Companies should be forced to issue non-financial reports, according to Mindy Lubber, president of Ceres
The present financial crisis and increasing acceptance of global warming means change for investors. A new appreciation of business risk, an expanded notion of fiduciary duty and even a fundamental rewriting of the rules of capitalism are now all on the table.
But what will change look like? Will it be a tweak to the system resulting in incremental improvements or an upheaval that leads to a paradigm shift in the foundations of corporate law and capital markets?
Within the socially responsible investment movement, few organisations are better poised to answer these questions than Ceres – the Boston-based coalition of investors, environmental organisations and public-interest groups that created the Global Reporting Initiative guidelines for non-financial reporting. About 1,500 companies reported on their social and environmental impacts using the guidelines in 2008, according to GRI, 10 years after the guidelines were first introduced.
But GRI guidelines are voluntary. The next “radical” step, says Ceres president Mindy Lubber, is to make them mandatory.
“[Mandatory] reporting, alone, is simple but radical in that it changes the way companies think,” Lubber says. “They understand what their [social or environmental] footprint is, what their risk is, and then, for the most part, because it’s been disclosed to the public and to their investors, there’s much more of an imperative to act on it.”
Lubber is the third head of Ceres since its founding in 1989 by Joan Bavaria, an early pioneer of socially responsible investing who, together with her successor Robert Kinloch (Bob) Massie, helped lay the strategic framework for building sustainability into the capital markets.
In Lubber’s six years at the helm, her noted accomplishment is the scaling up of the operation among traditional institutional investors, particularly through the Ceres-led Investor Network on Climate Risk, which has grown from 10 investors managing $600bn in assets to 80 investors managing more than $7tn in assets.
Now, with the backing of major institutional investors in the Ceres coalition, Lubber has set her sights on leveraging the network’s full financial heft.
Lubber is encouraged by ongoing discussions with the Securities and Exchange Commission, the US market regulator, and suggests that the commission may soon be ready to accede to an inclusion of climate risk in financial disclosure requirements.
If Ceres has its way, those corporate disclosure rules may include the effects of water scarcity on a wide array of industries. Such a development would reflect a significant broadening of the environmental risks that modern business must manage.
Lubber disagrees with investors in the socially responsible investment community who see business as being incapable of fundamentally altering its short-term profit-maximising mindset. She says: “Corporate board members understand there’s a fiduciary incentive to look at the risk of climate change.” But she agrees with investors who believe companies must do more, and quickly: “People understand these issues … the question is how to move at a completely different pace. We’ve got to take it up 100 notches.”
Referring to investors and companies, Steve Lydenberg, chief investment officer at New York-based Domini Social Investments, says: “The next step beyond the realisation that climate change is important is the extension of coalition groups such as the [Ceres] Investor Network on Climate Change to an investor network on sustainability risk and long-term risk.”
As it stands now, the Ceres coalition leverages its $7tn network to get these companies to do something as simple as reporting their carbon footprint, Lydenberg says.
For all the positive momentum, a December 2008 Ceres report, rating consumer and technology companies on corporate governance and climate change, found companies have done little so far to make climate change a governance priority. This is a trend that cuts across European, North American and Asian companies alike.
Only 15 of the 63 companies surveyed had tasked board-level committees with environmental oversight, and only seven of the chief executives of these ﬁrms had taken leadership roles on environment and climate change initiatives. More revealing, none of the companies had explicitly linked chief executives or other C-level executive compensation to climate change goals.
“Is enough happening?” asks Lubber. “Absolutely not.”
Yet progress is being made. In France, Sweden and Denmark, legislators and market regulating agencies have adopted GRI sustainability metrics for their benchmark disclosure standards. GRI, which was spun off as a separate standards setting body in 2002, counted 1,500 companies reporting against this.
“I want to double that number over the next two years,” Lubber says, “and make sure GRI is mandatory.”
