Climate change is forcing companies of all sizes to rethink the way they do business.. to find ways to sustain growth in a low, rather than high, carbon economy.
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A spectacular global political failure in dealing with climate change has led consumers to vote with their money, buying hybrid cars and green electricity and in turn creating huge new markets. Investors too are voting with their money and organisations such as the Carbon Disclosure Project offer a unified way for them to find out about the greenhouse gas emissions and risk management of many of the world’s largest corporations.
CLIMATE CHANGE AS A POLITICAL ISSUE
It is a simple mistake to make, to imagine the world is quite safe and the changes greenhouse gases are making will not lead to catastrophe. There is a growing school of thought that suggests catastrophe is already here, now.
The World Health Organisation talks of 150,000 people dying each year from climate change. In 2007 some 66 million people were made homeless by exceptional floods in Asia. Recently a million people were evacuated from fires in California. It is difficult to imagine what kind of catastrophe we are trying to avoid that is not already happening. And it will of course get worse and worse, every year, for all our lifetimes.
Some people say such talk is environmental alarmism. But whatever the talk is, climate change has risen as a political issue in almost every country. Citizens are demanding action. When something is true in reality they figure, it must also be true in theory.
CLIMATE CHANGE AS A CORPORATE ISSUE
Corporate responsibility is now evaluated through the acute lens of what a company does in core operations. The 21st century consumer is now less inclined to fund the products and services that invest in catastrophe for their children. This is unsurprising.
Human society is failing to solve climate change through our cherished democratic tradition of putting an x on a piece of paper every few years. Rather, the major response is being enacted by consumers voting with their money every day to create a different possible future. They are buying hybrid cars and green electricity thereby creating huge new markets. And it is not just consumers using the power of markets to avert catastrophe. As Madeleine Albright said at the launch of my organisaton: “Our business is to help investors vote with their money.”
Today there are many remarkable new associations seeking to protect citizens from climate change and those working towards a unified business response to climate change. The Carbon Disclosure Project is one such association with a mission to facilitate a dialogue, supported by quality data, from which a rational response to climate change will emerge. It is particularly worth emphasising the importance of a unified approach.
THE CARBON DISCLOSURE PROJECT
Representing 315 investors with assets of US$41 trillion (three years of US GDP), the CDP has found this unprecedented investor authority has led over 1,300 of the largest corporations in the world to report their greenhouse gas emissions to its website. If you want to know what Disney or Coca Cola and McDonalds emit, or Exxon and Shell for that matter, the data is available to download free of charge.
The CDP is funded by the five governments of the US, UK, France, Sweden and Australia and is pioneering some very exciting new developments. For example, Wal-Mart is sending our questions on greenhouse gas (GHG) emissions out to their supply chain. Tesco, Nestle, Cadbury, P&G, Unilever, L’Oreal and many others are following suit. This could see the CDP’s work grow exponentially. And as CDP Advisor Lord Adair Turner of Standard Chartered Bank said at our launch events in New York and London in 2006: “What gets measured gets managed.”
A UNIFIED APPROACH TO CLIMATE CHANGE
Businesses and investors can have considerable impact. Yet for this to happen they need to act together. It takes the union to make the force. But that force can move mountains. At a time when we have the technology of gods, but the politics of children, businesses and investors all over the world, supported by enlightened consumers, are starting to take the urgent action required. The global business community is looking with horror at the pathetic squabbling between national governments on measures to reduce greenhouse gas emissions. The political process is failing. On present trends we face certain disaster. Against this grim backdrop of government ineptitude, a softly repeating mantra of hope is coming from the business world. It goes like this. ‘You do your worst. And we’ll do our best’.
And the business world is changing, in more ways than one. Through powerful new initiatives such as the UN Principles for Responsible Investment, shareowners are beginning to identify how to exercise their responsibilities with regard to defending their long term financial interests.
THE PRUDENT INVESTOR
Major pension funds own so much of the economy, they have been described as having a legitimate interest not just in individual companies, but also the overall system. This very wide and long term perspective has led some people to call major pension funds ‘Universal Investors’.
So what are the responsibilities of so called ‘Universal Investors’ with regards to the key issue of climate change? The world’s many large pension funds control enormous assets and operate under a strict fiduciary duty to invest in the best interests of the beneficial owners.
Until now that duty has been expressed purely in terms of calculating financial return. However the UK Government Stern report has seen this distinguished former World Bank Chief Economist comment:
“If we do not act, the cost of climate change will be at least five per cent of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20 per cent of GDP or more.”
In the well known formulation of the prudent man rule, Justice Putnam of the Supreme Judicial Court of Massachusetts in Harvard College v. Amory (1830) held that a trustee is required only to “observe how men of prudence, discretion and intelligence manage their own affairs.” The core definition of fiduciary duty identifies an obligation to invest in the ‘best interest’ of beneficial owners, giving reasonable consideration to the facts a ‘prudent man’ would pay attention to, given reasonable knowledge of the situation prevailing at the time.
This creates a complex situation for fiduciaries. Financial returns today are relatively unencumbered by taxation or regulation of GHG emissions. It is a stark but unavoidable fact that national and international government efforts to materially limit GHG emissions have simply failed.
In response to this fact, prudent investors cannot and probably should not simply divest from companies associated with heavy emissions of GHGs for two reasons. Firstly, many of them are very profitable. Secondly, divestment extinguishes the possibility to alter the behaviour of the company through acting as a responsible owner.
