Climate Change and the Years of Investing Dangerously
GMO’s Jeremy Grantham has been warning about rising temperatures and resource scarcity for the better part of a decade. Investors can no longer ignore the risk — or the opportunities — that climate change creates for the companies in their portfolios.
No investor understands the importance of career risk better than Jeremy Grantham. As co-founder and chief investment strategist of Boston-based GMO, which manages $117 billion in assets, primarily for institutions, Grantham has built his career on the conviction that the behavior of professional investors is driven by the desire to keep their jobs. Although nobody wants to lose money on a position, the logic goes, it is okay if everyone else is losing money too. Not surprisingly, investment pros tend to pay close attention to what other investors are doing; the vast majority will “go with the flow,” as Grantham likes to say. This herding drives securities prices far above or below their fair value. Eventually, however, securities — and markets — return to their fair value. Grantham and his colleagues at GMO have long profited from that reversion to the mean by identifying undervalued securities and markets.
Career risk has taken on a somewhat different meaning for Grantham these days, I learned when I met with him in January at GMO’s headquarters at Rowes Wharf in downtown Boston, overlooking the harbor. I had spent the previous nine months reporting a story on the investment implications of climate change, and the 75-year-old Grantham, whose office is decorated with a large, eighth-century stone Buddha and other artifacts that point to a well-traveled life, has been one of the world’s most active money managers around the issue. In 1997 he and his wife, Hannelore, created the Grantham Foundation for the Protection of the Environment. In 2007 they funded the Grantham Institute for Climate Change at London’s Imperial College; the next year they endowed the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. In February 2013, Grantham joined with his daughter Isabel and the Sierra Club in Washington to protest the Keystone XL Pipeline, which if completed would carry as much as 830,000 barrels of oil a day from the tar sands in Alberta, Canada, to refineries in the Midwest and on the Gulf Coast.
“I’m a Johnny-come-lately, even though lately is 15 years,” the investor told me with a chuckle.
Grantham has been writing about the implications of climate change and its “close cousin” resource scarcity for several years in his widely read quarterly investor letters. The facts are simple, he says. The amount of carbon dioxide in the atmosphere has grown by almost 40 percent since the industrial revolution and continues to rise every year. The increase in carbon dioxide causes a rise in the Earth’s temperature, which in turn melts glaciers and ice sheets, raising sea levels. The warmer atmosphere holds more water and contains more energy, increasing the likelihood and severity of extreme weather events. The combination of higher temperatures and shifting rainfall patterns — more droughts and flooding — decreases crop yields. A significant rise in temperature (generally defined as 2 degrees Celsius) could have a devastating impact on food supplies, and not just because of the drop in crop yields.
“There are two deadly effects from carbon dioxide,” explained Grantham, who grew up in a coal mining town in South Yorkshire, England, and has lived in the U.S. since attending Harvard Business School in the early 1960s. “One, it has a greenhouse effect, and temperatures rise when you put carbon dioxide into the air. We know that. Carbon dioxide is also absorbed by the ocean, and it has a completely separate effect. When mixed with water, it forms a mild carbonic acid, and that eventually makes it impossible for shell-producing creatures to prosper, one of which is the coral reef, which is the nursery for something like 40 percent of all fish.”
Carbon dioxide is not the only greenhouse gas. Methane, which is released by human activities like raising livestock and natural sources like wetlands, is more efficient than carbon dioxide at holding radiation and has a 20 times greater impact on climate change over a 100-year period, according to the U.S. Environmental Protection Agency. Billions of tons of methane are trapped beneath the permafrost in the tundra and the continental shelf of Siberia. Grantham says that if the northern ice continues to melt, “there is a distinct possibility that the Siberian shelf will produce what one scientist has called the giant burp — a really dramatic sudden burp of methane. It contains about as much damage as all the fossil fuels ever used. No one can be sure it wouldn’t happen in a year or two or three or four or five.”
“And what’s the effect of this burp?” I asked, not sure I wanted to hear the answer.
“The climate shoots up, we have warm weather, and the shit hits the fan,” Grantham replied. “Scientists don’t even talk about this because they would rather protect against the slight risk of making an overstatement than help the planet.”
Listening to Grantham, I started to envision a dystopian future à la The Hunger Games, with food shortages, rioting and governments struggling to maintain control. The longer we talked, the more I realized that the odds are not in our favor.
“The big problem is, we’re going to have a devil of a time feeding the poor,” Grantham told me. “And what that will do is create destabilized countries along the lines of Syria. Did you know that the Syrian troubles were preceded by the driest six years in the very long history of Syria? The Mediterranean rim — like parts of the Midwest and Australia — has been a real danger zone for climate change in terms of taking the weather beyond the point where you can grow crops at all.”
