The Financial Risks and Opportunities of Global Climate Change

The mutual fund industry's previously icy attitude toward climate change shareholder resolutions is beginning to thaw as Wall Street starts to recognize the financial risks and opportunities of global climate change, according to a new Ceres report announced today analyzing the voting records of 1,285 funds of 62 leading mutual fund firms.

The report, evaluating 2004-2007 proxy votes, shows that historic opposition toward such resolutions is softening, with some fund firms such as Goldman Sachs supporting many climate resolutions outright, and others, such as Fidelity and Janus, abstaining on most or all resolutions after opposing them in the past. Opposition has dropped from three-quarters of fund votes to less than two out of three, while the number of abstention votes has more than doubled.

Still, many mutual funds are acting inconsistently on climate change -- offering new climate-related funds and research products while continuing to oppose virtually all climate-related resolutions. The inconsistent behavior is especially apparent at Morgan Stanley, State Street Global Advisors and other Wall Street firms which are investing aggressively in new climate-related business activities, yet have opposed virtually all climate resolutions in recent years. One positive stand-out noted in the report: Goldman Sachs, which is both promoting climate-related investments while also supporting climate change resolutions.

"More mutual fund firms are waking up to the broad financial realities of climate change, but very few are integrating this awareness across all of their business activities, including proxy voting policies," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk. "Investors should be scrubbing their portfolios for climate risks just as they're now scrubbing them for hidden sub-prime risks. Mutual funds that are ignoring climate resolutions aimed at boosting corporate disclosure of climate risks are failing in their fiduciary responsibilities and failing their customers."

"Fund managers are beginning to recognize that climate change issues are an indispensable element of assessing investment risk, and that proxy voting is one element of managing that risk," said Nell Minow, co-founder and editor of The Corporate Library. "We expect to see increasing support for these resolutions and withhold votes for board members at companies whose practices and disclosures show inadequate attention to the impact of climate change concerns."

The report, based on proxy voting data compiled by researcher Jackie Cook, is the fourth by Ceres examining mutual fund proxy voting practices on climate change shareholder resolutions. The report shows that near universal opposition to climate resolutions is gradually eroding as scientific evidence of climate change and its far reaching business impacts has become more conclusive. The industry's reduced opposition coincides with rising overall investor support for climate-related resolutions, which received record high voting support in the 2007 proxy season.

The report also highlights a growing number of climate-related fund products and related business strategies by mutual fund firms -- a trend that is contradicted by many of these same firms still opposing most or all of the climate resolutions they voted on in 2007.

"Ultimately, such schizophrenic behavior is creating financial and reputation risks for these firms -- risks easily avoided by adopting more sensible proxy voting policies on climate change," the report concludes.

Among the report's other key findings:

  • Opposition to climate-related shareholder resolutions is dropping: From 2004 to 2007, the overall level of mutual fund votes against climate resolutions dropped from more than three out of four (77.8 percent in 2004) to just under two-thirds (65.1 percent in 2007).
  • Abstention votes have more than doubled. Overall abstention votes on climate resolutions have risen from 11.9 percent in 2004 to 24.4 percent in 2007, with major firms becoming more neutral on climate resolutions including Fidelity, Ameriprise/AXP, Janus, MassMutual and Oppenheimer.
  • Some mutual fund companies and related entities are boosting their climate-related business activity while still voting against climate resolutions. Examples include Morgan Stanley, whose mutual funds supported none of the 215 climate resolutions they faced from 2004-2007, and State Street Global Advisors, whose mutual funds have opposed all 54 resolutions they faced over the same four-year period.
  • Only a handful of mainstream financial firms are distinguishing themselves on climate resolutions. Goldman Sachs stands out for matching its forward-thinking actions on climate change (such as conducting climate-related research and investing billions in clean technology) with its increasing support of climate resolutions (49 percent in 2007). Schwab, MassMutual and Janus also registered relatively high support for climate resolutions compared to other mutual fund firms.
  • The mutual fund industry still lags compared to other investors in supporting climate resolutions. While climate resolutions have garnered record votes in recent years (average voting support at annual meetings grew from 10.2 percent in 2005 to 21.6 percent in 2007), support from the mutual fund industry for climate resolutions has remained relatively stagnant.
  • Socially responsible investing firms are setting the bar on best practices by supporting all climate resolutions in 2007. Calvert, Domini, Parnassus, Pax and Walden have consistently supported all climate resolutions, and often file or co-file many of the resolutions as well.

The report recommends that mutual fund firms take specific actions to improve their support of climate resolutions, including the following:

  • Codify support for climate resolutions in their proxy voting guidelines and then follow those guidelines by voting in favor of climate resolutions.
  • Include language in their guidelines supporting resolutions calling for better climate risk disclosure by companies, as well as resolutions that go beyond disclosure, such as asking companies to set specific greenhouse gas reduction goals.
  • Funds that have moved from opposing to abstaining on climate resolutions are encouraged to go a step further by supporting such resolutions.

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