Mary: Hello and welcome to Grist Talks, our regular series of conversations with really smart people about really interesting topics. I’m Mary Bruno your really smart and interesting host. And I’m joined today by really smart and really interesting panelists. But before I bring them into the conversation, let me first introduce today’s topic.
On January 27th, commissioners at the U.S. Securities and Exchange Commission decided in a close 3-2 vote that publicly traded companies really ought to disclose any climate change-related risks and opportunities that might affect their bottom line. So for example, do ski resorts have a plan for dealing with warmer, dryer winters? Have insurance companies calculated the budget impacts of more severe weather or a rise in sea level? Has the healthcare industry prepared for an expansion of certain viruses and bacteria? Inquiring, responsible investors needed to know, hence the SEC’s vote, and I quote “to prove public companies with interpretive guidance on existing SEC disclosure requirements as the apply to business or legal developments relating to the issue of climate change.”
So what does it all mean? That’s why we’re here today.
We’re going to be talking about impact of this “interpretive guidance” on day-to-day corporate practices and on the U.S. economy in general. But we’ll also be looking at the impact of the SEC decision on climate change itself. Could it, for instance, mark a turning point in the struggle to arrest climate change? Could these new SEC guidelines give corporate America, and maybe the rest of us too, a little nudge, maybe a shove, to start thinking and planning for the long term? If so, it would be an immense, an important cultural shift. Because let’s face it, the ability to think ahead — way, way, way, ahead — is an obvious first step in tackling a problem as complex and multi-generational as climate change.
So with that, I am very pleased to welcome our three panelists:
Investor, Julie Gorte, Senior Vice President for Sustainable Investing at New Hampshire based Pax World Management Corporation, which, if you don’t know, was the first socially responsible investment firm in the U.S.;
Economist, Kristen Sheeran, Executive Director of the Economics for Equity and the Environmental, or E3 Network, in Portland, Ore., and co-author of the book, Saving Kyoto;
And futurist, Sara Robinson, a fellow at both the Campaign for America’s Future and The Commonwill Institute, which are located in Washington D.C. and San Francisco, respectively.
It’s a great pleasure to have you all with us today. Julie Gorte, let’s start with you.
Investors have been pushing the SEC for some kind of leadership or direction on corporate disclosure of climate-related risks, for 10 years, right? So why is this issue so important to investors? Why, if it is so important to investors, has it taken so long to get some action? And while you’re answering those questions, can you also describe for us who and how the investment community has been lobbying all this time?
Julie: The most proximate answer to that who and how question is that there were 22 of us that petitioned the SEC in September of 2007 to issue this guidance. And those petitioners included the treasurers, controllers, or financial officials representing California, Florida, Kentucky, Maine, Maryland, New Jersey, New York, North Carolina, Oregon, Rhode Island, and Vermont. There were also two asset managers, including my firm Pax, and three nonprofits that joined in this petition.
This was not the first time that the SEC had heard that we wanted some more interpretive guidance or action on climate change. We’d been saying so for quite some time. The Investor Network on Climate Risk, which includes all of the above mentioned entities as well as many more asset managers and asset owners, was formed in 2001. Part of our platform right from the start was that we needed some public sector action, including guidance or action on the reporting of climate change risks and opportunities. If I go back a decade, there were very few in the investment community that paid attention to it accept in the socially responsible investment world. In the years since 2001, the investment community has become much more interested in and aware of climate change.
There was a report in the early 2000s from the Association of British Insurers noting that the damages, or losses — insured losses — from severe weather had doubled and tripled over the previous two-to-three year period, and that they were expected to continue to rise on a rather dramatic scale as a result of climate change. So when the insurers get concerned, because that absolutely is their bottom line, a lot of other investors started paying attention.
Now we’re seeing reports from all the mainstream analysts that provide research to everybody else in the financial community — you know, Citigroup, Goldman Sachs, HSBC, Societe General — covering climate change, originally just with respect to the big emitters like utilities and energy companies, but then sort of branching out and saying “well, here’s how it could effect this sector or that sector.” And pretty soon it got to the point where we recognized that there are no sectors, really, that don’t have to think about climate change.
