Acknowledging Risks to Society

Yet when even the largest pension fund withdraws its capital from antisocial companies, they are unlikely to feel the sting. For genuine muscle, the reformers will have to generate a market-wide reaction to their critiques--with many investors, large and small, shunning the companies. That's why activists are working to accomplish their second strategic principle: convincing the governing institutions of the financial system to acknowledge that society's risks are also financial risks and that these factors should be made standard elements in evaluating corporate worth.

Confronting industrial producers of carbon emissions, the Investor Network on Climate Risk follows this logic systematically. Connecticut Treasurer Nappier, who leads the network, explains: "My basic premise is that by being an activist I can add value to the companies, not just by the integrity of their financial accounting but on issues we refer to as 'sustainable governance,' like the environment, treatment of workers, diversity in the workforce and on corporate boards. Climate change will affect the long-term value of the companies and therefore our pension-fund portfolio."

The investor network filed shareholder petitions with twenty-five corporations--the big names in oil, autos, electric utilities--asking them to disclose their risk exposure on global warming, then to explain how the companies intend to avoid the potential losses. Last fall, American Electric Power, the largest coal-burning utility and therefore the largest US generator of carbon emissions, startled the industry by responding forthrightly. It not only acknowledged the reality of global warming's threat to the world and its own risk exposure but also predicted that US controls on carbon emissions are likely in the next decade and spelled out its capital investment plans to begin reducing emissions. AEP had rejected previous petitions. Why did it respond this time? "They asked a reasonable question that had an answer," said AEP director Robert Fri. "What would be the economic impact to the nation's largest coal-burning utility? The answer is a lot." Other utilities, like Cinergy, followed with similar reports. In oil, ChevronTexaco and several smaller companies got religion too. In autos, Ford prepared a lame promise to make big changes by 2030.

The noose of global warming is tightening on US industry, as the Kyoto Protocol enters active enforcement. The global reinsurance firm Swiss Re has warned its corporate clients to come up with strategies for global warming or risk losing their liability coverage. The Association of British Insurers warns that "businesses responsible for high emissions of greenhouse gases could be held liable for the damage that is caused by climate change."

CERES, the environmental coalition that does strategy and research for Nappier's network, explains that the business risks go further than lawsuits and regulation. Electric utilities that build new power plants without incorporating carbon reductions may find they have misused billions in capital and are stuck with obsolete plants. Auto companies that continue to resist the transformation to nonpetroleum cars will lose market share to forward-thinking competitors like Toyota. Energy firms that ignore renewable sources are missing future business opportunities. These sectors might someday find they are the next tobacco industry, facing billions in damage lawsuits, insurance costs and capital losses. Yet most corporations still do not mention global warming in their quarterly disclosures of "material risk." Are they misleading shareholders? Thirteen pension funds have petitioned the SEC to require all companies to disclose these hidden risks.

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