Shifting the conversation back to investing, I posed to Grantham the primary question I had come to discuss: What can investors do, not only to avoid the risks associated with climate change but also to capitalize on the opportunities it creates?
He answered with a question. “I suspect you could do a little boutique investment operation in which you spend your life looking for the nooks and crannies and you could take advantage of opportunities brought about by climate change. Unfortunately, the more important question to ask is, What can the great mass of money do about climate change? And that is much, much harder to grapple with.”
I could not have agreed more. During my reporting on the meaning of climate change for investors, which had begun purely by chance, as a result of a conversation I’d had with a billionaire hedge fund manager early last year (more on that later), I had come across dozens of small, specialized asset managers, venture capitalists and private equity shops looking to profit from alternative energy (biofuels, solar and wind) and technologies for improving energy efficiency and reducing fossil fuel emissions. What I hadn’t been able to find were many asset managers, small or large, who were thinking about the broader impact that climate change could have on the economy and on the companies in their portfolios.
“Nine out of ten portfolio managers just haven’t really looked at climate change,” says Marc Fox, a Hong Kong–based research analyst. Fox worked at Goldman Sachs Group from 2005 to 2012 as an equity research analyst, helping the firm integrate environmental, social responsibility and corporate governance (ESG) factors into its global investment research. He has advised the Carbon Disclosure Project (CDP), a London-based nonprofit that provides companies with a system to measure, disclose and share environmental information about their businesses.
It’s easy to see why the investment community has been slow to the party. Climate change is measured over decades, and most investors have much shorter time frames. In addition, the data related to climate change reported by companies is erratic and difficult to use. Last, regulatory uncertainty, especially in the U.S., makes it difficult for investors to factor climate change into their decisions. Although most experts think it’s only a matter of time before the U.S. government institutes a price on carbon, either through a tax or a cap-and-trade program to limit greenhouse-gas emissions, investors typically say they’d prefer to wait until it happens to adjust what they do.
The intransigence of the asset management industry is illustrated by Grantham’s own firm. Founded in 1977 by Grantham, Richard Mayo and Eyk Van Otterloo, the value-oriented shop specializes in tactical asset allocation and benchmark-free portfolios that aim to offer investors the best mix of risk and return. “There’s not a lot of traction yet with GMO regarding climate change,” says Ramsay Ravenel, who joined the $400 million Grantham Foundation as executive director in 2009 and helps manage its grants and investments. “They have not been in a trying-something-new mode.” Although Grantham won’t comment on the reluctance of GMO to incorporate climate change and resource efficiency into its research process, he is clearly frustrated that he hasn’t been able to win over more people within the firm.
But asset managers like GMO may want to rethink their inaction. A global study published in September 2013 by New York–based Sustainable Insight Capital Management (SICM) and CDP found that companies that did a better job of disclosing their carbon practices had greater return on equity, cash flow stability and dividend growth than their less transparent peers. “There’s a prevailing misconception that companies that are focused on sustainability and climate change are wasting their time,” says Fox, who is one of the authors of the study.
Gerrit Heyns, founding partner of London-based Osmosis Investment Management, says his firm’s research shows that the outsize investment returns from companies that have a climate change focus come from efficiency gains. In a world growing by a billion people every 12 years and defined by ever-increasing demand and ever-decreasing supply, he explains, companies that efficiently use resources (in particular energy and water) and produce less waste do better financially in both the short and long term. Osmosis’ MoRE World Equity strategy, which includes the top 10 percent of resource-efficient companies by industry, delivered a 113.29 percent return for the five years ended December 31, 2013, a whopping 36 percentage points more than the MSCI World Index during the same period.
Grantham has met with the Osmosis team. Citing research by Harvard Business School professor Robert Eccles, he explained to me why he thinks the firm’s approach works. In a 2013 working paper titled “The Impact of Corporate Sustainability on Organizational Processes and Performance,” Eccles and co-authors Ioannis Ioannou of London Business School and HBS’s George Serafeim identified companies that had voluntarily put sustainability policies in place and compared them with a similar group of companies that hadn’t. “It turns out that, taking a 20-year view, the people who behave green and did all these good things made more money and did better in the stock market,” Grantham told me. “The reason the Eccles thing works is it picks out forward-looking managers, and they’re the best — the guys who are using their brains and thinking, ‘I can save energy.’ Marks & Spencer, Walmart — the good guys are just trying to anticipate more problems a little further out than the competition. It’s good business.”
Harvard’s Eccles is also involved in an organization trying to make it easier for investors to get meaningful information on what companies are actually doing when it comes to climate change and other ESG issues. He is chairman of the Sustainability Accounting Standards Board, better known as SASB, a San Francisco–based nonprofit founded in 2011 by Jean Rogers to create standardized reporting requirements by industry for nonfinancial factors that can have a material impact on a company’s business. Rogers expects SASB to finish issuing reporting standards for 88 industries across ten economic sectors by early 2016. (The group has already completed its work on the health care and financial sectors.) Of course, SASB can only recommend that companies follow its sustainability standards; the U.S. Securities and Exchange Commission would have to adopt them for the new rules to become legally binding.