You mentioned health care companies and the expanding landscape of morbidity and mortality. You’ve got Bell South with I don’t know how many thousands of wires strung all over the hurricane alley down in the South. So, what we’re really seeing in investment is that the consciousness of climate change as a financial issue has increased, and is still increasing, and I think that was part of the critical mass that led to the SEC issuing this guideline.
Mary: So no sector left behind-I like that. Publicly-traded companies are already required to report anything considered “material” to their investors. So, why did it take so long? Why was it so difficult to convince the SEC on climate-change related risks and benefits? Were there certain stumbling blocks? And what or who finally made the SEC take action?
Julie: Well, the SEC is kind of like a super-tanker: it doesn’t turn on a dime, and it probably shouldn’t. I think it does wait for issues to reach the level of concern or consciousness among a significant number of financial institutions before it acts. And that’s true of a lot of public policy. There was also an election, if you remember, a couple years ago that changed the makeup of all the executive [branch of government], including the SEC. So, we did have sort of a political change in America, as well as a rising tide of investor concern and sentiment regarding the materiality of climate change.
Mary: So, there has been this growing awareness on the part of the investment community that climate change was an issue that was material to the success of the businesses they were thinking of investing in. Has that awareness and urgency, before the SEC ruling at least, spilled out at all into the corporate community? Or is it just investors that are on board with this?
Julie: Oh, no. [Awareness and urgency] has been growing in the corporate community as well. The financial community is just kind of a mirror of the rest of society in many ways. So, if go back, for example, to 1997 to the third conference of the parties in Kyoto that resulted in the Kyoto Protocol, you could probably have used one hand to count the number of companies that actually reported anything with respect to climate change publicly. That would have included B.P. and Shell and a couple of other leaders, not too many. Since then, we’ve seen the insurance and reinsurance industries really start to run the bases on this issue, partly because they have to; they have long-term liability with respect to storms and fires and floods and droughts. A lot of the companies that were big emitters were aware, even back in 2000, that at some point, and certainly in 2005 when the Kyoto Protocol entered into force, [that they’d have to take account of climate change]. The awareness among U.S. companies was, “well, we may not have a law right now but there probably will be one someday and we should probably get ready to see what our liabilities are.”
Mary: Kristen, do you have anything to add to that?
Kristen: Sure. There’s this misperception amongst many that corporate America is opposed to actions that would deal with the climate change problem head on, and it’s simply just not the case. With the exception of the fossil-fuel industry and a few others who have very vocally opposed any pro-active measures in the U.S. to deal with climate change threats, most of corporate America realizes that the greatest risks of climate change come from its physical impact rather than from regulations per se. Whether you’re talking about big companies like Microsoft, Nike, Coca-Cola, Starbucks, these are just a few examples of businesses that have come out and openly supported immediate and aggressive actions to prevent climate change and have lobbied Congress in that regard. What business hates most is uncertainty. Business in America has been asking our elected leaders for clear and consistent rules, and clear and consistent pricing over carbon so they can plan ahead effectively.
Mary: Clarity-it’s what we all need right?
Kristen: Clarity and certainty.
Mary: Julie, let me get back to you for a couple of quick questions. So the SEC action isn’t a law, right?
Julie: That is correct.
Mary: So, will it be enforced? How does it get enforced? Can companies just choose to ignore it if they want to?
Julie: They can [choose to ignore it], yes. The law says that companies must report material actions to their investors. You ask any corporate lawyer what materiality means and they’ll say, “well, I can give you a long definition, but the short one is nailing jelly to a wall.” There’s always some doubt as to what materiality is, or what an investor would consider material, and the SEC has always resisted setting a numeric threshold: it’s not 5% of your earnings or your assets or something, although that’s often used as a rule of thumb.
The SEC has been issuing guidance on the reporting of environmental liability for over thirty years now, so they’ve done this before. You know, if you have big Superfund cleanup liabilities, or asbestos liabilities, or something like that, you’re expected to say so to your investors. So what this SEC guidance does, is basically signals that the SEC sees climate change as something that could have a material impact on a sufficiently large number of publicly-traded companies that it’s worth considering in its own right. How would it be enforced? It would be enforced pretty much after the fact. If, for example, we had a coal company that decided that climate change wasn’t material, and then we got a law that significantly limited emissions and established a carbon-trading regime and the stocks of the coal company fell 25%, that company’s investors could come back and lodge a securities fraud lawsuit and say ‘you should have told us about this and you didn’t.’