As corporate governance guru Bob Monks has noted, votes are an asset (voting shares always have a market premium over non-voting ones). Accordingly they should be used to further beneficiaries’ interests on all occasions. In effect, the voting of all institutionally held shares should be virtually compulsory.
But ownership is about more than voting at AGMs. It is about active participation in the life of a company, where required.
In a democracy, the citizen is a shareowner in the society, but his or her duty to that society is not limited to casting a vote at elections every few years. If something is going seriously wrong in society, a good citizen gets directly involved with the problem.
So what is going wrong with regard to climate change? A sequence of events is occurring that presents us with insurmountable problems. It runs as follows:
1 Scientists warn governments of a need for urgent action on climate change.
2 Governments prepare plans to cut emissions. They have difficulties negotiating among themselves but these problems are greatly amplified by;
3 Industry groups who anticipate risk from a disruption to business and then lobby governments requiring them to desist from taking action. The application of corporate resources to such campaigns overpowers government.
4 Inaction results from this sequence of events. This inaction threatens to result in dangerous climate change, with generally accepted predictions of very significant loss of life and catastrophic negative economic impact.
Practical steps to take for a concerned shareowner
First, communicate to the corporations you own that you take climate change seriously. Participation in UN Principles for Responsible Investment and CDP serve this function.
Secondly, consider specifically how the corporations you own are influencing government. This can involve desk research, interviewing companies or inviting expert organisations to provide submissions.
Thirdly, prepare communications to be issued individually or collectively (from one or many shareowners to one or many corporations), explaining the concerns of the fiduciary investor with regard to the best interests of beneficial owners.
Such a dialogue may seem slow and uncomfortable at first. New activities often do. But it may be useful to focus on three expert comments made at CDP launch events. Sir Derek Higgs, author of a major report on corporate governance for the UK Government said, February 2003:
“Our hands, all our hands, are on the controls and if we don’t exercise those controls appropriately we’ll have nobody to blame but ourselves. That’s companies, that’s governments, but it’s also institutional investors. All of us are the real principals in this; the companies are in a sense the agents.
“.... there is too much of a circularity, a deafness of dialogue if you like, between suppliers and users of capital in terms of information, in terms of the knowledge deficit. It goes something like this. Too often investors and analysts say, well we don’t have information from companies so we don’t know what to ask and the response comes back from companies, well we don’t actually know what they want so we don’t know what to give them. That’s silly, that’s unhelpful, it’s not necessary.”
Alan Hevesi speaking at the CDP launch at JPMorgan Chase Head Office, September 2005 observed. “I’m here as the sole trustee of the New York State Common Retirement Fund. It is the second largest in America after California.
“We have 982,000 members. We are long term investors and I’m a fiduciary. As a fiduciary I take the following position about our role as investors. I don’t accept the limited role that many pension fund managers and other investors take, that it is your job to get up in the morning, find a growth stock or other financial instrument, make some money for the fund and go home. There is a larger social purpose to our responsibility as fiduciaries, not for its own sake to pursue social issues, but because as fiduciaries we have to be prepared for the long term consequences of the behaviour of our companies.
“That’s the beauty of the Carbon Disclosure Project, to systematise and to organise this. The people who have sponsored this and participated, it’s terrific. A quiet, mature, expert way to raise the consciousness of CEOs who are under pressure to provide immediate profits for the next quarter’s reporting and by the way pressure from shareholders. This is a way to give them the sense that looking at the long term is really the smart and sensible way to go.
“Divesting means disengaging. It’s the last thing you do. The bottom line is that there is a potential crisis if we don’t do our job and we don’t get our governments and our corporations to get serious about these issues. We must be prepared, we must take the long term view, we must see that risk is also an opportunity and we must play our role in establishing that both thoughtfulness and faith in the sustainability of our planet is our mission and we do it on behalf of all the people that we represent.”
Chancellor Merkel of Germany, Chair of the G8 has put the point well:
“Global climate protection policy will only be successful, however, when it is supported by business and industry. Here, the capital market is of great importance, and it is extremely important for investors to take account of climate change in their decision making. This contributes to enhanced public perception of both the risks and the chances of climate protection.”
Can shareowners collaborate to break the logjam of political inaction? The UN PRI and CDP are committed to developing systems that help shareowners take the necessary action required. We hope all reading this will join the work programme and act together to defend assets from the risks presented by unmitigated climate change.
Author
Paul Dickinson is one of the founding members of the Carbon Disclosure Project and previously was responsible for the founding and expansion of Rufus Leonard Corporate Communications. More recently he has led the development of the EyeNetwork, the largest video conferencing service in Europe. He is a member of the Environmental Research Group of the UK Faculty and Institute of Actuaries. He is also the author of several publications, including Beautiful Corporations.
Organisation
The Carbon Disclosure Project (CDP) is an independent, nonprofit organisation aiming to facilitate a dialogue between investors and corporations through the dissemination of high quality information regarding corporate strategy in response to climate change. Each year a questionnaire is sent to the Chairmen of the world’s largest corporations by market capitalisation, asking for disclosure related to climate change risks, opportunities, greenhouse gas emissions accounting and management. It is the gold standard for carbon disclosure and methodology processes.
Enquiries
Paul Dickinson, CEO
Carbon Disclosure Project
Tel: +44 7958 772864
E-mail:
