Report: Top greenhouse gas emitters not disclosing financial risks of climate change

BOSTON, MA and WASHINGTON, DC, July 9, 2003 — Most of America’s biggest carbon dioxide-emitting companies – including ChevronTexaco (CVX), ExxonMobil (XOM), General Electric (GE), Southern Company (SO), and Xcel Energy (XEL) – are not adequately disclosing the financial risks posed by climate change and also are failing to deal with global warming issues in other key corporate governance areas, according to a new study of 20 of the world’s largest companies.

The report, Corporate Governance and Climate Change: Making the Connection, was commissioned by CERES, a coalition of investor, environmental and public interest groups, and written by the Investor Responsibility Research Center (IRRC), an independent firm that advises institutional investors managing more than $5 trillion in assets.

The 20 companies profiled in the report include the top five carbon emitters in electric power, auto and petroleum industries as well as five other industry leaders – all core holdings in institutional investment portfolios. A 14-point “Climate Change Governance Checklist” analyzes these companies’ response actions in the areas of board oversight, management accountability, executive compensation, emissions reporting and material risk disclosure.

According to the report, though all the companies are beginning to measure their greenhouse gas emissions and most have discussed climate change at the board level, barely half (12) have reported on the issue in their securities filings and less than half (nine) are projecting greenhouse gas emissions trends.

Among the 12 companies that do mention climate change in their securities filings, the disclosure tends to be minuscule and vague, often stating in a sentence or two that the risks may be “material” but cannot be determined at this time. Eight companies made no mention of the issue whatsoever.

The study finds that despite the companies’ governance actions on climate change, U.S. companies, in particular, are still pursuing business strategies that discount the global warming threat. By contrast, non-U.S. companies are more likely to report on the financial risks and undertake climate change mitigation strategies.

The widest disparity in corporate governance responses to climate change is in the oil industry, according to the study. BP (BP) and Royal Dutch/Shell (RD) have pursued all 14 items listed on the Climate Change Governance Checklist, positioning the companies to deal with emerging issues related to climate change, while American-based ChevronTexaco, ConocoPhillips (COP) and ExxonMobil have pursued only four or five actions.

The report notes that the U.S.-based oil companies are continuing to devote virtually all development efforts toward fossil fuels, while European competitors are gaining a foothold in renewable energy technologies that are among the fastest-growing energy sources.

The electric power industry as a whole scored lowest on the checklist, despite being the largest source of U.S. emissions and vulnerable to changing clean air regulations.

The auto industry failed to measure and disclose the emissions of its products, the source of more than 95 percent of that industry’s emissions. At the same time, Japanese competitors are taking the lead in introducing hybrid gas-electric vehicles that substantially reduce tailpipe emissions.

Other companies with low scores were DaimlerChrysler (DCX), General Electric and TXU (TXU), which have taken only four or five actions, while Alcoa (AA) and DuPont (DD) stood out among the U.S. companies profiled, having pursued 12 of the 14 actions.

“Recent corporate scandals point to the high price paid by everyone — investors, employees, and pension beneficiaries — for inadequate corporate governance practices,” said Mindy S. Lubber, Executive Director of CERES. “This report uncovers that climate change is a new “off-balance sheet” risk that could affect shareholder value. We need leaders in the private and public sectors to support climate change policy solutions that achieve real emissions reductions. As responsible stewards, we can and must rise to this governance challenge.”

Commenting on the report, William Reilly, former EPA Administrator under the first President Bush, said: “Climate change is a serious issue and it won’t go away. Companies with a significant presence in Europe will have to address the issue earlier than others, but ultimately everyone will be affected. Companies can begin today to consider and mitigate some of the risks by making a commitment to taking three steps: establish baselines for emissions; set targets for reductions; and report progress publicly so that management and shareholders can assess performance.”