Mary: Let me move to you Kristen. Were economists also out there lobbying or arguing for some sort of regulatory change? Do economists lobby?
Kristen: Economists, in general, tend to be very apolitical. But economists, especially those involved in the E3 network, have become increasingly vocal in warning that the economic damages from climate change will be significant, and that immediate and significant investments in things like reductions in energy efficiency and renewables will make good economic sense, especially when you compare those actions to the potential costs of inaction. There’s something that Julie just said that I really want to underscore. This ruling really demonstrates that the SEC, and the private sector more generally perhaps, is a lot further ahead than our own government at this point in really coming to terms with both the risks and opportunities present in the climate crisis. From an economics perspective, getting businesses to recognize and systematically account for the implications of climate change is important. But what economists more generally are lobbying for is a more broad-based and consistent policy framework that could help provide the right incentives to these businesses to make those changes.
Mary: Is there consensus about what impact the SEC ruling will actually have on day-to-day corporate business practices and operations? Is it just going to mean longer annual reports? What’s going to happen?
Kristen: It’s hard to say what impact this specific ruling will have. But I think it’s safe to say that there’s no doubt that climate change, and the realities of grappling with climate change, are going to change business as usual in America. Planning for climate change, by definition, means planning for the long term. It means having different attitudes and practices with regards to risk and the environment. One thing we’ll see coming out of this is that firms will no longer be able to relegate the environment to an afterthought. Sustainability, it’s clear, is no longer about marketing green products to your high-end consumer, or making sure that your workplace is more resource-efficient, or being civic-minded; it’s about being smart and strategic over the long-term. What we’re starting to see with this SEC decision is the elevating of long-term environmental concerns to the same realm as things like labor and capital to decision-making. This shift has been a long time in the making because long-term environmental concerns have been relegated to the back burner for quite some time.
Mary: Julie, how do think this SEC action is going to affect investment decisions at Pax’s World and other, maybe, more or less “enlightened” firms? And do you want to speculate quickly about what impact you think it might have on the corporate community and the economy in general.
Julie: One of the things that the financial market is not at all short on is ego. There are a lot of people in finance who are basically born on third base and go through life thinking they hit a triple. And if they don’t know something, it is, by definition, not important. And what they know is what companies report to them. If you give them information on a lot of companies, they will find a way to do really interesting things with it. What this will do is increase the trend of raised awareness toward climate change. Once that awareness is raised, investors start to act on that information. They say, ‘if you’re in this sector and aren’t aware of climate change, we don’t think you’re a terribly well-managed company.’ So you’re a little less willing to pay more for their earnings. The great secret about financial markets is that, in some sense they [create] a self-fulfilling prophesy. If we all, as investors, think that companies that are environmentally well-managed are going to perform better, we’ll pay more for them and they will trade at a premium. They will be worth more because of their environmental management. It’ll take a while. But giving people this information, giving them another way to distinguish well-managed companies from the hoi polloi is going to lead to that outcome.
Mary: So it could unleash a cascade of sustainability.
Mary: Kristen, when it comes to the SEC ruling and then, longer term, from climate change itself, some businesses are going to be winners and some are going to be losers, right? The impact, of course, will vary based on the type and the size of the business in question. But given that, can you predict who the winners and losers will be, both short- and long-term?
Kristen: There are two kinds of climate-related risks that this SEC ruling is basically taking into account. On the one hand there’s the risks that stem from the physical impacts of climate change. And on the other hand, there are the risks that are embodied in the impacts of regulating carbon and how that [regulation] is going to affect a firm’s operating costs and its competitiveness.
The industries that are most vulnerable to the physical impacts of climate change, we’ve talked about some of them already, include industries like agriculture, forestry and paper products, tourism, real state, offshore energy development, and, of course, insurance. But companies that use fossil fuels intensely in their production, like the electric utilities that invest in high-emission power plants, or companies that produce carbon-intensive products, like car companies that continue to produce gas-guzzling SUVs rather than more efficient hybrids or diesel engines are also examples of companies that are going to find themselves at a competitive disadvantage in the future because of regulations on carbon and the resulting decrease in demand for carbon-intensive technologies and products.
