Investors Demand Carbon-Risk Disclosure

As Avis Budget Group (CAR) stockholders prepare for the company's annual meeting in Wilmington, Del., on June 12, they're facing unfamiliar terrain. For the first time since the formation of the company three years ago, shareholders are being asked to vote on a shareholder proposal on greenhouse gas emissions. At issue: Should Avis Budget prepare a report on whether it makes sense to cut emissions from the company's rental cars?

Investors in U.S. and Canadian companies have filed 67 global warming-related resolutions during the 2009 proxy season, up from 57 last year, according to Ceres, a national network of investors, environmental organizations, and public interest groups. The increase reflects growing concern among shareholders over the corporate risks of climate change. Some investors fret that if companies don't police themselves, the government will do it for them. Others are concerned over the possible impact of natural disasters or global warming on operations. Many are motivated by a combination of such concerns.

A recent resolution filed with IdaCorp (IDA) passed with 52% of the vote. But green-proposal backers often don't get what they ask for. On May 28, a proposal asking Home Depot (HD) to assess and set targets for reducing its companywide energy consumption failed to pass, with 23% voting in favor, according to a preliminary count by Home Depot. In filings, the company said it already assesses energy usage and has taken steps to reduce energy consumption.

Playing "Chicken" with Investors

Some companies make concessions before proposals are submitted to a vote. Just before Chevron's (CVX) annual shareholder meeting on May 27, the company agreed to track and report on the carbon content of its products, prompting a group of faith-based investors led by the Sisters of St. Dominic in Caldwell, N.J., to withdraw its resolution asking the company to adopt long-term goals for reducing greenhouse gas emissions. Chevron says it annually sets a greenhouse gas emissions goal, and that it's met the goal every year since 2004. The company also says it has tracked emissions voluntarily from its products in the past. "We informed the Sisters that we intend to continue reporting emissions from our operations and products and to improve our methodology for doing so," says Chevron spokesman Morgan Crinklaw.

So far, 27 of the 67 shareholder resolutions have been withdrawn because the companies have agreed to take action, a record number, Ceres says.

Some investors have discovered that they can be more effective by banding together. One such effort is the Carbon Disclosure Project, which began in 2002 with the support of 35 institutional investors. The founders realized that climate change was going to have a serious impact on the economy and that investors didn't really have any place to go for information on how it would affect their portfolio companies, says Zoe Riddell, head of investor relations at the Carbon Disclosure Project. The Securities & Exchange Commission currently doesn't require companies to disclose financial risks related to climate change, although some investors, state officials, and environmental groups have started asking for the requirement.

Looking for a Link

Today, 475 institutional investors that manage $55 trillion in assets back the Carbon Disclosure Project. "Whenever we talk to a company that says, 'Nobody is asking us for this information,' we put information from the Carbon Disclosure Project in front of them and use that as a tool," says Jennifer Coulsen, manager of the shareholder action program at the Ethical Funds Co., a manager of socially responsible mutual funds in Canada.

Does going green make a company more successful? It's still too early to tell, but at least one study suggests a correlation between an emphasis on sustainability and share performance. A recent study by A.T. Kearney found that companies focused on sustainability outperformed industry peers in 16 of the 18 industries examined over three-month and six-month periods.

Some companies have begun to report climate risk voluntarily in regulatory documents. Coca-Cola (KO) now includes a climate-specific risk factor in SEC filings: "There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters," the company says in its annual 10-K report. Those weather patterns could affect the availability of water and key agricultural commodities such as sugar cane, corn, beets, and other ingredients for Coca-Cola products, says Bryan Jacob, director of energy management and climate protection at Coca-Cola.

Historical Data Is Helpful

On Mar. 17, the National Association of Insurance Commissioners adopted a mandatory requirement that insurance companies with annual premiums of $500 million or more disclose to regulators the financial risks they face from climate change as well the actions they are taking to respond to those risks.

Other companies are starting to disclose potential opportunities associated with climate change, such as the creation of new energy-efficient products. "We think that type of information, in addition to risk information, is necessary to make informed investment decisions," says Rebecca Henson, sustainability analyst at the Calvert Group, an investment management company. Henson says the type of information she'd like to see is outlined in the Global Framework for Climate Risk Disclosure, created by 14 institutional investors in 2006. That information includes the total historical, current, and projected greenhouse gas emissions; a strategic analysis of climate risk and emissions management; assessment of physical risk of climate change; and the risk related to the regulation of greenhouse gas emissions.

Avis Budget spokesman John Barrows says that proxy advisory firms Institutional Shareholder Services, a subsidiary of RiskMetrics Group (RMG), and Glass Lewis & Co. have joined the board in recommending a vote against the green proposal. In its filing urging shareholders to vote no, Avis Budget says the number of vehicles in its 2009 fleet rating 32 miles per gallon or better has increased 18% from 2008. It also argues that an additional report would add little value while requiring substantial administrative burden and expense. Yet if groups like the Carbon Disclosure Project are correct, the costs of keeping quiet on carbon ultimately may be higher.