The SEC may be hesitant to do that given the firestorm of criticism former chair Mary Schapiro received from Republicans in 2010, when the agency simply issued interpretive guidance regarding corporate disclosure related to climate change based on existing accounting rules.
Climate change is a deeply polarizing issue. During my reporting several of the people I interviewed (including Schapiro) refused to give their personal views on climate change — largely, they said, because it shouldn’t matter. “The point of the guidance was that regardless of the cause of climate change — or even whether the world’s climate is changing — investors still need to know what companies that believe they may be impacted by climate change are doing to address the issue,” Schapiro says.
Grantham, for his part, has tried to influence the political debate. In October 2008 his foundation was the major funder of a two-hour PBS Frontline documentary, “Heat,” which examined what big business was — and mostly wasn’t — doing to reduce its carbon footprint and mitigate the threat of climate change. “It was brilliant, and it had no effect,” he told me toward the end of our own two-hour session. “TV is a cost-ineffective medium in general.”
Part of the problem was timing. “Heat” aired five weeks after investment bank Lehman Brothers Holdings filed for bankruptcy, and the global economy was facing a far more immediate crisis than the one portrayed in the documentary. Today, Grantham is back at it again as one of the major financial backers of Years of Living Dangerously, a nine-hour documentary series premiering on Showtime on April 13. The brainchild of former 60 Minutes producers Joel Bach and David Gelber, the Years Project, as it is called, has some serious Hollywood muscle behind it, including executive producers James Cameron of Titanic and Avatar fame and Jerry Weintraub (former head of film studio United Artists), and celebrity correspondents Matt Damon, Harrison Ford and Arnold Schwarzenegger. The idea was simple: Rather than using celebrities to record voice-overs, as in most documentaries, the Years Project team would send them around the world to witness firsthand the devastating impact of climate-related weather events and how individuals, communities, companies and governments are trying to cope with them.
“The reason I wanted to fund this was because Cameron was such a good propagandist in [Avatar] that he had the audience I was in cheering for the blue creatures against what appeared to be red-blooded GIs just following their orders,” Grantham told me. “That’s an amazing thing to do. So I figured, well, if anyone can help influence this issue and set the tone, he can.”
Hedge fund manager Christopher Hohn has a well-earned reputation as one of the world’s most feared activists. In 2005 the founder of $7.6 billion The Children’s Investment Fund Management (UK) burst on the scene by blocking Deutsche Börse Group’s attempted purchase of the London Stock Exchange, prompting the German exchange operator’s CEO at the time, Werner Seifert, to compare the London-based manager to “a plague of locusts.” Since then Hohn has waged activist campaigns against the likes of the Netherlands’ ABN Amro, U.S. railroad operator CSX Corp. and Japan Tobacco, helping TCI deliver annualized returns of 19 percent a year over the ten-year life of its flagship fund. That performance led me to ask Hohn to join the advisory board for last year’s Delivering Alpha investment conference, a one-day gathering of many of the world’s finest financial minds, cohosted by Institutional Investor and CNBC. Little did I know how that decision would affect me.
As an advisory board member, Hohn was tasked with helping us come up with topics for the conference’s agenda. When we spoke last March, he told me about TCI’s investments in out-of-favor companies like Rupert Murdoch’s News Corp., whose shares his firm had bought after 2011’s phone-hacking scandal. He also described investing in companies involved in complex litigation, such as German automaker Porsche, which had been sued for securities fraud by hedge funds in a New York court in 2012. Of course, Hohn talked about activist investing, including TCI’s success in persuading the Japanese government to sell its shares in Japan Tobacco. “I’m not a Japan expert, but I’ve done activism in Japan, so I can talk a little bit on that theme,” he said.
I asked what he thought about the energy sector, and that’s when our conversation took an intriguing turn. “I don’t really get involved in it,” Hohn said. “The one aspect of energy that I could talk to, because I’m involved on a philanthropic basis, is climate change. If you believe over time a carbon tax is coming — which I do — and if you believe in climate change, 80 percent of the reserves of energy companies can never be extracted. All these oil and gas companies and the coal companies will have stranded reserves, basically. You may not be interested in that topic, but it’s in my view the elephant in the room that investors have not understood. A 2-degree-Celsius uplift in temperature results in a 10 to 20 percent drop in crop yields; at 4 degrees they go down 50 percent.”
