from Corporate Board Member
Founded in 1989 in response to the Exxon-Valdez oil spill, Ceres (pronounced “series”) began as the Coalition for Environmentally Responsible Economies. Its mission: to integrate sustainability into capital markets by putting a financial value on water, climate change pollution, and the like. While the organization has since dropped its full name to the shortened Ceres, its efforts have only intensified. Mindy S. Lubber, Ceres’ president, believes sustainability isn’t merely about mitigating risk, it’s about increasing opportunity. She first spoke with Corporate Board Member in November 2009 about Ceres’ coalition of corporate companies, its work influencing the SEC to set new reporting standards, and its goal for a sustainable economy by 2020.
Corporate Board Member: What do you think of the SEC's decision to encourage companies to disclose climate change risk?
Mindy Lubber: Wednesday's vote at the SEC is a clarion call about the vast risks and opportunities climate change poses for US companies, and the urgency for recognizing those risks in investment decision making. Just as subprime mortgage risks were inadequately disclosed, the financial risks and opportunities of climate change have not been accounted for in companies' business plans.
The longstanding requirement that publicly traded corporations disclose material information to their shareholders is based on a simple proposition: only through the steady flow of timely, comprehensive, comparable, and accurate information can people make sound investment decisions. With this guidance investors can make more sound decisions based on better information, and businesses will have a level playing field with clear standards and expectations for disclosure.
Disclosure is a cornerstone of federal securities law and assuring transparency is central to the SEC's mandate -- it's good that the SEC is getting ahead of the curve in identifying these regulatory responsibilities now.
The calls for this guidance have been investor-driven. They stem from formal requests by leading investors for the SEC to require full corporate disclosure of climate-related business impacts and strategies for addressing those impacts in their financial filings. Investors managing over $5 trillion in assets, plus Ceres and the Environmental Defense Fund, requested formal guidance either in the petition filed with the Commission in 2007, or supplemental petitions filed in 2008 and 2009.
Below is Corporate Board Member's November 2009 interview with Mindy Lubber:
Corporate Board Member: Tell us about Ceres’ goal for sustainable economy. The vision is based on four pillars: having honest accounting, setting new standards and expectations, accelerating green innovation, and changing the rules of the game. What does all that mean?
Mindy Lubber: Ceres adamantly calls for honest accounting, and all that means is if carbon pollution costs us money as a society, then put a price on carbon pollution. Right now, it’s free. When something is free, you get a lot more of it. We want to see a price put on carbon, an initiative that is being considered in the U.S. Congress. That’s sending the right market signal. And we want make sure incentives are in place for clean energy and not just dirty coal. That’s sending the right market signal.
We want to change the way boards of directors look at sustainability. Sustainability has never been a governance issue. We’ve called on the SEC to require companies to have better disclosure on sustainability risks like climate, water, and biodiversity. They are actively considering this. There’s no reason for depleting our natural resources, because we’re not going to have enough of them to run our economy. We need to look at those as real financial risks plaguing our economic markets. So all we’re calling for is the SEC to require better disclosure of material risks around sustainability, and for the New York Stock Exchange to require companies that are listed on the stock exchange to not only disclose other information about who they are, but also about sustainability. Doing so will make sure that analysts, when they’re reviewing whether or not to invest in company X or company Y, are looking at the risks and the opportunities of sustainability issues.
CBM: Do your coalition companies make these disclosures now?
ML: Not all of them, and partially because they’re not asked to. The SEC hasn’t elaborated on the material risks that need to be disclosed in their filings. Every company Ceres works with does its own voluntary sustainability report. And they’re doing a good job, and it’s focused on metrics and material issues and about setting goals. But in the end, it shouldn’t be the case that one company does these things and another company doesn’t. If this is a material risk and these numbers matter, then all companies should be asked to do it. And if not, then no company should have to do it.
CBM: Do the companies in the Ceres coalition use the GRI-based sustainability report that Ceres created?
ML: Most of them do use all of it or part of it. Ceres, as you said, designed and built the global reporting initiative. We spun it off in the early 2000’s to be its own independent standard-setting body. Our goal is to get companies to disclose their sustainability impacts on anything from environmental sustainability issues to worker safety, and then to put them in a document and make it available to the public, to shareholders, to large investors, and so on. Every company that we work with as a Ceres company does a sustainability report, and almost all of them are built off of the global reporting initiative.
CBM: How many Ceres companies are there, Mindy?
ML: There are about 80 Ceres companies, and we’re talking to 45 or so others. Our job is to see as many companies integrate, from the boardroom to the copy room, sustainability programs.
CBM: Do you recruit companies, or do companies approach you?
ML: It’s a combination. We do look at the high impact sectors and say even though these companies may not be the greenest companies, we want to work with them because we can have the biggest impact, and we may go to them or they may come to us. It really varies.
Last year, we did a study on how the top 40 financial institutions are dealing with climate change. Once the report was out, every company that was benchmarked nearer the bottom called to say, “My CEO doesn’t want to see us in the bottom quartile next year; how can we work with you to learn how to get the sustainability metrics right within our firm?” Sometimes activist shareholders file shareholder resolutions for the company, saying they want a sustainability report because they think that’s necessary information. And once a company thinks of that, they turn to us, because Ceres is one of the leading organizations that works with both companies and investors.
CBM: How does “setting new standards and expectations” fit in?
