From the June 2007 issue of Treasury & Risk magazine

When Green Matters

This year's proxy season has arrived and, with it, another record-breaking wave of climate change activism. In total, 45 resolutions have been filed by investor groups, dwarfing last year's previous high of 36. The new crop of resolutions isn't just greater in number. The resolutions are also more ambitious than before and have greater support, as mainstream investors and stock-pickers throw their considerable weight behind the activist agenda. "More and more investors are paying attention to climate risks and opportunities," says Rob Berridge, manager for investor programs with CERES in Boston.

Most filings call for better information on the risks companies face and tend to target industries that are either big emitters of greenhouse gases or are seen as most exposed to the impact of climate change. But companies who believe they are safely below the activists' radar might be in for a surprise--the end goal is routine disclosure of climate-related risks and activities across entire industries.

Climate-related activism has become so mainstream--filers now include pension funds, foundations and labor funds, alongside the environmental groups that filed the first such resolutions 17 years ago--and the movement's concerns have become so widely accepted, that a major tipping point has already been reached, says Doug Cogan, director of climate change research with shareholder services firm ISS Proxy. Increasingly, he says, the targets of climate change resolutions simply agree to address investors' concerns before the vote takes place. In both 2005 and 2006, there were more of these withdrawals than votes. This year there have already been 15 resolutions withdrawn because companies agreed to take action prior to a vote. "But if that's the tipping-point, then the moment the seesaw touches down will be when this kind of information is routinely included in annual reports and securities filings. At the moment, investors still have to file to produce action, so we're not there yet," Cogan says.

Interestingly, companies agree usually out of what must be principle rather than because they think they will lose the vote. The four votes taken so far this year only garnered support ranging from 22% at Dominion Resources Inc. to an anemic 9% at oil giant Chevron Corp.

Socially responsible mutual fund Calvert Group Ltd. is one of the old hands at climate-change activism. This year it targeted insurers Hartford Financial and Prudential Financial and was able to withdraw both resolutions without a vote.

Each followed a tried and tested pattern, says Lily Donge, senior social research analyst with Calvert. The fund identified an industry exposed to climate change and then zeroed in on companies with below-par policies. That task was aided by a study of all member companies of the Standard & Poor's 500 carried out last year by Calvert in conjunction with the Carbon Disclosure Project (CDP), an annual initiative through which companies report their climate change impact, exposure and related management actions.

Investors' aims are now becoming more ambitious. Among this year's bumper crop of filings are several which, instead of pressing for greater transparency, seek to commit the company to certain targets or hold them to specific actions. ExxonMobil Corp. and Chevron, for example, have both been asked to cut their greenhouse gas emissions to 1990 levels by religious shareholder groups. Power company TXU, meanwhile, came under pressure because of plans to spend $10 billion building 11 new carbon-belching coal-fired plants--a move which an ISS Proxy report claims would have more than doubled the company's emissions. After the investor community's sights were trained on it, in the form of three separate resolutions, the company has been making conciliatory noises, says the report, and the number of new coal-fired plants may now be cut to just three.

The leverage wielded by activists has increased thanks to the tacit support offered by leading investment banks, many of which have begun publishing reports that identify the winners and losers that climate change will create, says CERES' Berridge: "Lehman, UBS, Citi are all issuing reports --Goldman Sachs is all over this." As a result, climate risks and opportunities are now increasingly being factored into investment recommendations--and, potentially, lending decisions--which makes it harder than ever to dismiss resolutions as the work of environmental worry-warts, says Calvert's Donge: "The buy side and sell side are moving together and this shift is fundamental for climate change risk to be recognized in the marketplace. Now, it's not just a threat in proxy battles--it's a threat to the balance sheet."

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