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Wall Street Eyes Heart of Darkness: Global Warming

by: Peter Bohan    13 December 2006

CHICAGO - The topic of the conference was climate change and the rhetoric was sobering, haunted by scientific projections of a roasted world for our children and a looming environmental disaster of Biblical proportions.

But this was no talk shop of environmental activists. It was a meeting of Wall Street investors, insurance executives, state treasurers and pension fund managers, who between them manage about $3.7 trillion in assets.

"The insurance industry has historically taken on social issues. I know of no social issue that is bigger than this one," said Tim Wagner, director of insurance for the state of Nebraska.

The consensus of Wagner and others addressing the conference of the Investor Network on Climate Risk (INCR) was that institutional investors are still too near-sighted to factor climate change into their investment decisions.

While there will be costs to the U.S. economy from climate change, the problem for Wall Street is that those costs are unknown and in the future. Many drew a parallel to the asbestos and tobacco industries, which were hit by lawsuits after the fact.

"The value proposition is one the Street isn't really recognizing," said William Page, a portfolio manager at State Street Global Advisors.

Michael Moran, vice president of global investment research at Goldman, Sachs & Co., said Wall Street was still taking its first steps. "The first step to recovery is acknowledging you have a problem."

The short-term focus of investors at hedge funds and mutual funds made climate change issues a harder sell that it would be for individual investors or long-term funds, Moran said.

"So much capital is focused on short-term strategies. They say: 'I understand climate change. I think it's a big risk. But you are talking about long-term issues. I get evaluated every three months. I get a percentage on this year's profits,'" he said.

Richard Sandor, head of the Chicago Climate Exchange, said it was up to every institutional investor to push companies to evaluate and estimate their climate risk.

Investors need to do so for three reasons: financial risk from liabilities, investing opportunity in "green" technologies and rising public concern, said Win Neuger, chief executive at AIG Global Investment Group, a unit of insurance company American International Group Inc. .

"Companies that are irresponsible carbon emitters will pay a price," Neuger said.


For insurance companies, climate risks are already center stage following Hurricane Katrina, which caused about $125 billion in damage in 2005, with $45 billion covered by private insurers.

Nebraska's Wagner estimated that Hurricane Andrew, which damaged or destroyed 125,000 homes from Florida to Louisiana in 1992, would cause $150 billion in damage if it hit Miami today -- one-third of the U.S. property and casualty insurance industry's capital base of about $450 billion.

"Insurance availability will be an issue. Insurance affordability will be an issue," said Wagner, who heads the National Association of Insurance Commissioners' task force on climate change.

Some $2 trillion in real estate was at risk from future storms in coastal communities of Florida alone, he said.

"The increasing scientific consensus is that this represents a trend beyond natural variability and a likely increase for the future," said Gary Guzy of Marsh USA, a unit of insurance broker Marsh & McLennan Cos. .

Participants at the conference, held on Dec. 7 at the University of Chicago, agreed to keep pushing companies to disclose their climate risk and to press the Securities and Exchange Commission to encourage such disclosure.

"Analysts are starting to ask the right questions and put some of the real numbers in their analysis," said Mindy Lubber, a director of the network. "There are thousands that need to change."

Meanwhile, Democrats have told President George W. Bush that mandatory limits on greenhouse gas emissions will be a priority when they take control of Congress next year.

Participants at the conference foresaw difficulties in Bush's firm opposition and the complexity of creating the limits.

Yet Sandor, whose exchange already offers contracts for such a "cap and trade" emissions system, said another Hurricane Katrina was all it would take for it to become reality. "It's not a question of 'if.' It's only a question of 'when.'"

Kentucky state treasurer Jonathan Miller said a trend to watch was a push by U.S. church groups, especially conservative evangelicals, to spotlight climate change.

"When this message is coming from the pulpit, that is when we're going to see the real action take place," Miller said.

Until then, investment funds will continue to follow the money. "If our clients care about this issue, we better pay attention," said AIG's Neuger.