Ignoring risk of climate change could put companies in hot water

After a sputtering start, the green revolution appears to be steadily making its way into corporate boardrooms.

An increasing number of businesses are conducting annual surveys of carbon dioxide footprints. Some are filing CO2 inventories with national or private registries.

Others are purchasing greenhouse gas credits. And a few businesses are actually tying executive bonus pay to environmental targets.

First steps, to be sure, but ones environmental groups applaud. Indeed, some activist investors claim that the biggest risk companies now face from climate change is not acknowledging its risk.

Lack of disclosure, they say, could turn out to be a costly mistake.

“Right now, this is an issue that the investment community is beginning to get its arms around,” said Beth Young, a senior research associate at The Corporate Library in Portland, Maine.

Institutional investors certainly seem to be taking global warming seriously. Florida’s chief financial officer recently issued a directive requiring investment managers of state money to report on the potential effects of climate risk as part of their semiannual reviews.

Likewise, officials at CalPERS and CalSTRS, the influential California state employee and teacher pension funds, have teamed with other large funds to devise a global strategy tied to climate change. Eventually, the two funds, which collectively manage $420 billion in assets, may end up rejiggering their portfolio mixes, pulling capital out of businesses that remain silent on the topic.

“It’s not an issue of tree-hugging activists,” Jack Ehnes, chief executive of CalSTRS — the California State Teachers’ Retirement System — told the Sacramento Bee in December. “This is a hard-core business issue.”

Companies that fail to gauge the impact of global warming on their operations, he added, “pose a risk, and ultimately, it’s going to damage our portfolio.”

More than a dozen states have adopted laws restricting CO2 emissions from automobiles.

California went one step further, suing six automakers over the effect of tailpipe emissions on the state’s environment. The case was dismissed in September.

More lawsuits may be coming. The Corporate Library recently issued a report analyzing which carbon-intensive companies were most at risk for shareholder litigation.

The research evaluated the disclosure practices and governance arrangements of 24 Russell 1000 Index companies with CO2-intensive businesses. The businesses were then rated on their governance arrangements relating to their exposure to climate change.

But investors say the risks go beyond potential litigation. Insurance companies, for example, are already looking at policy losses arising from damage to coastal properties.

And utilities appear to be girding for carbon emissions regulations.

As of December, there were more than 165 bills, resolutions and amendments in Congress specifically addressing global climate change. The most likely bill to pass, observers say, is a cap-and-trade system espoused by Sens. Joseph Lieberman, I-Conn., and John Warner, R-Va.

Under such a setup, corporate greenhouse gas emissions would be limited, or capped. Businesses that can’t get below the cap would be forced to buy carbon credits — potentially an expensive purchase, depending on the supply of the offsets.

Anne Kelly, director of governance and corporate programs for Ceres, a Boston-based coalition of investors and environmental and public-interest organizations, thinks that businesses should include global warming in their long-range financial planning and risk management.

“Climate risk is a governance issue and needs to be handled at the highest levels,” she said.

Businesses that ignore the issue can find themselves on the receiving end of some unflattering publicity. A Ceres report issued last month analyzed the climate change governance practices of 40 of the world’s largest banks and investment banks.

Among the highest scorers were HSBC Holdings PLC of London, ABN Amro Holdings NV of Amsterdam, Netherlands, and Barclays Bank PLC of London. The Bear Stearns Cos. Inc. of New York and Bank of China in Beijing, among others, were on the low end.

CNS