Although I didn’t think the Delivering Alpha crowd was ready for a panel on climate change, Hohn had captured my attention. For the next 45 minutes, we talked about the risks — stranded fossil fuel assets, skyrocketing food costs, water shortages — as well as the opportunities (solar being the most obvious) associated with rising global temperatures and increasingly extreme weather events. Actually, Hohn did most of the talking; I knew embarrassingly little about climate science at the time. He explained how his charity, the $4 billion Children’s Investment Fund Foundation (UK), is devoting $25 million a year — a third of its annual giving — to climate-related causes. Like Grantham, Hohn is a major backer and co-producer of the Years of Living Dangerously series. “The whole purpose of it is to show that this thing is right here, right now,” he told me. “If we don’t alter paths dramatically in the next four or five years, the arctic ice cap will be completely gone during the summers — completely gone.”
Hohn, 47, who grew up in a working-class family in Surrey, England, does not consider himself an environmentalist. He became interested in climate change only after he realized that all of the work his foundation is doing to help children could be for naught if the problem isn’t addressed. The more he studied, the more he became convinced that climate change is the single most important issue facing investors today: “Every industry is impacted. There’s energy, vehicles, transportation, city planning. Agriculture is being destroyed. It’s geopolitical: There will be war between India and China over water. Investors’ heads are in the sand.”
By the end of my conversation with Hohn, I knew what the subject of my next major story would be. But I didn’t realize that I would be working on it for the better part of a year. Like most Americans, I hadn’t thought much about climate change, especially when it comes to its potential impact on investing.
Hohn put me in touch with Daniel Abbasi, an executive producer on the Years Project and founder of GameChange Capital, a small private equity firm that provides financing for start-ups and growth companies with products and solutions that reduce greenhouse-gas emissions. Abbasi has been involved with climate change for more than 20 years, getting his start as a financial correspondent for the Earth Times in the early ’90s. In 1992 he covered the United Nations Conference on Environment and Development in Rio de Janeiro, also known as the Earth Summit, which produced the U.N. Framework Convention on Climate Change, a treaty whose stated goal was to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” The U.S. was one of 165 nations to sign the treaty, which has been largely ineffectual because it failed to include emission limits, a timetable for countries to adopt them or enforcement mechanisms.
Abbasi has seen climate change from all sides. Following the Earth Times he spent three and a half years at the EPA as a senior adviser during the first Clinton administration, helping to design investment criteria for the U.S. Environmental Technology Initiative, serving on vice president Al Gore’s team to streamline the agency and working closely with the White House to develop the first U.S. national action plan on climate change. In 2005, after earning his MBA from Harvard Business School and working in a few non-climate-change-related jobs, he joined MissionPoint Capital Partners, a Norwalk, Connecticut–based private equity firm focused on clean energy and energy efficiency. There he got to know TCI’s Hohn, who was interested in learning more about carbon capture and storage — the process of trapping carbon dioxide as it comes out of coal-fired smokestacks and transporting it deep underground. Hohn backed Abbasi when he left MissionPoint to start his own firm in August 2011.
“People have a general sense that climate change is a problem, but because of the uncertainty around the issue they may talk about it but they’re probably not going to act on it,” Abbasi said when I met with him last June at an office he occasionally uses at the Connecticut Film Center, a Stamford-based company that provides production services and facilities for the motion picture and television industries. The office, decorated with posters for movies shot in the state where I grew up, was an appropriate setting for our conversation.
Abbasi told me how he’d hooked up with Bach and Gelber on the Years Project: When he met the pair, in the spring of 2011, they were working at CBS and visiting MissionPoint in hopes of raising money for their documentary series. Abbasi himself was looking to move on and had been in discussions with other filmmakers about doing a documentary on climate change. He, Bach and Gelber hit it off and decided to join forces. “They hadn’t landed James Cameron yet, but I really liked the fact that they weren’t left-wing and that they were going for a more mainstream vehicle for TV,” said Abbasi, who was responsible for bringing in Hohn as an investor.
While we were talking, Abbasi got a call from the general manager of Flowcastings, a 25-person German company that works with jet engine makers to produce high-performance turbine airfoils. Flowcastings is GameChange Capital’s first investment; Abbasi serves as its president and CEO. The company has filed patents on a process to manufacture turbine blades that can run at higher temperatures than other blades to improve fuel efficiency and reduce greenhouse-gas emissions. “The best way to avoid carbon from aviation is not to fly,” he explained. “But the reality is that there’s a huge macro trend to fly, including India and China taking to the air.”
Abbasi is a pragmatist. He spends his days thinking of ways to make money in a low-carbon economy. The potential opportunities span everything from what he calls yield plays, such as solar thermal energy used to heat water and homes, to higher-risk technologies like carbon capture and storage. Privately held Flowcastings, whose ultimate success depends on its ability to get jet engine manufacturers to adopt its technology, falls toward the higher end of the risk spectrum. Tesla Motors founder Elon Musk’s SolarCity, which installs, maintains and monitors solar systems for homeowners and businesses, is an example of a publicly traded lower-risk (but certainly not low-risk) investment.
