investment opportunities posed by climate change. This will serve their need to have a global venue for news updates, discussion and coordination.
During the Summit, 24 leading investors released a ten-point action plan calling on institutional investors, fund managers, financial advisors and companies, as well as the Securities and Exchange Commission, to intensify efforts to provide investors with comprehensive analysis and disclosure about the financial risks presented by climate change. The group also pledged to invest $1 billion in prudent business opportunities emerging from the drive to reduce greenhouse gas emissions. The specific investor commitments also included:
Urging publicly-held companies in the electric power, auto, oil and gas sectors to report to investors within a year on how greenhouse gas emission limits and other climate change scenarios will affect their businesses, and on steps they are taking to reduce those risks and to seize new market opportunities;
Requiring investment managers overseeing their fund assets to describe their resources, expertise and strategies for assessing financial risks associated with climate change; and
Evaluate and rank 100 of the world’s largest publicly-held companies on their actions for reducing climate change risks and share the scorecard report with investors in late 2005;
“Assessing climate change is now an essential aspect of intelligent investing”, said William C. Thompson, Jr., Comptroller for New York City. “Global warming will cause major shifts in the global economic landscape. For investors, those changes hold both risks and opportunities, and understanding these risks and opportunities is an important part of fiduciary responsibility.” The second largest private pension in the United Kingdom, the Universities Superannuation Scheme, also supported the call for action. Its Chairman, Sir Graeme Davies, urged other pension funds to take similar steps.
Michael J. Johnston, Executive Vice President of The Capital Group Companies, moderated a panel on “Addressing Climate Risk and Opportunities: Investment Manager and Company Perspectives”. Abby Joseph Cohen, Managing Director and Chairman of Investment Policy Committee at Goldman Sachs, and James Rogers, CEO of Cinergy, provided their insights during the session. Ms. Cohen outlined the obstacles where leadership is needed to improve financial assessments of climate change risks. “The data by itself is not good” to measure the impact. The time horizon of institutional investors is increasingly shorter, creating a mismatch between long-term objectives and short-term demands for portfolio management. Furthermore, she said, it is “very hard to find any studies in environmentally sound investing strategies that have led to better returns” than those of broad market indices. Examples of investments that meet, if not outperform, the market are key to persuading investors to commit their capital. Mr. Rogers stressed the importance of a “cap and trade” system for greenhouse gas emissions, under which companies could sell their unused emission allowances in the marketplace. “The tone at the top makes the difference”, he said in recounting how his company has reduced emissions. His motivation is also a personal one: how his grandchildren will judge his effort. “Will they look back and say, ‘my grandfather made good decisions’?”
Former United States Vice-President Albert Gore, Jr., Chairman of Generation Investment Management, addressed the opportunities for business and government leadership. “Of course, it [global warming] is real, it’s well-established; and because it’s well-established, we have a moral obligation [to act]”, he said. “We’re all here because there is an enormous policy vacuum. The business community, the insurance companies, the pension funds, the institutional investors are stepping forward with leadership from you all, because those who should be stepping forward have not.” He noted that “integrating issues related to climate change into your analysis of what stocks are worth investing in is simply good business common sense. It is time to take the businesslike, common-sense, difficult but necessary steps to shift the perspective and integrate the data, and to start acting in ways that are fully in step with your fiduciary responsibilities. And don’t let anybody suggest that it cannot be done.”
In closing the Summit, Mindy Lubber, President of Ceres and Director of the Investor Network on Climate Risk, said: “The trillions of dollars in assets of investors assembling at this UN meeting is a powerful message that global climate change is both an environmental threat and a financial threat, and that actions to mitigate these threats are needed now.”
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‘The Problem in a Nutshell’
The extensive presentation by Harvard University Professor John Holdren outlined the science of climate change. Some key points he raised are:
The problem of disruption of global climate by human-produced greenhouse gases in the atmosphere is coming to be understood as the most dangerous and intractable of all the environmental problems caused by human activity.
It is the most dangerous because climate is the “envelope” within which all other environmental conditions and processes operate. Distortions of this envelope of the magnitude that are in prospect are likely to so badly disrupt conditions and processes as to impact adversely every dimension of human well-being that is tied to environment.
The problem is highly intractable because the dominant cause of the disruption–CO2 emission from fossil-fuel combustion–arises from the process that currently supplies nearly 80 per cent of civilization’s energy. The technologies involved represent a huge capital investment ($12 trillion worldwide) and turn over slowly (30 to 40 years). Thus, there is no “quick fix”. If the energy system is to look much different in 2050 than today, a major push to change it must start now.
Most current policies and practices of Governments, firms, consumers and investors are actively contributing to driving up the risks from human-induced climate change, or if aimed at abating those risks are falling far short of what would be needed to reduce them significantly.
The public, investors and policymakers alike will be looking for damage-limiting options as the magnitude of climate disruption becomes increasingly apparent. Strategies and technologies for coping at manageable cost exist, but insight, initiative and resolve will be needed to get them deployed in time. The countries and companies that develop and exploit the needed strategies and technologies first will benefit, and laggards will suffer.
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| This is part of a series of articles exploring the many facets of partnerships supported by the United Nations Fund for International Partnerships (UNFIP). In the series, some of the UN private sector and foundation partners will convey their views on how partnerships with the United Nations are being built and are achieving impact on the ground.
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Amir A. Dossal, Executive Director of UNFIP since 1999, is responsible for managing the partnership between the United Nations and the UN Foundation. In 1997, he established the Management Policy Office and served as its Director, in charge of implementing management reform within the United Nations. |
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Mindy S. Lubber, President of Ceres, a coalition of investors and environmental leaders, is the Director of the Investor Network on Climate Risk. She has held leadership positions in government and the private sector, as well as in the not-for-profit area, for more than a decade, leading environmental and public interest law organizations, such as the National Environmental Law Centre. |
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