At the same time, companies that demonstrate that they can meet this new demand for low-emissions technology are gong to be at a competitive advantage. And these are the companies I think we’ll see emerge as winners in the new green economy. One of the most beneficial things that might come out of this ruling is that it’s going to help people begin to envision exactly which companies will or will not succeed in a carbon-constrained world over the next 25-to-50 years. We talk to people about how business-as-usual has to change, about how the economic system has to be transformed in order to really meet the climate challenge. You run up against the limits of people’s imaginations and their ability to think long-term about what that would look like? ‘What kind of car am I going to be driving?’ ‘Where am I going to live?’ ‘What kind of industries are my kids going to be working in?’ This is the first step in systematically beginning to identify that these are the industries that are poised to advance and these are the industries that are going to struggle in a carbon-constrained world.
Mary: Sara, let me loop you into the conversation here. We’ve been talking, thus far, about the impact of this one, specific SEC decision’s effects on corporations and investors and the economy in general. But as a futurist, what is it going to mean to the rest of us? For the regular people, like the college student who’s pulling coffee at Starbucks, or the single mom who’s stocking shelves at Wal-Mart, or the unemployed auto worker, public school teacher — you name it. Is my life, or my habits, or my community going to change at all in the next year, or 10 years, or 20 years? Can you look into the crystal ball and tell us how?
Sara: This [ruling] is part of a very important inflection point. After 20 years of talking and educating each other about climate change, we’re finally reaching the point where the doing is happening. Julie talked about turning supertankers. Changing our minds, changing our attitudes, our beliefs about things is comparatively low-cost compared to changing the entire financial and physical infrastructure of our society, which is really what this is about. And so we’re at that point. When the SEC makes guidances like this, it helps change the entire way money flows. And that in turn will change the structures we live by. So, yes, within five years I think investments will be flowing differently. Governments and businesses will be making big decisions, high-stakes decisions that they haven’t been willing to make on this kind of scale until this point. This does open the door. Changes will begin to happen more quickly because these [corporate] institutions are big; they control a lot of our resources. Individuals residences are only about 15% of the carbon problem; business is 85%. When business begins to change, that’s when the problem begins to get solved. I’m very excited about the prospects here.
Mary: Kristen, you pointed at one point, earlier in the conversation, that an accounting for environmental risks has been largely absent from long-term corporate planning. But isn’t long-term planning central to corporate success? Does corporate America just not take climate change seriously? Have the captains of industries just been sticking their heads in the sand on this one? Or is corporate culture just not really designed at the moment to think more than two or three quarters out?
Kristen: Long-term environmental risks have largely been absent from the forefront of business priorities and decision-making, and they’ve been absent, largely, from economics that then models those business decisions. In part, it’s because all of us have had this default assumption, whether we made it explicit or not, that we didn’t have to worry about long-term environmental problems because between technological change and economic growth would be able to negate most, if not all, negative environmental feedbacks. And here we are talking about an environmental crisis where the impacts are largely irreversible, at least within a human time frame. It forces us to realize that we can’t wait for technology to save us; we can’t just assume that being richer in the future will insulate us from these feedbacks. We need to take proactive actions in the present.
We could, of course, also point to all sorts of other things that encourage institutional short-term decision-making. The current system of pay and rewards for corporate leaders, for example. When a CEO’s pay depends largely upon stock options and dividends, it’s no surprise that she’s going to make decisions based on short-term profitability rather than long-term considerations. The SEC ruling really won’t change that, but at least it’s going to give investors the information they need to determine which firms are going to remain profitable over the long-term.
Mary: Julie, what’s your view on that? On that kind of short-term thinking that has come to dominate Wall Street, and American businesses, and certain investors, probably, for at least the last couple of decades? Why do you think it’s become so entrenched?
Julie: It’s really embedded in our society. We have fast food, continuous polling in Congress. It’s all stuff that tends to focus you on the right here, right now. What I call the wolf at the door problem. If the most important thing in your life right now is that you don’t have a job, you’re not going to be very worried about climate change. Climate tends to be more of the termite in the basement problem. Termites will eat your house just as surely as the wolf will blow it down. But you can’t wait until the termites have eaten the parlor floor until you act, because by then it’s too late. We have greenhouse gases that persist in the atmosphere for up to a century in many cases. It’s something we have to start on now and get the payoff later. That is not terribly in step with our current society.