Flowcastings and SolarCity represent what Grantham refers to as the direct opportunities that come from climate change. (Grantham is a major investor in Flowcastings, and the Grantham Foundation’s Ramsay Ravenel sits on its board.) But as the GMO co-founder emphasized when I met with him in January, situations like that cannot accommodate the large chunks of capital that traditional asset managers need to put to work.
It took about a year of research for the team at Osmosis Investment Management to come to that same conclusion. Heyns, who spent more than 20 years in equity sales at investment banks in Asia and Russia, and co-founder Ben Dear, a British entrepreneur, launched Osmosis in 2009, looking to capitalize on the findings of the Stern Review on the Economics of Climate Change. The 700-page tome, published for the U.K. government in 2006 by economist Nicholas Stern, concluded that carbon emissions would need to be reduced by 60 to 80 percent by 2050 for the planet to avoid the worst effects of climate change and that much of the needed investment would have to be made within ten to 20 years. Heyns and Dear saw a potential windfall in investing in the makers of “the picks and shovels” needed to reach those goals. “They tended to be smaller companies,” says Heyns, 52, who grew up in New Orleans but has spent almost his entire adult life outside the U.S. since earning a master’s degree in international finance from the University of Glasgow in 1986. “We found that the alpha we were getting was coming from the transportation, industrial and energy-efficiency sectors.”
Osmosis shifted gears, looking at what larger enterprises were doing when it came to efficiency. The firm decided to focus its research efforts on developing a process to identify the companies excelling at using resources wisely. The result was a metric the firm calls resource efficiency, which measures the amount of energy expended, water used and waste generated by a company to produce a unit of revenue. Osmosis evaluates the resource efficiency of companies relative to their industry peers and invests in the companies with the highest resource-efficiency scores within each of 34 industries for its MoRE World Equity strategy. Its top 20 holdings include Apple, BMW Group, L’Oréal, Microsoft Corp. and Procter & Gamble Co.
“It’s not about the environment or ethics or ESG or some acronym you pull out,” Heyns explains. “It’s not even about the share price. It’s really about trying to find an economic connection from the behaviors that are sustainable and that are helping us to deal with the fact that we are living in an environment where the climate is changing and it is having an impact. It’s about connecting those behaviors to share price movement. It tells us these are well-managed businesses.”
Heyns cites BMW as an example. The German automaker has focused on sustainability since the early ’70s and worked hard to minimize the environmental impact of its global manufacturing process. BMW’s factory in Munich produces just 30 grams of waste per vehicle — an amount that weighs less than a set of keys — while its Spartanburg, South Carolina, facility uses methane gas from a local landfill to provide more than 60 percent of its energy needs. BMW reduced the carbon dioxide emissions of its vehicles by 30 percent between 1995 and 2010.
Osmosis, which manages $145 million and employs just nine people, collects data on waste generation and energy and water consumption for nearly 5,000 companies globally, using annual and sustainability reports. It’s a painstaking process that includes verification and validation of data across multiple sources (including CDP and the Bloomberg Professional service) and the standardization of the data so it’s comparable within industries and across the firm’s database. Although companies are increasingly disclosing material information about their resource usage and waste generation, “the data is often inconsistent and lacking in context,” says Heyns, who considers Osmosis’ investing a type of information arbitrage.
The lack of good data has been a problem for investors hoping to cash in on climate change. “Believe it or not, these companies don’t know what they are doing,” says Bruce Kahn with a laugh, referring to the corporate-data-gathering process. Kahn is a portfolio manager with SICM in New York and co-author of its September 2013 study with CDP. “They are these huge, behemoth companies,” he says. “They have to go collect all the information from the line managers around the globe, pull it together, figure out what they are doing and then try to disclose it and create policies around all this. Up until five to ten years ago, this wasn’t on their radar — it simply wasn’t — so they weren’t managing for it.”
I met with Kahn and SICM chief executive Kevin Parker last November at the St. Regis. Not the hotel — this St. Regis is a small, nondescript conference room named after the New York landmark and shared by SICM and other tenants of a Midtown building. (The firm is moving to new offices this spring.) Parker headed Deutsche Asset Management from 2004 to 2012; Kahn was a senior investment analyst in Deutsche’s DB Climate Change Advisors division, which Parker had set up in 2006 to research the investment risks and opportunities arising from sustainability issues. Parker, who owns Chateau Maris, a sustainable vineyard in France, retired from Deutsche in May 2012. The firm shut down DB Climate Change Advisors a few months later. Parker, Kahn and a dozen or so of their former colleagues started SICM in February 2013 to continue the work they had begun at Deutsche.
