Taking climate change to the boardroom
Climate change is one issue that is going to have an enormous impact on investment returns over the medium to long term. This has been outlined in reams of research over the last few years, and plenty of concerned investors are taking steps to ensure the companies they hold shares in are dealing with climate change; to protect both their investments and the planet.
May 4, 2007 by Miguel A. Lopes. Copenhagen Industry Pollution #1
Tar Sands
BP was subject to shareholder action at its AGM over its joint initiative to extract oil from the Alberta tar sands. Several shareholders expressed their concern at the environmental implications of this project and the potentially adverse affects such a damaging project could have on the company's value. It will cause substantial local and global environmental damage, and significantly increase BP's contribution to climate change. On a local level the project will damage a large area of virgin forest, use massive amounts of water to purify the tar sands, and emit a large quantity of toxic waste which will then have to be managed. There are also concerns about the health impact on the local population. The investors who put forward resolutions at BP's AGM are concerned that this project is contrary to BP's commitment to go "beyond petroleum" and will harm its reputation as one of the more progressive oil and gas majors, which could ultimately make it lose value.
BP is already facing legal proceedings over a previous incident that shows disregard for environmental implications can damage a company's value. Lothian pension fund is participating in a class-action suit in the US against BP over a catastrophic oil spill in Prudhoe Bay, Alaska, in 2006. The lawsuit alleges that the company neglected spending on pipeline maintenance and misrepresented this information to its shareholders, with the result that the value of the company's shares fell dramatically after the accident. ConocoPhillips, set to become the largest developer of tar sands projects, is also facing shareholder resolutions asking for it to report on the environmental impact of the project and set Greenhouse Gas emissions reduction targets.
The scale of current tar sands development is huge - this Google earth image shows the impact they've had already. The tailings ponds are 50km across and can be seen from space.
US Investor resolutions on Climate Change
Investors active on environmental and social issues in the US have been proposing shareholder motions at AGMs of major companies asking them to report on their exposure to climate change and commit to reducing Greenhouse Gas emissions, sometimes with the use of binding targets. The institutional investor research group Ceres filed 54 of these resolutions, and encouragingly was able to withdraw 14 of them when the companies in question made commitments on climate change.
A report by Ceres on voting by US pension funds on climate change resolutions showed that while a majority of the pension funds still opposed climate change motions, this majority had fallen from 77.8 percent in 2004 to 65.1 percent in 2007. There were a growing number of abstentions.
Discouragingly, though, some major fund managers who are taking a proactive approach to getting climate change related business - through launching 'clean energy' and climate change funds - are not taking a joined up view of voting. For example Morgan Stanley and State Street, who both use climate change funds to boost their businesses also use their shareholder power to oppose climate change resolutions at the AGMs of major companies. Happily there are other firms, Goldman Sachs among them, who are consistently supporting resolutions as well as growing CC business. Read the Ceres report here
Visit the Ceres website http://www.ceres.org
Visit the Investor Network on Climate risk site http://www.incr.com
Governance and Climate change
Another oil company coming under fire in April was Exxon. The Rockefeller family made the news when they filed shareholder resolutions at Exxon (the company founded by John D. Rockefeller) asking for improvements in corporate governance and climate change reporting. It's interesting to note that they consider the lack of independence of Exxon's board to be an important contributor to its position on climate change, where it lags significantly behind other major oil companies. They indicated that the combined chairman/CEO role and insufficiently independent non-executive directors had led to a lack of any perspective other than the "company line" being given at board meetings. Family representatives said that Exxon was failing to plan for the long term in a way which threatened its future profitability. The following day Exxon announced that despite record profits, its production had decreased 10% and analysts warned that the company might not grow at all over the next five years.
The episode is an illustration of how governance, environmental and social performance and financial growth are all closely linked together. Many socially responsible investors (and many traditional ones) use a company's governance record as an indication of overall management quality, and the extent to which the management examines environmental and social considerations can indicate their wider approach to risk management and planning for the future.
Guardian report on the Rockefellers' press conference http://www.guardian.co.uk/business/2008/may/01/exxonmobil.oil
UK Institutional investors examine their own performance on Climate Change
Back in the UK The Institutional Investors Group on Climate Change examined how its own members were incorporating climate change factors into their investment decision-making. These are some of the most progressive investors in their approach to climate change, but results were mixed, showing that although most of the signatories had started to take climate into account in some way, there was still room for progress. All of the fund manager signatories surveyed now ask companies to provide better reporting on climate change, and approximately 60% of them ask for this to incorporate measurable emissions reduction targets.Rory Sullivan, head of responsible investment at Insight Investment, said:
"I think the report should be applauded for its honesty. What it demonstrates is that, while we've seen a lot of good work, for example in investors encouraging better climate change reporting from companies, we've yet to see that translate into hard action such as climate change related investment mandates. The lack of clear public policy is clearly one dimension of the problem. However, you also have to ask why progress has been so slow given that - using the UK as an example - it has been eight years since the amendments to the Pensions Act and that these eight years have seen a huge amount of high-level discussion about how investors should be more responsible."
Visit the IIGCC website http://www.iigcc.org/