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Climate Risk

Mitigation strategies

and policies

Dan BakalCeres

A Presentation for Climate Change Policy En Banc

February 23, 2005

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The Big Picture

• The relationship between capital markets and corporations is changing

• Central claim: “social, environmental and geopolitical issues can materially impact a company's ability to sustain returns.”

• Attention to sustainability = good governance

– Visionary boards address major trends

– Myopic boards place shareholder value at risk

Climate Change is a Key Wedge Issue

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Climate Change Financial Risk

• Physical Risk– Physical effects may impair company profitability by

reducing revenues, increasing expenses, or both• Policy Risk

– Companies may incur additional costs as a result of emission reduction requirements, or may fail to earn credits associated with emissions reductions

• Competitive risk– Companies may fail to recognize business opportunities

related to climate change• Legal Risk

– Five power companies being sued by AGs to reduce carbon dioxide emissions 3 percent per year each of the next 10 years

• Reputation risk– Companies may face reputation damage if perceived as

causing climate change or impeding measures to reduce climate change and its impacts (e.g. ExxonMobil boycott in Europe in 2003)

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Nov 2003 Summit Conveners:

16 U.S. State & City Treasurers

• California: Phil Angelides

• Connecticut: Denise

Nappier

• Florida: Tom Gallagher

• Iowa: Mike Fitzgerald

• Kentucky: Jonathan Miller

• Maine: Dale McCormick

• Maryland: Nancy Kopp

• Massachusetts: Tim Cahill

• New Mexico: Robert Vigil

• New York City: Bill Thompson

• New York State: Alan Hevesi

• North Carolina: Richard Moore

• Oregon: Randall Edwards

• Pennsylvania: Barbara Hafer

• Vermont: Jeb Spaulding

• Wash. DC: Anthony Calhoun

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Argument advanced at SummitEVOLUTION OF FIDUCIARY DUTY

1. We face the largest physical changes in history of human civilization

2. Such changes are likely to have significant but uneven financial impacts on industries and regions

3. Therefore embedded in every portfolio.

4. Thus every responsible trustee, fund manager, director needs to ask: how will we be affected?

5. Willful failure to analyze is breach of fiduciary duty

“Under what circumstances and to what degree is my portfolio affected by climate risk?”

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Investor Call for Action on Climate Risk

• Signers:– State Treasurers (CA, CT, MD, ME, NM, OR, VT)

– State and City Comptrollers: NY State, NYC

– Labor: AFSCME, CWA/ITA, SEIU, Teamsters

• 10-Point Action Plan - Summary– SEC: Require climate risk disclosure and protect

shareholder rights to file climate resolutions

– Corporate Boards: Insist that management report climate risk information to shareholders

– Investment Managers: Analyze climate risk

– Institutional Investors: Adopt proxy voting guidelines supporting climate risk disclosure

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Investor Actions on Climate Risk Since 2003 Summit

• Global Warming Shareholder Campaign– Big investors - NY State files first climate resolution ever– Victories with 5 electric power companies– Highest votes ever: Apache (37%); Anadarko (32%)

• Environmental Investing– CalPERS approved 2 environmental investing initiatives– Other states interested in replicating CA “Green Wave”

• SEC Climate Risk Campaign• Ceres Electric Power Dialogue• Harvard Pension Trustee Workshop• Engagement with University Endowments• Building a Global Investor Network on Climate

Risk (Linkages already with EU, Canada, UNEP-FI)

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INVESTOR GUIDE TO CLIMATE RISK

Expert Advice

Risk Assessment

Network with Others

Public Statement

Public Disclosure

Emissions Accounting

Stakeholder Dialogue

Investment Strategy

Clean Energy

Government Action

10 Steps to Address Climate Risk

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Corporate Governance and Climate Risk

• AEP • Alcoa • BP• ChevronTexaco• Cinergy• ConocoPhillips• DaimlerChrysler• DuPont • ExxonMobil• Ford Motor

• General Electric• General Motors• Honda Motor• IBM• International Paper• Royal/Dutch Shell• Southern Co.• Toyota Motor• TXU• Xcel Energy

Profiled Companies = 15% of Global CO2 Emissions

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CORPORATE GOVERNANCE14-Point Climate Checklist

1. Board oversight

2. Board climate review

3. Chain of command

4. Executive compensation

5. CEO leadership

6. 10-K disclosure

7. Sustainability report

8. Emissions offsets

9. Recent inventories

10. Historical baselines

11. Future targets

12. 3rd party certification

13. Emissions trading

14. Renewable energy

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Electric power DialoguePhase I Participants

Investors• Calvert Group• CT State Treasurer• Innovest• IRRC• ISIS Asset Mgmt• NYC Comptroller

• Pax World Fund• Social Investment

Forum• Trillium Asset Mgmt• Walden Asset Mgmt

Power Companies• Calpine• Con Edison• Keyspan• Northeast Utilities• PG&E Corp• PPL Corp• PSEG• Wisconsin Energy

Environment Groups• NRDC, UCS, WRI, WWF

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Electric Power Dialogue consensus statement

“The issue is not whether the U.S. government will regulate GHG emissions, but when and how. . . . Continued uncertainty over when and how carbon dioxide emissions will be regulated at the national level is the least optimal path forward.”