“We believe that this shift toward a more sustainable framework is already starting to take place,” Parker told me, speaking over a cacophony of carbon-spewing taxis on the street one story below. “The risks associated with carbon are going up. The repricing of risk effectively makes it too expensive to build a coal plant. There will be a similar repricing of risk across all industries.”
The morning before, I had spoken to Marc Fox, Kahn’s co-author on the SICM-CDP study, who called me from an outdoor café in Hong Kong, where he moved last August after working for a year as an investor relations volunteer for CDP in New York. A typhoon slammed Hong Kong during Fox’s first week there, a reminder of the growing number of extreme weather events around the world. “My apartment building in Greenwich Village was flooded by Superstorm Sandy,” said the 36-year-old former Goldman analyst, whose New York–based investment research advisory firm is named Snow Fox. “The frequency of these events is alarming.”
Fox and I traded war stories. In the aftermath of Sandy, I told him, my wife and I were without power at our home on the North Shore of Long Island for 13 cold nights, making daily trips to the local beverage mart (which had a generator) to buy wood for our fireplace and bags of ice to pack into our fridge.
Fox, who majored in history at the University of Maryland before getting his MBA in finance from the University of Cambridge, says you don’t need a deep science background to understand climate change. “We burn more carbon, there are more parts per million in the atmosphere, and the weather becomes more volatile, both up and down,” he explained. “That’s the part people miss. This is about volatility; that’s what we’re not prepared for. It’s not just that the world is warmer.”
About six months — and some 20-odd interviews — into my reporting on climate change, I was starting to think that investors may seriously regret not paying more attention to Hohn’s “elephant in the room.” I also began to notice a network effect of sorts: Potential sources started contacting me. I received a call in September from an executive recruiter I know who was helping accounting standards group SASB with a search for board members. The recruiter had heard about my story, and he wanted to introduce me to Jean Rogers, the organization’s founder and CEO. Rogers was in New York City that week for the annual meeting of the Clinton Global Initiative; the two of us agreed to meet for lunch at Fig & Olive, a few blocks from the event.
As I scribbled notes between bites of my salad, Rogers told me that the idea for SASB came out of a paper that she coauthored with Steven Lydenberg and David Wood in August 2010, titled “From Transparency to Performance: Industry-based Sustainability Reporting on Key Issues.” Lydenberg is a partner at Domini Social Investments and a co-founder of KLD Research & Analytics. One of the first firms to focus on socially responsible investing, KLD was bought by RiskMetrics in 2009 and is now part of MSCI. Wood, an adjunct lecturer at Harvard University’s John F. Kennedy School of Government, is director of Harvard’s Initiative for Responsible Investment. Their paper asserted that corporations should be required to disclose ESG information and came up with a six-step process for identifying material nonfinancial performance metrics on an industry-by-industry basis. They even coined the name SASB — a “tongue-in-cheek” play on FASB, Rogers told me, referring to the acronym for the Financial Accounting Standards Board, a private industry group established in 1973 to create reporting guidelines for companies.
“FASB in the ’90s did some guidance on accounting for nonfinancial issues and took an industry approach,” noted Rogers, who has a Ph.D. in environmental engineering from the Illinois Institute of Technology. “That’s how we’re slicing it. For these nonfinancial issues the industry approach is essential for making it useful information. We’re continuing in that legacy.”
In 2011, Rogers left a cushy job as a management consultant in the San Francisco office of Arup, a global engineering consulting firm, to launch SASB. Following the model of FASB, she registered the new entity as a 501(c)3 nonprofit organization, wrote a business plan and set out to raise money. The first major funder was Bloomberg Philanthropies, the umbrella organization for the charitable activities of billionaire Michael Bloomberg, which made a $1 million grant to SASB in April 2012. By the following October, SASB had nine people (today it has 24 and a $5.8 million annual budget) and had begun its rigorous research process, which starts with the identification of material nonfinancial factors that could have a potential financial impact on companies in specific industries and the determination of accounting metrics to address them. SASB then brings together industry working groups — including representatives of companies, investment firms and intermediaries — to get feedback on its proposed standards.
Though many might consider accounting a dull subject, Rogers’s enthusiasm is contagious. “We’re on a mission to revolutionize corporate reporting by incorporating sustainability issues,” she told me.
I asked Rogers where climate change ranked among the issues SASB had examined. “It’s not us saying where we place it; we let the evidence for materiality speak to the prioritization,” she replied. “Climate change is clearly a significant material factor in a number of industries from both an adaptation perspective and a mitigation perspective. We look for the evidence of economic impact and where the theoretical ‘reasonable investor’ is likely to be interested or affected by that economic impact.”