Ceres aims to expand its reach to credit-rating agencies with an upcoming conference that seeks to push rating agencies beyond traditional quarterly report valuations.
“One of the problems that got us into the subprime crisis is the obsessive dependence on short-termism,” says Lubber. “If everything is measured around value over the next three months or value over the next three minutes, as investors we won’t have a good viewpoint looking at material risks – whether it be water, natural resources or biodiversity.”
Disclose risk, take action
Lubber charts the path of reporting reform as follows: “First disclosure, followed by mandatory reporting by working with the SEC and then we work to integrate those reports.” She would like to see fully integrated reporting, where financial, social and environmental information is included in one report.
Evidence of Lubber’s acumen came in March when Ceres helped the US National Association of Insurance Commissioners pass a groundbreaking requirement that mandates insurance companies disclose to regulators and investors the financial risk they face from climate change, as well as actions the companies are taking to respond to those risks.
“It’s huge,” Lubber says. “Once companies disclose risk then they have to act on it. That’s just the way it is. You can’t say I’ve got a major risk and then ignore it.”
But the bright line test of disclosure will most certainly shift once a price is put on carbon, says John Elkington, a leading sustainable business thinker and consultant who is on the board of GRI.
“I am no longer personally as excited with reporting as I was 20 years ago,” Elkington says, “and part of the reason for that is we are beginning the long haul out of the era of volunteerism into the era of regulated requirements.
“This will be a profoundly political process,” he adds, “and we will often see at least one step back for every two forward.”
Ceres anticipated this new era six months ago by forming the Business for Innovative Climate & Energy Policy (Bicep) group – a Washington DC-based corporate coalition now lobbying Congress to pass cap-and-trade legislation slashing greenhouse gas emissions to 25% below 1990 levels by 2020.
Its 2050 targets are consistent with the Obama administration’s plan – aiming for 80% below 1990 levels. They are also a significant contrast to the cap-and-trade scheme proposed by the US Climate Action Partnership (US Cap), a two-year-old lobby group that represents energy producers and utilities such as GE, ConocoPhillips and other corporate heavyweights.
Bicep wants the government to auction 100% of carbon pollution allowances to companies affected by the cap-and-trade scheme, whereas US Cap wants a significant portion of the allowances to be issued initially for free.
US Cap is calling for an emissions cut of 80% by 2050, but the coalition uses 2005 as its baseline rather than 1990.
Worse yet is the US Chamber of Commerce, says Biceps’s director, Anne Kelly. In the autumn the chamber said all global warming efforts have to stop until the economy recovers.
“That’s sending exactly the wrong message,” Kelly says. “The right message is that the same tools that stabilise the economy will stabilise the climate.”
Kelly, a former prosecutor with the US Environmental Protection Agency, who joined Ceres in 2006, has lined up a formidable cast of consumer-facing companies, including founding members Levi Strauss, Nike, Sun Microsystems, Starbucks and Timberland.
Having the likes of these companies standing alongside Deutsche Bank, CalPERS and House of Representatives Speaker Nancy Pelosi recently at a Capitol Hill press briefing is pretty unusual, Kelly points out with evident pride.
“You aren’t going to find business sectors saying they don’t think there should be climate legislation,” Lubber says, referring to industry opposition groups. “They’re going to say they think it should be minimal caps and minimal price on carbon, and I would argue a weak statute is worse than no statute at all – because you can’t redo it next year.”
Indeed, as the socially responsible investment movement arrives within sight of its end-goals, the task is only getting harder and the stakes that much higher. But because the financial sector will be playing a central role, Ceres is remarkably well placed for what comes next.
A strong coalition
Ceres (pronounced “series”), the Coalition for Environmentally Responsible Economies, is a US national network of investors and campaigners working with companies and investors to address sustainability challenges such as climate change. This year Ceres celebrates its 20th anniversary.
Investors in the Ceres coalition include CalPERS and CalSTRS, the Californian state pension funds; Eiris; and the New York City comptroller’s office.