| Part 1 | Part 2 | Part 3 | Part 4 | Part 5 |  

Part 4 - Market Pressure Mounts - 2000
             4.1 Equity Markets
             4.2 Proxy Results

4.1 Equity Markets
Description
Financial analysts and capital markets generally have taken little explicit note of how different industries and companies are differently positioned on climate change. We argue overall that most industries and companies have significant value at stake on climate change and - in many cases the impact will be financially material. Therefore, positioning on climate change is a logical element of financial analysis for investment purposes.

If financial analysts applied this knowledge, share prices would reflect both the degree to which each company had value at stake on climate change and the quality of management preparation of each for climate change. This would drive significant change in corporate decision-making in response to investor questions and analysis of its positioning on climate change.

Value at Stake
If companies have value at stake on climate change, then equity markets integrating an understanding of this would effectively bring that value at stake into share prices. The share price of those companies that are demonstrably better positioned on climate change would benefit, relative to those that are less well positioned. As such, the role of the equities market as a driver of corporate action on climate change is to magnify and focus existing value at stake. It is reasonable to assume that information about how particular companies have value at stake will eventually be incorporated into share price, but the important point here is that it could happen relatively quickly as existing initiatives gain momentum and market understanding increases.

Developments and Trends
A number of mainstream investment banks have published investment research for their institutional clients on the implications of climate change. UBS and Dresdner Klienwort Wasserstein both published reports on climate change and the Pan-European utility sector. WestLB has published a report on the scope of financial value at risk in the economy overall and by specific industries. UBS, Credit Suisse First Boston and Citigroup have published reports on the implications of carbon trading. Sachs has published an index an environmental and social index for the global oil and gas industry.

Several prominent leaders of major public pension funds in the US have publicly expressed concern that global warming posed long-term economic risks that threatened the value of retirement funds. Led by Denise Nappier, Treasurer of Connecticut, the group includes the treasurers of California, Maryland, Vermont, Maine, Oregon and New Mexico as well as the Comptrollers of New York State and City. Together with labor pension funds representing Service Employees International Union and Communication Workers of America, these state officials have formed the Investors Network on Climate Risk around an action plan calling for:

• The SEC to:
  - Enforce corporate disclosure requirements as the pertain to climate change risks; and
  - Recognize shareholders right to vote on resolutions calling for corporate reports on climate change risks
• Corporate Boards of Director to ask management for an assessment of climate risk;
• Companies to analyze the potential impacts of climate change on their companies and report the results to shareholders;
• Investment managers to include climate change considerations in their investment decisions;
• Institutional investors to adopt proxy voting guidelines on climate change and support resolutions requiring disclosure of information on climate change risks;
• US Congress and Administration to develop policies to address climate change and assess the financial impact of climate change on the long-term value of investments; and,

State governments to assess the financial impact of climate change on their states and local businesses.

• There has been much philosophical and theoretical discussion about the value at stake due to climate change, but there has been fairly little analysis of:
        - how much value is at stake in particular sectors and industries, and
        - how much value particular companies have at stake.

That's changing. Over the last two years, several key studies have provided solid first order answers:

• a study for University Superannuation Scheme which lays out the fiduciary argument on value at stake based on UK law (see http://www.claros.co.uk);
• a study for CERES (Coalition for Environmentally Responsible Economies) - fiduciary argument on value at stake based on USA law (see http://www.ceres.org);

• a study on Exxon for the campaign to change ExxonMobil's stance on climate change - quantification of the value at stake at a specific company (see http://www.claros.co.uk);
• the investment research arm of WestLB, the German bank, quantifying the value at stake for industries and an analysis of value at stake in each of 18 sectors; and,
• the World Resources Institute studies on oil and auto sectors quantifying the value at stake to climate change for each of the leading companies in these sectors (see http://www.wri.org).