Mary: Sara, let me get back to you. When I think about our ability to think long-term as a species, the Mayans built these huge temples, the Egyptians built pyramids, the Europeans built cathedrals. All projects that took generations to complete. The person who launched these projects — the pharoah, the archbishop — had to know that they certainly wouldn’t be alive to see their completion, nor would their grandchildren, or their great-grandchildren. So humans obviously possess the capacity for very long-term thinking. Are there more contemporary examples of long-term planning that you could provide that would give us some hope in that regard? Or has that ability to plan for the long term somehow atrophied? If it has atrophied, why did it happen and how can we get it back?
Sara: First of all, Americans are world-class planners; we are in league with those [temple, pyramid, cathedral] people. We tend to do it on a very fast basis. We’re acute responders. We do it in the E.R. What we don’t do in the long-range, we can do a lot, and very quickly, in the short-range. We know how to organize and prioritize in a way that nobody in the world has been able to do. We proved this in World War II: we were arming the world and fighting a two-front war and we had these logistical tools. We had this magical ability to plan that on a scale that nobody else really could. It’s a gift that we have and we take it very much for granted.
I think it’s going to come back to the fore. In terms of longer-term thinking, the societies that you described were all monarchies of one kind of another and in a democracy it’s harder to hold a vision for the longer term. You need to assign the role of vision holding to the institutions of your societies rather than to an individual like a king or a series of kings. The way you do that is you embed it in your educational system and in your religion. There are institutions that are foundational, that carry forward our values and priorities from generation to generation. And as long as these institutions keep teaching new generations you can hold the vision. Our education system, our media, and to a very large extent our religious institutions, have a big role to play here in holding that vision for as long as it’s going to take, which is the rest of this century.
Mary: Let me stick with this topic for a second. On the question of how does broad cultural change usually happen, Sara, who and what are the reliable agents for this kind of change? You mentioned religious and educational institutions. Is it ever business? In this SEC instance, could the corporate community actually be a leader in this cultural shift toward a more strategic long-term approach?
Sara: They’re not a leader, but they’re an important follower. Change usually happens on a lot of levels at once, but it always starts with a fundamental shift in our assumptions and our visions about how the world should work. So the first thing, you have to change the world, change the story. Most of us are aware that our foundational assumptions about economics don’t work anymore, and we’re actively looking for new paradigms. So, for the last 20 years, our documented storytellers in religion, media and education, have been telling us that we need to change our views around this, meaning our priorities around climate change. And this is why 70% of us now get it; most of us are on board. But that’s the talking stage; doing is harder, and doing only really happens when you get business and government involved in actively taking these new values and basing their decisionmaking process on them. I think that’s what we’re seeing now. It’is that inflection point where business and government begin to get on the side of change and that’s when we really start to see those changes taking place on the ground.
Mary: Kristen, let’s say that in the wake of this SEC ruling, American corporations stand up and embrace climate-change related planning in a big way. What can we expect the U.S. to look like in say, 30 or 50 years? What businesses will dominate? Which will decline or disappear? Can you read the tea leaves a little on that?
Kristen: Well, it’s hard to say for sure. One of the challenges all along in thinking about the post-fossil fuel economy is that fossil fuels provided such a quick and easy and cheap energy source and there’s likely not going to be a single silver bullet that comes along and replaces that. So we’re going to have an energy system based on massive advances in energy-efficiency, as well as different renewables — geothermal, solar, wind, etc. So we’re likely to see a mixed of different energy sources and we may see a more decentralized, more community-based energy production.
When you think about what’s actually going to have to happen in the U.S. economy, say by the year 2050, to really get us on track for making a dent in the climate problem, for doing what the scientists say we have to do to minimize the worst risks from climate change, we’re looking at some pretty significant transformations. By 2050, we need a minimum of 80% reduction in our greenhouse gasses, and to achieve that we’re either going to have to convert most of our energy system over to a mix of different renewables, or make some really quick advances in carbon capture and storage by the midpoint of the next century. We’re going to be investing in reforestation and prevention of deforestation. Our companies are going to have to take a leadership role in both developing the new technologies, but then also exporting and sharing the technologies for renewable energy production with the developing world. These are huge changes that have to take place in a relatively short period of time. But the good news on the climate front is that it’s economically and technically possible. What we really need is the political will and the public will to do it at this point.