“All companies profiled in this report are taking some governance actions to respond to climate change. But few have adopted comprehensive programs to treat this issue as an imminent financial and environmental threat,” said report author Douglas G. Cogan, Deputy Director of Social Issues for IRRC. “Companies cannot expect to mitigate climate change risks and seize new market opportunities until they build a foundation of well functioning environmental management systems and properly focused governance practices for a carbon-constrained world.”

Eliot Spitzer, New York State Attorney General, said: “The nation’s corporations have a vast impact on the environment both within and beyond our borders. That impact is very much connected to these companies’ long-term viability, shareholder value, and competitiveness in the domestic and global marketplace. The fact that the current federal administration has turned its back on the environment – and is blind to the threat of global warming- does not and should not absolve these companies of their responsibility to accurately and honestly assess, disclose, and act on the risks.”

Phil Angelides, Treasurer, State of California, said: “The report underscores the lack of disclosure in securities filings about climate change and raises serious questions about the adequacy of reporting and enforcement of SEC rules.”

Key Findings

The 20 companies included in the study are Alcoa, American Electric Power, BP, ChevronTexaco, Cinergy (CIN), ConocoPhillips, DaimlerChrysler, DuPont, ExxonMobil, Ford Motor Company (F), General Electric, General Motors (GM), Honda (HMC), IBM (IBM), International Paper (IP), Royal Dutch/Shell, Southern, Toyota â„-, TXU (TXU) and Xcel Energy.

Major points highlighted in the report include:

Board oversight and shareholder disclosure: The boards of 17 of the profiled companies have discussed climate change, illustrating the growing importance of the issue, yet only 12 of the companies made reference to climate change in their 2001 Form 10-K filings. Just nine mentioned the issue in the front section of their 2001 annual reports.

Executive compensation and management accountability: All 20 profiled companies have environmental links to compensation, and 19 of the 20 companies have their top environmental officer reporting directly to the CEO or one level below. Yet only three of the companies have linked attainment of greenhouse gas targets to executive compensation.

Emissions inventories and reporting: By the end of 2003, all 20 profiled companies will be taking regular greenhouse gas inventories of emissions from their facilities. Yet only 11 companies have set historical emissions baselines (dating back at least 10 years), and only nine companies have made forward-looking emissions projections. Especially lacking are inventories and projections of product and other end-use emissions, the lion’s share of worldwide emissions.

Product development and renewable energy: Seventeen of the profiled companies are purchasing and/or developing renewable energy sources that do not emit greenhouse gases. However, the commitments and investments made by most of these companies still account for only a tiny fraction of their total energy budgets. Greater progress is being made in terms of improving the energy efficiency of manufacturing.

The report also cites market-led initiatives, lawsuits, new government requirements and rising shareholder pressure that are converging to make climate change a core component of the emerging corporate governance agenda, including:

Independent directors: Proposed new governance listing standards require corporations to have a majority of independent directors, while the SEC is considering new rules allowing shareholders to nominate their own board candidates, clearing the way for nomination of directors who understand the issue and would take steps to address it.

Executive compensation: Emerging efforts to redefine “pay for performance” – and align executive performance with long-term investor value – make attainment of greenhouse gas targets a logical addition to many executive compensation plans.

Proxy voting: New SEC rules require mutual funds to disclose their proxy guidelines and proxy votes, opening them to scrutiny and client pressure to support global warming related shareholder resolutions.

Investment research: A legal settlement involving major U.S. investment banks is putting greater separation between banks’ brokerage and underwriting arms, giving analysts more leeway to conduct critical analyses of companies’ responses to climate change.

Potential liability: As a sign of growing legal and economic concerns about how companies respond to global warming, the giant Swiss Re reinsurance company has begun asking companies applying for directors and officers liability insurance whether they have developed a strategy for addressing the issue.


CERES is a coalition of investor, environmental, and public interest groups working together to improve corporate environmental responsibility worldwide. CERES investor members include the New York City, New York State and State of Connecticut pension funds, and represent over $300 billion in assets.

IRRC is an independent research firm that is the leading source of high quality, impartial information on corporate governance and social responsibility issues affecting investors and corporations worldwide.

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