SASB is addressing the biggest challenge that climate change presents for investors: the lack of uniform, easy-to-use information. The current data ecosystem has several members. Nonprofit CDP, which employs 100 people and has an annual budget of $9 million, collects extensive information on greenhouse-gas emissions and climate change activities from more than 4,000 companies globally, but individual reports can run to 60 pages. MSCI ESG Research includes carbon emissions and climate-related issues as part of the environmental material it gathers, which clients can access through a proprietary database platform. Similarly, Amsterdam-based Sustainalytics has a variety of climate-related factors (carbon and water intensity, and energy from renewables, among others) in its ESG research offering. GS Sustain, part of Goldman Sachs’ global investment research division, has been producing one-off reports on climate change since 2007. “If you take your average institutional client and you begin to talk about climate change, they are not equipped with the tools to act on it,” says researcher Fox, who coauthored “Introducing GS Sustain” in July 2007.
Climate change is a major material factor in several industries, including airlines, automobiles, banks, electric utilities, insurance, oil and gas, and real estate, according to the spring 2012 article that Rogers and Harvard’s Eccles published in the Journal of Applied Corporate Finance. For autos and airlines fuel efficiency is a key metric, as well as the use of alternative fuels and (in the case of airlines) hedging practices. For companies in the oil and gas sector, the two key metrics are the volume of reserves (much of which may never be taken out of the ground, as TCI’s Hohn told me) and capital expenditures. Greenhouse-gas emissions and renewable-energy usage are important inputs for determining utilities’ potential liability in the eventuality of a carbon tax or other new regulation. Greenhouse-gas emissions, however, have little direct meaning for banks and insurance companies, which are vulnerable to weather-related events that affect the companies they finance or insure. The key factors for real estate businesses are the locations of their properties and the energy efficiency of their buildings. Thanks to Sandy I was all too aware of the potential damage to coastal properties from extreme-weather-related events, flooding or eventual sea level rises.
“Climate change breaks down really differently in different industries,” Rogers, who lives in Oakland, California, told me as we left the restaurant on an unseasonably warm fall day. “It is not as simple as a single metric.”
I saw Rogers again a couple of weeks later when she returned to New York for SASB’s one-year anniversary party, held in the ornate, five-story Upper East Side town house that then-mayor Bloomberg bought for $45 million in 2007 for his family foundation. Both Bloomberg and Gore were there to commemorate the occasion. Gore — the subject of the 2006 Oscar-winning documentary An Inconvenient Truth — represented the Generation Foundation, the philanthropic arm of Generation Investment Management, the $10 billion firm the former vice president co-founded with onetime Goldman Sachs Asset Management CEO David Blood in 2004 to pursue sustainable investing. The Generation Foundation, which is funded by a portion of the profits of the London- and New York–based investment firm, is a major supporter of SASB.
As host, Bloomberg kicked off the evening, talking about the importance of what SASB is doing and his firm’s commitment to sustainability. Gore touched upon climate change. Even following two such experienced public speakers, Rogers more than held her own as she described SASB’s mission and outlined the organization’s accomplishments during its first 12 months. These included creating standards for 36 industries in five sectors and signing up more than 800 participants for the board’s working groups.
Early the next morning I caught up with Rogers at Bloomberg LP’s Midtown headquarters. She was there for an event to discuss SASB’s standards for the nonrenewable resources sector. Pleased with the success of the previous evening, she was more than ready to get to work. Curtis Ravenel, global head of the sustainability group at Bloomberg and a member of SASB’s advisory council, kicked off the meeting, which was held under the Chatham House rule; this meant I could write about what was said but I couldn’t reveal who said it. One of the most interesting exchanges took place during a discussion of the interpretive guidance issued by the SEC in February 2010 on the need for companies to report about climate change based on existing disclosure rules.
“The SEC has said that climate change is likely to be material in certain cases,” Rogers later told me. “But they haven’t gone so far as to say exactly how you should disclose your impact if you’re in this industry or that industry. That’s exactly what we’re doing, so companies know how to comply and the information is actually decision-useful for investors.”
Rogers would love for the SEC to adopt and enforce the new accounting standards that SASB is crafting. However, as I learned during the meeting, companies don’t need to wait for the SEC. In theory, they are already required to disclose information on climate change that is of material importance to investors. As Ravenel told me after I introduced myself while he was standing alone eating soup in the vast food court that is the sixth-floor lobby of Bloomberg Tower, SASB’s work to create uniform reporting standards for sustainability issues like climate change is good for the public. It’s also good for Bloomberg because ultimately it will help the company sell more of its data terminals.