Sara: And if I could add something here, one of the great things here about this ruling is that it should, in the long-run, make our businesses stronger and more innovative. Whenever we step outside of our usual assumptions to look for new risks and threats, we also very often notice the new opportunities that we would have never seen if we hadn’t been pushed out there. So by forcing businesses to get real about their risk exposure, we’re also pushing them to where they’ll be able to see and position themselves for new opportunities as well. So this is a competitiveness issue and investors hopefully reward that.
Mary: Sara, when you talked before about how we’ve done this before when America geared up for World War II, for instance, with phenomenal results. Did that experience in World War II translate into a planning culture, post-World War II? And again, how did we lose that ability?
Sara: We’d always been good at planning, but World War II forced us to get good, fast. And what you found was, throughout the military, from the highest general down to the supply clerk, everybody had to learn to think strategically, three-steps ahead. ‘What am I gong to need down the road?’ All of America went through this process, and when the boys came home, these same skills got applied into creating post-war America. You saw this in the way wives ran their households, and in the way bureaucrats ran city governments. Suddenly, you had these planning departments, at the county level mostly, that were planning out 10, 20 years. What schools are we going to need? Where are we going to get our water? What kind of roads are we going to need? People were thinking ahead.
The G.I. generation was amazing at that. It’s what enabled them to put a man on the moon. Just sticking it out there, as JFK did in 1960, and saying ‘we’re going to do this in ten years,’ with technologies that didn’t even exist at the time. He said, ‘we’re going to put a marker out and in 10 years we’re going to do this.’ And there was a tremendous confidence in their own ability to hit that mark.
That was our parents and grandparents. It’s still in us. It’s still there in our culture. We’ve gotten away from it because we’ve been living off the fat of the prosperity that all that planning created. So we’ve had a wide margin for error. If we get something wrong, it’s not that big a deal; the consequences aren’t that severe.
Buit we’re at a point now where Gallup is telling us the number one concern of American families is paying off debt and saving for the future. Families are starting to hunker down and come back together and get serious because we don’t have that margin for error anymore. The consequences for failure are high and getting higher. We have proven in the past that we can focus wonderfully well under those circumstances, and I have faith that we can do it again.
Mary: We only have a few minutes left, so I’d quickly like to hear from all of you on this last question. When historians look back, in, let’s say, 50 years on how significant this January SEC ruling is in terms of addressing climate change and sustainability, are they going to say it was “no big deal” or that as Sarah pointed out, it was “an inflection point?” Kristen?
Kristen: History books will look at this period of time in our history as one of momentous social change. And with most social change, when you’re in the middle of it, it’s sometimes hard to see how much of it is actually going on around you. But I think when we look back 50 years from now we’ll see this as the period of time when we finally righted the ship.
Julie: Fifty years from now, we’re either going to have 600 parts per million carbon in the atmosphere or we’re going to have 300 ppm or so. If we’re in the latter condition, that is, if we do manage to curtail our emissions and curb this problem, then yes, I do think we’ll look back on [the SEC ruling] as one of the things that caused the inflection point. This was the decade during which investors, governments, citizens really started getting it, and really started changing their behavior as a result. If [that doesn;t occur], then we’re going to look back on this period of time and say “oh shit” — or add the epithet of your choice — we should have seen it coming, we should have done something, this wasn’t enough.”
Mary: Sarah, as the futurist I’ll give you the last word. The SEC’s ruling in January: big deal or tiny blip on the radar screen?
Sarah: The SEC ruling is one piece of a larger shift that’s happening. As I said, it’s an inflection point where we’re moving from talking to doing, and the doing is starting to happen very quickly. I think over the next 10-20 years, as the money flow shifts, and the way we think about it really begins to shift in terms of policy and the larger decisions we make as a culture, we’re going to be surprised at how much progress finally gets made. It seems so slow until now. But we’re really hitting that point. It’s really going to move. And Julie is absolutely right. Looking back 50 years there are really only two scenarios: one is that we responded correctly and got it right. The other is that we didn’t and the results will be really quite awful.
Mary: And we’ll have to leave it at that. Thank you to our panelists: Julie Gorte, Kristen Sheeran, and Sara Robinson. Thanks also to our listeners for tuning in. This program was produced in conjunction with The Climate Desk, a journalistic collaboration dedicated to exploring the impact of a changing climate.