As human-induced climate change makes its ominous presence known, investors are starting to size up corporations on the basis of their preparedness for associated risks and opportunities. Indeed, savvy investors know that the companies that can’t adapt to a carbon-constrained world will be forced to compete with forward-thinking competitors ready to capitalize on emerging markets in renewable energy and clean technologies.
Despite the likely threat of global warming, the largest CO2 polluters in the U.S. are failing to address the related financial risks. A recently released study by the nonprofit Investor Responsibility Research Center (IRRC) finds that while foreign rivals scamper to meet European Union CO2 emission reduction targets, American companies such as ChevronTexaco, ExxonMobil, General Electric and Xcel Energy continue to ignore the threat of global warming. “Such strategies leave them and their shareholders especially vulnerable to the increased financial risks and missed market opportunities posed by climate change,” says IRRC’s Doug Cogan.
In response to growing investor concern about global warming, the nonprofit Civil Society Institute (CSI) recently launched CookingYourNestEgg.org, a website that lets you research the holdings of major mutual funds in terms of their exacerbating or mitigating climate change. The website’s free, searchable database can serve as an invaluable resource for socially conscious stock and mutual fund investors looking to put their money where their mouths are. Reports from the site deride companies such as Alcoa, American Electric Power, ConocoPhillips, General Electric and Marathon Oil for lack of foresight on issues of climate change. Meanwhile, it salutes other companies, including Bank of America, Baxter International, Caterpillar, DuPont, Hewlett-Packard, IBM, International Paper, Johnson & Johnson, UPS and Waste Management, for proactive efforts to adapt business strategies to a warmer world while reducing energy needs.
On another front, groups of investors are using the power of shareholder resolutions—which mandate yes or no votes on specific practices at corporate annual meetings—to affect company policies on climate change. According to the nonprofit Investor Network on Climate Risk, 28 shareholder resolutions calling for companies to either quantify and reduce greenhouse gas emissions or disclose corporate responses to climate change risks and opportunities were filed at 22 companies in 2004. While the majority of such resolutions fail, the pressure often makes an impact, sending executives scurrying to make changes in anticipation of growing investor concern.
While many if not all business sectors will be affected by the onset of global warming, perhaps the insurance industry—which is already receiving many new claims based on droughts, flooding, hurricanes, West Nile Virus, coastal erosion and other climate-related maladies every day—has the most to lose. “Today, climate change as a financial issue is very much underestimated from the point of view of the insurance and reinsurance industry,” says Christopher Walker, managing director of the Greenhouse Gas Risk Solutions at the world’s second-largest reinsurance company, Swiss Re.
As of yet, though, insurance companies have not raised rates as a result of global warming threats, according toWalker. But as volatile weather becomes more frequent—as is predicted with the onset of global warming—rates are likely to go up, especially for those insuring coastal properties prone to hurricanes and flooding. Reinsurance companies—which underwrite retail insurers and thus fund the majority of claims—adjust rates on the basis of losses over five- to 10-year periods, meaning that industry rate hikes are likely to lag behind the onset of global warming effects.
Trading Our Way to Safety?
Industrialized nations around the globe—with the noticeable exception of the U.S.—are fighting global warming via new “cap-and-trade” programs, which allow companies to buy and sell pollution credits while capping the overall total amount of emissions. Indeed, the European Union has already instituted a CO2 cap-and-trade program that will help member countries comply with emissions reduction goals set by the recently authorized Kyoto Protocol.
Ironically, the emissions trading concept was first dreamed up and then successfully implemented in the U.S. during the 1990s (under President George H.W. Bush) to reduce sulfur dioxide emissions causing acid rain. But this time around, the U.S. is watching from the sidelines as its allies work to reduce global CO2 emissions. Without any formalized federal response to the onset of global warming, concerned Americans are forced to effect change any way they can, and indeed many are choosing their investments accordingly.
RODDY SCHEER is not investing in beachfront property.