Financial services industry addresses climate change issue

Jun 19, 2006 @ 12:01 am

By Dan Jamieson

IRVINE, Calif. - Concerns about global warming are changing the way financial services firms do business.

But critics say the industry, in addressing greenhouse gas emissions, is caving in to pressure groups. Even some in the environmental movement say corporate actions sometimes are just lip service.

Nevertheless, across the financial services industry, concern over climate change has moved beyond being just an environmental issue: Global warming now is seen as a key risk factor for companies.

The latest example came last Wednesday, when 27 institutional investors - managing more than $1 trillion in assets - wrote in a letter to Securities and Exchange Commission Chairman Christopher Cox that climactic change poses material financial risks to many companies in their portfolios.

While some U.S. firms reported their climate risk to shareholders, the letter states - citing commission rules governing the acknowledgement of material dangers to shareholder wealth - the majority of businesses have refused to disclose such risks.

Also this month, Lloyd's of London said insurers - which were some of the first firms to see a financial effect from global warming - still must do more to anticipate weather-related risks from climate change.

Several brokerage firms and banks have adopted investment policies that address carbon dioxide emissions, both from their own activities and from the companies and projects they cover, advise on and finance.

"The thing we have broken through [with Wall Street] on are that [environmental impacts] are financial issues as real as currency risk, interest rate risk and inflation," said Mindy Lubber, president of Ceres Inc., a Boston-based network of investment funds and public interest groups.

"Wall Street is waking up, because [environmental costs] are not being put on the taxpayer's back anymore," said Thomas Van Dyck, San Francisco-based senior consultant in the SRI Wealth Management Group of Piper Jaffray & Co. of Minneapolis. "Those costs are ending up on balance sheets of insurance companies."

Insurers are putting the costs back onto industry, said Mr. Van Dyck, whose 11-person team handles just under $1 billion for individual investors.

Another cost is likely to arise from mandatory limits on greenhouse gas.

Capping carbon emissions has gained "significant political momentum" in Congress, Hugh Wynne, an electric utility analyst at Sanford C. Bernstein & Co. LLC of New York, wrote in an April research report.

In one of the more ominous warnings, Goldman Sachs Group Inc. of New York last year said carbon emissions could create corporate liability comparable to asbestos.

But that comparison is "absurd," said William Niskanen, chairman of the Cato Institute, a libertarian think tank in Washington. "I think it's a rationalization to justify" environmental investment policies, he said.

"Those are fantasy liabilities," said Steven Milloy, co-portfolio manager of the Free Enterprise Action fund, which buys stock in companies likely to be targeted by activists, then advocates against social policies.

The fund is advised by Action Fund Management LLC in Potomac, Md.

Firms that have adopted various environmental investment policies include Goldman Sachs, Citigroup Inc. in New York, Piper Jaffray, Wells Fargo & Co. of San Francisco, JPMorgan Chase & Co. of New York, Canadian Imperial Bank of Commerce and Royal Bank of Canada, both in Toronto, and ABN AMRO Holding NV of Amsterdam, Netherlands.

Corporate hypocrisy

"None of these [firms] have justified any of this stuff," Mr. Milloy said.

Some of the financial services firms are going along just to appease interest groups, he added.

Financial firms disagree.

Goldman Sachs is advancing environmental concerns "because it's the right thing to do," said Christopher Williams, a spokesman for the company. "And we also see business opportunities."

Mr. Milloy says Goldman's policies were favored by former chief executive Henry M. Paulson Jr. "Who [at Goldman Sachs was] going to say no to Hank?" Mr. Milloy said.

Mr. Niskanen sees an element of corporate hypocrisy in eco activities. He points to London-based energy giant BP PLC, which uses the tag line "beyond petroleum" and espouses a shift to clean energy.

The company "escalated that pitch right about the time it became clear that its largest refinery in America was unsafe," Mr. Niskanen said.

Last year, an accident at a BP refinery in Texas killed 15 workers. And a company-run pipeline in Alaska this year suffered a large oil spill, which critics say the company was warned about.

Ilyse Hogue has the same concerns. Her group, Rainforest Action Network in San Francisco, recently has criticized ABN AMRO and Wells Fargo for violating promises to avoid destructive projects.

ABN AMRO has a bid to finance an oil and gas project on Sakhalin, a Russian island just north of Japan, the "largest oil project on the face of the earth, [with] huge environmental problems," Ms. Hogue said.

Wells Fargo has lent money to Massey Energy Co., of Richmond, Va., which Ms. Hogue calls one of the "worst of the worst" coal-mining companies due to its controversial mountain-top removal process in Appalachia.

"Wells Fargo's rhetoric just doesn't match up with its promises," she said.

Cap and trade questioned

With the overriding issue now being global warming, most observers expect that carbon-emission caps will be applied to U.S. companies.

They expect a "cap and trade" system to develop - similar to the one in Europe, where the right to release emissions can be traded like commodities.

But some question whether such systems can be gamed.

The price of carbon-emitting permits in Europe fell by almost 70% at the end of April after several countries disclosed they had overestimated their carbon dioxide emissions, creating excess permits.

"No one is sure how these calculations are done," Mr. Milloy said. "You can say whatever you want your carbon emissions to be.

"They're literally trading hot air," he said.

Mr. Milloy suspects speculators drove up prices in the hope U.S. buyers would step in.

The European system miscalculated how many credits were needed, Ms. Hogue said. "But certainly, the methodology exists to measure [how much carbon] you're putting out."

Nations might be able to come close to calculating their emissions, Mr. Milloy said, "but who really knows?"

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