It's clear that confronting the challenge of global climate change will require the participation of powerful institutions of all kinds. The scientific community is united on the urgency of the threat; so are the 156 governments, and regional organizations such as the European Economic Community, that have ratified the Kyoto Protocol. Giant corporations, including such household names as GE, Ford, and Royal Dutch Shell, are the latest to add their voices to the chorus. New Yorker staff writer Elizabeth Kolbert, author of the forthcoming book Field Notes from a Catastrophe: Man, Nature, and Climate Change, recently spoke to Mindy Lubber, the president of Ceres, a coalition of 85 investors, environmental groups, and public interest organizations working to encourage sound environmental stewardship by corporations. In 2003, Lubber helped launch the Investor Network on Climate Risk, whose mission is to evaluate the financial implications of global warming.
You spend a lot of your time these days trying to convince corporations and financial institutions that they should be thinking about and acting on climate change. How responsive is your average corporation to that message?
I appeal to them not because they are enthusiastic, card-carrying environmentalists but because climate change is a business issue, a financial issue. It has a profound impact on the financial strength of companies and on the economy overall. It's important to shareholders. We work with nearly three trillion dollars' worth of investors who say they care about climate. And again, not because they're environmentalists. They may be, they may not be. They may be Democrats. They may be Republicans. I have no idea. What they care about is the financial strength of companies, and that's the reason they want to know more about the financial impact of climate change.
Do you find it an easy case to make or is it a hard sell?
Well, it's a hard sell, but not an impossible one. Three years ago we tried to bring leaders of Wall Street financial firms and the largest pension funds into a room at the United Nations to talk about climate risks. And it was painful. They hadn't thought about it. It wasn't part of their vernacular. But last May, we brought that same group of people back into the room. Three hundred leaders of Wall Street money management firms at the most senior level and about 80 to 100 pension fund leaders, and we looked at the financial risks of climate, the risks of regulatory change, and what this means to the industries that would most likely be regulated -- the electric utilities sector, the auto sector, and others.
And by last May they were more willing to be there?
Absolutely. Before, the leaders of Wall Street would say, I'll send a junior associate who just graduated from Columbia and I think they took a course in the environment. And we said, well, that's not what we're looking for. It was a struggle. But the world has changed. Now climate risk is a commonly used term, as it should be. Is it being factored into every company's risk evaluation? Not yet. But we're seeing it more and more. Large pension funds are also saying, we want our Wall Street money managers to start looking at climate risks when they're building a portfolio for us. They already assess currency risk and interest-rate risk and dozens of other risks. Why not climate risk? Investors need that information if they're to make smart decisions.
Give me a good example of what constitutes climate risk.
American Electric Power did an 80-page report in response to investors who were saying, we want you to assess your risks. They looked at regulatory change. It may not happen for three years; it may be on a state-by-state basis; but it's going to happen. So, for example, if a large power company were about to invest nearly a billion dollars in a pulverized coal-fired power plant and regulatory change forced them dramatically to retrofit their facility, maybe they wouldn't use that facility anymore and would end up with hundreds of millions of dollars in potential stranded costs.
The Investor Network on Climate Risk represents some very large institutional investors, including pension funds. What kind of leverage do they have?
When the New York City Comptroller's Office or the New York State Comptroller's Office or the Office of the Connecticut State Treasurer engage with a company, they're doing so as owners, not as environmentalists. They want to understand a company's financial situation and its shareholder value. So the company will listen to them.
What about the financial institutions? As much money as you may leverage, Goldman Sachs's leverage is greater. Where are they?
I think they're slowly coming around. Goldman Sachs recently put out a report on why businesses and investors need to pay attention to climate change. I would have liked to see them recommend that all analysts within the electric utility, auto, and other high-impacted sectors start assessing climate risk. They didn't go quite that far, but they moved a lot farther than we've seen from the financial community. Merrill Lynch and JPMorgan also recently said that the financial implications of climate change are part of their analysis of the auto sector.
In terms of carrot and stick, there are companies out there that are saying, we're going to get hit by regulatory action sometime in the future, so that casts a lot of our decisions into doubt. Is there any kind of carrot to offer them? I mean, you do this, you make more money?
Well, for example, Toyota is seizing a huge part of the hybrid market because American auto manufacturers weren't ready to take advantage of the opportunity. Now they're finally starting to move and that's a good thing. And they're moving because it's good for business and they want to sell vehicles. But it is hard to ask one company to make major financial investments if its competitors are not going to move. So we want to find a way to bring a critical mass of business leaders to see that.
Let's look at a company using a less carbon-intense source of energy. It may be at a financial disadvantage in the short term, but it may have an advantage in the long term. How do you "incentivize" that, I guess, to use a Wall Street term?
I think people now realize this problem is big enough that we need to look at incentives as well as regulatory changes. Take General Electric, for example, and their "ecoimagination" project. What they've said is, we're going to do what's right. We're going to mitigate our carbon footprint, and at the same time we're going to make a lot of money. That's the kind of American ingenuity we're looking for, and we need to see far more of it. General Electric is not putting their shareholders at a disadvantage by taking a strong stand on climate. They are doing something they believe is smart for the business, that's going to generate more revenue. They're saying that if they produce cleaner, more energy-efficient engines, people are going to buy them. And they're right. People are clamoring for that. GE is doing exactly what we'd like to see more and more businesses do.
What kind of impact can shareholder initiatives have on corporate behavior?
The number of shareholder resolutions on climate has increased considerably over the past five years. The resolutions are generally from large investors who are saying, we want you to assess your risk so we can decide whether we want to be invested in you. The number of resolutions has gone up, and so has the number of votes for those resolutions. At Chevron a year ago, I think the figure was 32 percent. At American Electric Power, it was 27 percent. And companies without question realize they can't ignore that, because the resolutions are coming from their own owners.
Is there anything the individual investor can do?
Most of us are in mutual funds, and when we looked at how mutual funds vote their proxies on these global-warming shareholder resolutions, 98 percent voted against them. I think that's going to start to change, because 2004 was the first year in which mutual funds had to disclose how they vote on their proxies. Nobody ever knew how they voted before. What can individuals do? When they get those proxy statements in the mail -- and we all get them -- they're lengthy, detailed, hard to read, complicated. But it's worth taking the time to wade through them. Shareholder resolutions are certainly part of what is engaging companies to look at this issue. The most important message is: This can't be dismissed as just another environmental campaign.
