By Amy Cortese
The New York TimesAugust 18, 2002
Global warming has been on the agenda of environmental activists for years. But it is also becoming a green issue of another kind — discussed not only in terms of melting ice caps and endangered species, but as a problem that can cost corporations and their investors billions of dollars.
With their confidence shaken in corporate bookkeeping and the market's omniscience, investors are starting to look for other possible "off balance sheet" land mines, including the hidden risks that could be associated with global climate change.
A scientific consensus has formed that greenhouse gases — carbon dioxide and other heat-trapping emissions released by automobiles, power plants and industrial factories — are causing the average temperature to increase, setting off environmental reactions ranging from rising water levels to droughts.
Losses from global warming were in evidence just this past week. A report released last Monday by the United Nations predicted that a two-mile-thick layer of brown haze blanketing Asia, caused in part by greenhouse gases, could severely cut rainfall and reduce India's rice harvest by 10 percent. And abnormally high temperatures in Eastern Europe have been partly blamed for the severe floods ravaging Prague and other beacons of European architecture.
Munich Re, a large German insurance company, estimates that global warming could cost $300 billion annually by 2050 in weather damage, pollution, industrial and agricultural losses and other expenses. Companies may also face unexpected expenses because of compliance with future regulations, fines, taxes and caps on products that produce greenhouse gases.
The impact of climate change varies by sector. Oil, gas and utilities, of course, are directly affected by changes in energy policy, while real estate is affected by coastal flooding and drought. But environmental activists and a growing number of investors have started to catch the corporate world's attention with their warnings that nearly all industries are exposed to some risk. Of particular concern are the costs of complying with a patchwork of regulations in the United States and abroad and the potential harm to a company's reputation if it is contributing to global warming.
In another ominous sign for chief executives and board members, some experts in corporate governance say company officers could be held accountable for failing to protect their companies from climate-related risk. And the lawsuits could come from governments as well as investors and other aggrieved parties. Peter Lehner, chief of the New York attorney general's Environmental Protection Bureau, said it was studying the issue of climate change and might sue polluters along the lines of the successful tobacco litigation by states in the 1990's.
YET most of the risks and potential costs go unreported. Although Securities and Exchange Commission rules require companies to disclose trends and uncertainties that could affect their stocks, few specific provisions exist for disclosing environmental liabilities. Critics say that even those regulations are barely enforced and that financial analysts rarely take such risks into account when assessing companies.
It's not necessarily deliberate. In many cases, companies are unsure how to calculate potential liabilities — especially when regulations have yet to be written. Because global warming is a long-term trend, it does not fit neatly into the quarterly reporting schedule or the outlook of many executives.
Still, many investors are taking such omissions seriously. "There was an assumption that everything important was valued by the market," said Robert K. Massie, executive director at the Coalition of Environmentally Responsible Economies, an association of environmental and investor groups that is based in Boston. "We know now that investors can be unaware of something with big impact."
Robert Monks, chairman of LENS Investment management and Ram Trust Services, and a longtime corporate governance activist, said companies need disclosure guidelines for environmental liability because "the market can't reflect something it doesn't know."
Mr. Monks was behind a shareholder resolution this year aimed at reducing the duties of Lee Raymond, chairman and chief executive of Exxon Mobil, to mitigate what Mr. Monks saw as the damaging effects of Mr. Raymond's rigid view that global warming was not a problem for the company. The resolution got 20 percent of the vote, considered surprisingly strong.
The issue of executive and director liability is likely to be closely watched. Shareholder activists "are creating a record of these companies' being put on notice," said Christopher Walker, managing director of a group that assesses the insurance risks of greenhouse gases at the New York offices of Swiss Re, a large insurer. "Our concern is, will there be a shareholder action 5 or 10 years from now?" In particular, he said, emissions reduction is shaping up as a "clear liability issue" for corporate managements and boards.
Swiss Re is reviewing the companies it insures to determine what they are doing to manage climate change risk, he said, and is considering excluding from coverage companies or directors that are not addressing it.
Some companies, like DuPont, BP and Ford, have addressed risk from climate change in their annual reports and S.E.C. filings. In its 2001 annual report to the S.E.C., for example, DuPont acknowledged the possible consequences of the Kyoto treaty on greenhouse emissions. Although not ratified by the United States, the treaty will limit gases like carbon dioxide and nitrous oxide, which DuPont produces in chemical manufacturing. DuPont's report said it has been reducing these emissions since 1991, yet may still face further restrictions in some countries.
IN contrast, Dow Chemical, a competitor, does not mention climate change or greenhouse gas emissions in its 2001 annual report to the S.E.C.
"We're going to be saying more about climate change," said Peter Molinari, a Dow executive who monitors climate change and the company's greenhouse gas emissions. For example, a social responsibility report to be released by Dow in September will chart its greenhouse gas emission reductions (15 percent since 1995) for the first time, Mr. Molinari said.
Advocates of more disclosure say that in lieu of hard numbers, even qualitative assessments are helpful. Pressure for such assessments has been growing. Shareholder resolutions that ask companies to disclose or reduce greenhouse gas emissions won an unexpectedly high 30 percent of the vote at some companies during the 2002 annual meeting season. Law firms and insurance companies are setting up business units to deal with climate-related risks. And more institutional investors are lobbying the S.E.C. and companies for better disclosure of environmental risks, particularly those related to climate change.
"People are recognizing that it's an issue they are going to have to deal with," said Tracey Mihelic, a partner at the Baker & McKenzie law firm in Chicago and a member of its new practice dealing with energy and climate-change litigation.
Tim Little, executive director of the Rose Foundation for Communities and the Environment, a shareholder advocacy group based in Oakland, Calif., that has been campaigning for clearer guidelines on environmental reporting, said, "We see environmental disclosure as the next big corporate accounting scandal out there."
A report being drafted by the foundation predicted shareholder losses from "fines, penalties, and cleanup costs due to violation of environmental laws, increased costs due to changes in environmental regulation, and greater-than-expected costs due to understated or undisclosed liabilities."
Innovest Strategic Value Advisors, based in New York, estimates that as much as 15 percent of the total market capitalization of major companies may be put at risk by climate change.
A report in July by the World Resource Institute, an environmental research group, said shareholders in leading oil and gas companies could lose 6 percent or more of the value of their investments because of regulatory and other efforts to curb climate change. Of the 17 companies studied, only three — British Petroleum, Conoco and Phillips Petroleum — mentioned in their annual reports that climate policies and regulations could affect future business operations.
Big names are behind some of the campaigns. In May, Rockefeller Philanthropy Advisors in New York organized the Carbon Disclosure Project, a petition supported by institutional investors representing $4 trillion in assets from Credit Suisse, Domini, Merrill Lynch Investment Managers and UBS Global Asset Management, among others. The investors wrote to 500 large corporations asking them to quantify their greenhouse gas emissions and plans for reducing them.
For many corporations, the process of even starting to calculate liability is difficult, because liability is contingent on future regulations. In addition, a single company can have several areas of seemingly insignificant risk that become significant when added up.
"How do you know what your risk is when the rules are not yet established?" said Ms. Mihelic of Baker & McKenzie. She said that if companies take action before regulations are in place — say, building a more efficient plant — those actions may not count toward credits when regulations are written years later.
"If I'm a board of directors, am I going to spend $100 million?" she asked. "If I address it now, are you going to sue me for addressing it too soon?"
Nonetheless, she said, "every company is discussing this, whether or not they are saying it's an issue."
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