Together this work provides the intellectual infrastructure for all investors (not just self-identified socially responsible investors) to understand climate change as a potentially material business issue for which companies should have a strategic plan:

• climate change in the context of investors fiduciary duty,
• several analyses of how much value at stake to climate change there is in the overall equity market
• analysis of value at stake by sector and industry, and
• several methodologies and results on value at stake at corporate level

This transition is likely to build gradually until it reaches a tipping point when it becomes generally accepted that climate change positioning is a key investment consideration. Then, prudent investors will analyse this issue across their portfolios.

4.2 Proxy Results
Description
The socially responsible investment (SRI) community in North America has long used a strategy of filing proxy resolutions on social and environmental issues at target companies. Often, these resolutions represent an investment dimension as part of a broader campaign on a company. In other instances, the proxy resolutions are based on an agenda particular to the investors involved.

In recent years, SRIs have an increasing number of resolutions related to climate change. Most of these resolutions would require the target company to develop and adopt a business policy on climate change. For the most part, these resolutions cannot and do not prescribe what that policy would be or even that the company should reduce it's GHG emissions because such specifics would not qualify to be voted on at the annual general meeting as they are regarded as operating issues.

Value at Stake
The level of support for a proxy resolution is an explicit measure of investor support for a given proposition. As such, they reveal the attitude of investors more clearly than the valuation considerations mentioned in the Equity Markets section of this series (link). Rising levels of support for resolutions regarding climate change send clear messages to management about how seriously investors perceive climate change is in influencing their business investments.

Developments and Trends
Both the number of resolutions on climate change and the level of support they receive is increasing. In the 2003 proxy season, eight significant resolutions went to a vote in the US at seven companies. Another three went to a vote in Canada. A similar number in both the US and Canada were filed but withdrawn based on the filers being satisfied in their discussion with the companies.

Most of the resolutions received support from investors holding about one quarter of total shares outstanding in the companies. That level of support in the mid-20 percent range clearly demonstrates support well beyond the traditional SRI community. Most resolutions on social issues don't break the 5 percent barrier.

While some of the 2003 resolutions received support still in the lower range (e.g. 6.2 percent at General Motors), at least one came very near to outright passage (IPSCO, a Canadian steel company, at 49.2 percent). The most notable of the 2003 climate change resolutions was directed at ExxonMobil and gathered support from investors holding 22.2 percent of the shares outstanding. A similar resolution at General Electric captured 22.6 percent, up from a figure of 19.2 percent for a similar resolution in 2002. This highest vote total for a climate change resolution in the US was at American Electric Power (AEP), a Midwestern utility.

For the 2004 proxy season, activists have filed a total of 28 resolutions at 27 companies on climate change. New targets include Apache Corp., Marathon Oil, Unocal, Valero Energy, Ford, and Anadarko. As usual, some resolutions were excluded from the proxy statement and others have been withdrawn due to successful negotiations with the company. 15 climate change resolutions are currently slated to go to a vote companies in North America.

The withdrawal of resolutions at several companies is of note. At AEP, a similar resolution got 27 percent in 2003. In 2004, however, the sponsors withdrew the resolution after AEP agreed to recognize that it had a fiduciary duty to treat climate change as a business issue, appoint a committee of independent Board members to evaluate climate change risks, and seek input from other shareholders. Cinergy, Reliant, TXU and Southern have all agreed to write reports on climate change risks and the resolution sponsors have withdrawn their resolution.

Underlying the trend of these resolutions getting more support is the degree to which the leading proxy voting service, Institutional Shareholder Services (ISS), has conducted analysis that supports the contention that these companies have material value at stake from climate change issues that warrants the attention of their institutional investor clientele.

Implications
The primary implication is the growing acceptance within the institutional investment community that energy-intensive companies have value at stake from climate change. If the trend towards investors filing more such resolutions and them receiving greater support increases, expect a number of companies to have such resolutions passed and for others to negotiate more seriously with the sponsors of the resolutions, in an effort to avoid an embarrassing defeat at the annual general meeting.

Go to Part 5 - The Carbon Constrained Economy Emerges - 2010?

^   Back to Top