“Climate change could be the next subprime meltdown”

Financial Post, 14th February 2008

Another subprime-mortgage-meltdown-sized risk could be looming for investors: global warming. That alarm was sounded Thursday at an investor summit at the United Nations headquarters, at which 480 investors, pension fund leaders and corporate executives from around the globe were warned that the vast majority of companies are ill-prepared for the Earth’s changing climate.

Many oil producers, utilities and manufacturing plants have yet to factor in the added expense if the United States – as is expected in the next few years – imposes caps on carbon-dioxide emissions. Similarly, many companies with big real-estate holdings in U.S. coastal regions haven’t calculated their exposure to increased tropical storms and rising seas.

Most of the financial institutions that lend to these companies and the insurance companies that protect them also have yet to adequately consider how they might get burned.

"It’s like subprime mortgages…one of longest kept secrets of uncalculated risk," said Mindy Lubber, president of Ceres, a coalition of investors and environmental groups, which co-hosted yesterday’s event. "By not acting on climate change…we face the same kind of [risks] with what we’re seeing in subprime."

Former U.S. vice president Al Gore, who was awarded the Nobel Peace Prize last year for bringing attention to the issue of climate change, echoed that theme as keynote speaker, urging investors to dump any assets they hold in businesses that are heavily reliant on carbon-intensive energy – or risk losing a ton of money down the road.

"You need to really scrub your investment portfolios, because I guarantee you…that if you really take a fine-tooth comb and go through your portfolios, many of you are going to find them chock-full of "subprime" carbon assets," Mr. Gore said according to an Associated Press report of the speech, which was closed to the press.

Similar to betting on subprime mortgages given to people with bad credit histories, "the assumption that you can safely invest in assets that come from business models that assume carbon is free is an assumption that is about to go splat," Mr. Gore added.

Wall Street is starting to catch on. This month, a group of big U.S. banks said lending for coal-fired power plans would hinge on utilities demonstrating they’d be economically viable under a crackdown on emissions.

Nevertheless, many companies remain oblivious to the risks, panelists at the summit said.

A survey of global executives by consultancy McKinsey found that 60% see climate change as strategically important, 82% expect to see stricter regulations on green-house gas emissions in the next three to five years, and 61% believe climate change could boost their profits. But only 40% of executives polled said their companies considered how climate change might affect their businesses.

Diana Farrell, a director for McKinsey who presented those findings yesterday, said companies’ failure to act represents an opportunity for investors.

Since the first UN Summit on Climate Risk about five years ago, investors have ratcheted up pressure on companies to disclose how they manage the risk posed by global warming. Since then, proposed shareholder resolutions on environmental concerns have jumped from five to 40 and such resolutions now get an average vote of support of 25%, up from 4%.

As part of yesterday’s summit, nearly 50 top U.S. and European institutional investors managing US$1.75 trillion in assets pledged to invest US$10 billion in clean technology opportunities over the next two years and also agreed to cut energy use in their core real estate holdings by 20% over the next three years.

The group also plans to put more pressure on Wall Street analysts, ratings agencies and banks to analyze and report on the potential impact of carbon emissions and to urge the U.S. Congress to introduce a mandatory national policy to reduce greenhouse gas emissions.

"Our goal is to transform the economy into one that is clean, green and sustainable," said California state treasurer Bill Lockyer, who sits on the boards of pension funds Calpers and Calsters.

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