I returned to Bloomberg six weeks later for a non–Chatham House rule interview with Ravenel. The only problem was that he thought we were speaking over the phone, so he hadn’t booked a conference room, and there was none available. We ended up standing at a table outside the room that held the SASB event. Ravenel, whose first job after college was working as a program associate at the Recycling Advisory Council in Washington, joined Bloomberg as a financial analyst in 2002 after earning his MBA from Columbia Business School. In 2006, while living in Hong Kong as the financial controller for Bloomberg in Asia, he wrote a proposal to start a sustainability effort within the company; a year later he moved back to New York to implement it.
In 2011, Ravenel was working on a project plan with Bloomberg president and CEO Dan Doctoroff to improve “the signal-to-noise ratio” of existing ESG data by bringing together an industry group to come up with better disclosure standards. But when Rogers presented her vision for SASB to them, it didn’t take long for Ravenel and Doctoroff to realize that it made more sense to approach disclosure as a nonprofit. “Our primary role is to make this stuff decision-useful and actionable,” says the 45-year-old Ravenel, who is the older brother of the Grantham Foundation’s executive director, Ramsay Ravenel. (The foundation is a supporter of SASB.)
For Bloomberg — both the company and its founder — the sustainability initiative has been an opportunity “to elevate the conversation in a way that is an accelerant to change” by demonstrating the connection between environmental and financial returns, Ravenel says. Bloomberg, which has 15,500 employees spread among 192 global locations, has reduced its carbon footprint by more than 50 percent, improved its energy efficiency by 35 percent and saved $55 million since 2008.
Bloomberg’s success as a private enterprise is not unique. In my reporting I came across dozens of publicly traded companies with similar stories. United Parcel Service, which ships more than 16 million packages a day worldwide and operates a ground fleet of nearly 100,000 vehicles, has reduced its carbon footprint in recent years even as it has grown its shipping volumes, by using strategies like intermodal shifting — changing airfreight to ground transport and ground freight to rail — and optimized route planning (the latter allowed UPS to save 1.3 million gallons of fuel in the U.S. in 2012, reducing its potential carbon dioxide emissions by 13,000 metric tons).
“Our business strategy is our sustainability strategy; they are one and the same,” says Scott Wicker, who became UPS’s first chief sustainability officer in 2011. “It makes good business sense for us. It’s brand-enhancing, cost-reducing and just the right thing to do.”
Both Grantham and Hohn would agree with Wicker’s assessment, but they are realists. They understand that not all companies are as enlightened as UPS to the potential economic benefits that can come from tackling climate change head-on. They also realize that most investors pay little attention to the issue, regardless of what companies are or aren’t doing. “Climate change should be front and center on how people invest, but investors are very complacent,” Hohn told me in February, nearly a year after our first conversation. “This is the biggest thing happening in the world, and the world is basically asleep on it.”
Hohn and Grantham will try to wake up the world this spring with the first of what they hope will be many seasons of Showtime’s Years of Living Dangerously series. They have each invested $1.5 million in the project, which has raised a total of $20 million. Executive producers Bach and Gelber sent camera crews and celebrity correspondents into the field to shoot 16 different stories, ranging from wildfires in California (Arnold Schwarzenegger) and deforestation in Indonesia (Harrison Ford) to the melting of the polar ice cap (60 Minutes correspondent Lesley Stahl) and drought-inspired political unrest in the Middle East (New York Times columnist Thomas Friedman). Each of the nine one-hour episodes will have multiple narratives.
“We see this as a nine-hour documentary,” Bach told me when I met with him in November at the Years Project’s offices in the historic Film Center Building on New York’s West Side. “At the end of the day, it’s one big story: climate change.”
The Years of Living Dangerously series isn’t just about devastation; it offers solutions being pursued by individuals, companies, governments and communities. Investors may want to pay particular attention to the corporations appearing in the series, such as NRG Energy, the U.S.’s largest independent power producer and one of the nation’s biggest polluters. David Crane, NRG’s chief executive and an outspoken advocate for renewable energy sources, flew with actress America Ferrera, of Ugly Betty fame, to visit inventor Dean Kamen at his house in New Hampshire. Kamen, creator of the Segway, has a company called Deka Research & Development Corp. that is working on solar devices, including an in-home generator powered by natural gas that NRG has begun to deploy in a pilot program. “His house and workshop are amazing; it’s Tony Stark stuff,” says Crane, referring to the hero of the Iron Man movies.
Grantham, who was interviewed by columnist Friedman for the segment on the Middle East, wrote the first check for the Years Project — $750,000 in the spring of 2011 — about a month after having lunch with Bach and Gelber. As he sees it, the decision was a no-brainer because the stakes are so high.
“People tend to wait until there’s a crisis to do something,” he says. “The problem with climate change, unlike the markets, is that it is irreversible. When you drive a creature out of business, it doesn’t come back. And when you destroy a habitat, it typically doesn’t come back.”
That is career risk that none of us can afford to take. • •