Shareholder Pressure for Carbon Disclosure Puts Corporate Fleets in the Cross Hairs

By Mike Antich

A record number of global warming resolutions were filed with 58 U.S. companies during the 2009 proxy season that occurs prior to annual shareholder meetings. These resolutions are part of a growing, organized effort by investor groups to get companies to voluntarily disclose data about their "carbon footprints," which typically includes the total set of greenhouse gas (GHG) emissions caused directly and indirectly by their operations. These investors are concerned future government GHG regulations will have a significant financial impact on corporations. They furthermore argue companies that disclose and mitigate GHG emissions will be rewarded with higher valuations and a lower cost of capital.

One example of this investor trend occurred earlier this year when Hertz committed to report to investors efforts to improve the fuel economy of its 500,000-vehicle global rental fleet and provide sustainability reporting. A similar, but unsuccessful effort, was made last June at the Avis Budget Group annual stockholder meeting to require the company to develop a reporting structure as to how it would reduce emissions by its rental vehicle fleet.

A leading proponent of corporate sustainability disclosure is Ceres, a national network of investors, environmental organizations, and public interest groups. Its mission is to integrate sustainability requirements into capital markets. Ceres President Mindy Lubber has been quoted as stating, "climate change is a bottom-line issue and investors have a right to know which companies are best positioned for the emerging clean energy global economy."

Of 575 companies surveyed by Gartner in the U.S. and 10 other countries, almost 19 percent have implemented a formalized carbon reporting structure. At many of these companies, fleet represents a sizeable percent of their carbon footprints and green fleet initiatives present for them a significant opportunity to demonstrate carbon reduction accountability. One example is Abbott, which in 2007 determined how many tons of carbon dioxide was emitted by its fleet to establish a GHG baseline. At that time, 11 percent of Abbott's emissions were generated by its 6,500-vehicle fleet. Abbott's fleet emission reductions support a corporate goal to reduce operational GHG to 10-percent below its 2004 levels by 2010. Similarly, other companies have also established fleet emission baselines, such as USG, sanofi-aventis, U.S. Foodservice, and Novartis. Among utilities, American Electric Power tracks carbon emissions generated by its vehicle fleets as part of a sophisticated system to track carbon and other emissions produced by its power plants.

In some instances, fleet is discovered to be less a factor than anticipated in GHG emissions. For instance, Coca-Cola has begun to voluntarily include "climate risk factors" in its annual 10-K report filed with the Securities & Exchange Commission (SEC). Coca-Cola, which pledged to eliminate 2 million tons of CO2 emissions from its global manufacturing operations by 2015, expected most emissions to be generated by its truck fleet and manufacturing operations. Instead, Coca-Cola discovered the largest contributor of GHG emissions was from its 9 million coolers and vending machines, which generate 15 million metric tons of emissions annually. This dwarfs the 3 million metric tons emitted by its entire diesel truck delivery fleet.

Proposal to Mandate Carbon Disclosure in SEC Filings

A growing number of investors, state officials, and environmental groups are lobbying the U.S. Congress to mandate climate change disclosures in SEC filings. Presently, the SEC doesn't require companies to disclose financial risks related to GHG emissions.

On June 12, 41 investors sent a letter to Mary Schapiro, SEC chairwoman, urging her to take steps to require disclosure of "climate change-related risks" in securities filings. The letter's signatories, representing $1.4 trillion in assets under management, included treasurers, comptrollers, controllers, asset managers, and institutional investors such as the California Public Employees' Retirement System (CalPERS); the American Federation of State, County, and Municipal Employees (AFSCME); and the New York City Employee Retirement System (NYCERS).

Other federal legislation on the horizon would institutionalize carbon footprint disclosure. For instance, the American Clean Energy and Security Act (also known as Waxman-Markey) was passed by the U.S. House of Representatives on June 26, but is yet to be passed by the U.S. Senate. The bill would mandate a nearly 20-percent carbon emission reduction by 2020. The bill also creates a cap-and-trade system for carbon emissions. In many energy and resource industries, the EPA requires new carbon emissions disclosures for 2010 to be reported in 2011.

As corporations deliberate about voluntary GHG disclosures, there are concerns about potential legal liabilities. As a precaution, these companies are considering specialized directors' and officers' (D&O) liability insurance coverage to protect senior management from potential lawsuits. One thing is clear, however. When corporations begin investigating D&O insurance, it validates (at least in my mind) that corporate disclosure of GHG is a real and growing trend.