From recommendations: “National governments should “develop national policies to reduce greenhouse gas emissions. . . . These should include: A climate change program to limit greenhouse gas emissions to create certainty.”

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2004 Results - Electric Power

Investors approached 6 companies - AEP, Cinergy, TXU, Southern Co., Xcel, and Reliant

AEP, Cinergy, and TXU have issued climate risk reports, Southern to come in April

– Acknowledged climate change as a major business issue deserving board involvement

– Voluntary actions are limited/insufficient

– Regulatory uncertainty is huge challenge

– Inevitability of GHG regulation

– McCain-Lieberman costs would be manageable (AEP)

– Investments in renewables, efficiency, demand-side management, IGCC, etc. are part of the solution

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AEP Emissions Assessment Report

“We share your position that

management and the Board have a

fiduciary duty to carefully assess

and disclose to shareholders

appropriate information on the

company’s environmental risk

exposure.”

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Regulatory Risk: AEP

“Large-scale investments in pollution control can only be undertaken prudently if there is little risk of such investments becoming “stranded” by future environmental or economic mandates, including carbon constraints.” -- Aug. 31, 2004

Assessment of AEP’s Actions to Mitigate the Economic

Impacts of Emissions Policies

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• The current regulatory uncertainty has made it difficult to plan capital expenditures that will bring the company into compliance with environmental requirements while also serving customer needs

• Investing $21 million to reduce GHG emissions to 5% below 2000 levels by 2010 - 2012

• Considers IGCC to be key part of long-term solution

• Carbon controls are inevitable and a “well constructed policy that gradually and predictably” reduces greenhouse gas emissions can be managed “without undue disruption to the company or the economy.”

Cinergy Climate Risk Report

Analysis of the Potential Impact of Greenhouse Gas and Other Air Emissions Regulations on Cinergy

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2004 Shareholder Resolutions Oil & Gas

• Votes

– Apache 37%

– Anadarko 28%

– Marathon 28%

– Petro Canada 20%

– Valero 9%

– ExxonMobil 9%

• Dialogues

– ChevronTexaco

– ConocoPhillips

– Devon

– Valero

– Unocal

– Occidental

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2005 Shareholder SeasonMost resolutions ever filed:• Autos: Ford, GM• Electric power: Dominion Resources, FirstEnergy,

Progress Energy• Oil & Gas: Anadarko, Apache, ChevronTexaco,

ExxonMobil, Marathon Oil, Tesoro, Unocal, Vintage Petroleum, XTO Energy

• Manufacturers: Allergan, Avery Dennison, Analog Devices, Corning, Dow Chemical, Newell Rubbermaid, Nucor

• Real estate: Centex, Health Care Property Investors, Lennar Corp, Liberty Property Trust, Ryland Group, Simon Property Group

• Financial services: J.P. Morgan Chase, Wachovia, Wells Fargo

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McKinsey Quarterly - Feb. 2005

• Over the next 5 to 15 years the way a company manages its carbon exposure could create or destroy shareholder value.

• Managers who fail to respond to calls for more transparency and better planning will face greater public censure or even charges of breach of duty

• Companies in all industries, whether or not they emit carbon in their production processes or produce goods that emit carbon, should set up new tracking and reporting processes to keep shareholders informed.

• Found wide variation in the impact of regulation on carbon-intensive industries in Europe.

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What really is best practice?

• Engage - with all relevant stakeholders (employees, mgmt., board, customers, suppliers, shareholders, NGOs, regulators)

• Disclose - all relevant information (past, current and projected emissions, reduction commitments and projects, overall plans and business strategies)

• Act - publicly acknowledge significance of climate change, make specific reduction commitments, factor cost of carbon into capital plans, perform scenario analysis, participate in collaborative efforts, seek constructive public policy solutions

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For More Information

Dan Bakal

Director of Electric Power Programs

Ceres

(617) 247-0700 ext. 13

bakal@ceres.org

www.ceres.org

www.incr.com