ML: In the early 1990s Ceres came out with the Ceres Principles, a set of principles that we ask companies to endorse or adopt around sustainability, energy use, and environmental use. Most companies at that point said, “Sustainability doesn’t have anything to do with business; we’re not signing those principles.” And it took years to get to a point where companies, almost across the board understand that sustainability is a part of strategic planning and needs to be integrated. So 15 years ago, all we could do was expect a company to perhaps sign on to aspirational principles. Ten years ago, we were audacious enough to ask companies to measure their sustainability impacts and to disclose it in the sustainability reports that we just talked about. We’re now at a point where we need to raise the standards on what is expected of investors and companies, and that’s what we’re trying to do at Ceres.
We have a new report coming out on the model 21st century corporation and what should be expected, and some of the things include taking advantage of this moment in time, because sustainability isn’t being debated anymore. People understand it has value. The SEC needs to require that information be disclosed. We need to change the way boards of directors look at their requirements and their mandate. Let’s be very specific. The role of a board of director is to analyze risk. That’s one of the key fiduciary requirements of a board member. So, if there is a material risk from not having enough water or not having enough timber or having too much climate impact that is soon going to cost the company, those are issues that rise to the level of a governance body.
CBM: Has the SEC given you any indication that this will be seriously considered under Commissioner Schapiro?
ML: The SEC has absolutely given us an indication that it will be considered. A few weeks ago, [Elisse B.] Walter, one of the commissioners, said “We plan to act; the time to act is now.” Ceres has met with the commissioners. We’ve met with the staff. They are actively considering this and many, many other things in their role of the protector of investors, which they believe they’ve got to reestablish, given what took place over the last two or three years.
But we need to make sure that the new set of standards, the benchmark for what companies ought to be doing, live up to where we are today and not of the standards of10 years ago. So that means boards need to be looking at sustainability.
[Regarding green innovation] Mike Morris at AEP and the CEO of National Grid [Steve Holliday], are not only being rated on return on investment, but their metrics for how they report to their board include sustainability metrics. And we need to make sure that companies are looking at sustainability when they’re bringing out new products and when they’re rebuilding their facilities and that they’re setting expectations for themselves as well as their supply chain. Not only is Nike concerned about sustainability, but also it’s making sure that the practices it holds out around the environment and social and labor issues are practiced, and it demands that from those who are in its supply chain. It is a new day. Companies need to integrate sustainability into their corporate and strategic planning because these issues are financial issues; they’re balance-sheet risks, not off-balance sheet risks, and they need to be looked at as such.
CBM: Is Ceres an activist investor?
ML: We’re not an activist investor because we don’t own stock, but we work with $8 trillion worth of investors who are part of a Ceres program, the Investor Network on Climate Risk. It’s the large institutional investors that are now saying to companies, “We want you to make progress on sustainability because we see it as the way to increase the shareholder value of the company.”
CBM: To what extent do the coalition companies follow the pillars? What do the coalition companies have to commit to in order to join the coalition?
ML: That’s a good question, and moving up the sustainability journey, so to speak, is a continuous process. I know of literally no company that I’d say gets a green star, they’ve done 10 out of 10. For every company that’s doing two things, there are two things that we want them to be doing and we keep pushing. They must commit to full disclosure on sustainability and doing a GRI-based report, as we talked about. They must commit to engaging with the stakeholder group we bring in to help them identify the most important sustainability issues—how to deal with them and set goals for addressing them. In addition, they must commit to specific goals on increasing their accountability on sustainability. So if they brought their energy footprint down by 10% this year, we would expect it to be 15% next year. If they are recycling 10% of the computers they sell, we would expect that to go to 20% over the next few years. We are looking for companies who are engaging with us that are willing to be transparent, that are willing to put the real numbers out to the public, that are willing to engage with stakeholders, and that are willing to commit explicitly to addressing material impacts from sustainability on a continuing basis.
CBM: And obviously, they must get something out of this, to have as many companies as you do in the coalition.
ML: Companies are realizing that these issues are on the agenda. They’re being debated by Congress. Their European counterparts are getting beyond them. These companies are smart. They want to keep up. They want to, A, make sure they’re dealing with the right sustainability issues; B, they want to be competitive and get out there on the cutting edge; and C, they want to be poised to deal with the opportunities. The companies that are out there looking at cleaner energy, cleaner facilities, and looking at using fewer resources are the companies that are making money.
Of all companies to be leading on this, Walmart is. Walmart has said over the last six months that sustainability has been one of the most powerful forces for motivating its workforce, for saving money, and for allowing it to drive an agenda. It’s not requiring all of its supply chain companies to look at sustainability. Walmart is saying this is a straight business proposition: This is about making more money, this is about selling products that the consumer population is getting more and more interested in, this is about saving money by having better refrigeration, transportation and energy systems, and this is about motivating our workforce in a way that has never happened in our history. So companies are getting involved because they realize this is not only good for the environment or for the workforce, but it’s good for their financial bottom line.
CBM: What would you like to add, in closing?
ML: The final point is it’s also about changing the rules of the game. If we have policy that rewards dirty coal fire power plants rather than renewable energy, we’re not going to see the kind of change we need. So we’ve got to make sure that it’s not only the practices of companies or pressure from investors telling companies that they see sustainability as a financial issue, but it’s also making sure that financial structures and incentives at the congressional level are all in the right place. It’s putting a price on carbon, and that’s what Congress is considering now. We’ve got to make sure that we get all four tiers. We get companies moving in the right direction, investors as part of that debate and discussion, but we’ve got to make sure that the administration and Congress are sending the right financial signals about dealing with sustainability.