Thursday, June 10, 2010

Something FLG Heard Last Night

FLG was listening to Marketplace and heard this interview with Mindy Lubber, president of the nonprofit environmental advocacy group Ceres.

In it she makes two claims FLG finds problematic. First, she wants companies to state climate change risks on their balance sheets:
If you're an investor, you look at those SEC filings to decide "do I want to invest in GE or Caterpillar or any other company out there?" And you expect to understand the risks that companies face. Risks of climate change are as real as risks of not having enough uranium to mine to produce your product.

From a practical matter, how is a company supposed to accurately assess how climate change, which happens over decades and centuries and the precise effects of which aren't exactly clear, will affect their company? The simple fact of the matter is that we don't know how much the climate will warm or what its effects will be. Companies would be making wild ass guesses with only a patina of science and risk management bolted atop.

Second, Libber makes the normal green-energy-will-save-us claim:
some people look at sustainability challenges as big, scary risks and addressing them means we're going to go back to the Dark Ages. I would argue it's absolutely the contrary. The clean energy future is where we're going to see the growth in our economy and we need to build it with a vengeance.

Again, as FLG has repeated ad nauseum, green energy is much like the economic analogy of breaking windows to spur economic activity. Yes, it may spur it, but only by destroying wealth. The Green Economy is an opportunity for individual firms, but will not make us richer. In fairness, it done properly it might make us all better off if we include non-economic factors, much in the same way that taxing people and using the proceeds to build a big park makes people better off in non-economic ways. The Green Economy offers growth opportunities for specific businesses, but isn't fundamentally a way forward to grow the economy overall. And just to be clear because FLG gets emails about this from time to time, demand in the green economy is the result of political decisions and processes, not fundamentally economic. Creating demand by regulation is a political demand, not an economic one.

And this leads FLG into his next point nicely. He felt that taking Mindy Lubber's comments from one, short radio interview wasn't exactly fair. So, he went to her organization's site and perused some of the studies. The first one he came across was this (PDF). The biggest concern about climate change among risk management officers, and the only one that comes in at a majority of respondents, is "political / regulatory environment." Roughly three quarters listed that. The next biggest concern, weighing in at 41%, was "regulatory liability." The actual physical impacts of climate change was second to last at 14.9%. What does that say to FLG? Risk managers aren't worried about climate change itself, but the political consequences of it.

Then FLG saw that Ceres had a publication that perhaps would explain how companies ought to state their climate change risk in SEC filings. Ceres wants companies to follow a framework that requires them to state:
  • Their emissions
  • Strategic Analysis of Climate Risk and Emissions Management.
    • Climate Change Statement
    • Emissions Management
    • Corporate Governance of Climate Change
  • Assessment of Physical Risks of Climate Change
  • Analysis of Regulatory Risks
FLG isn't exactly impressed.  The direct emissions statement makes sense.  Indirect emissions seems too hard to figure accurately.   Requiring a climate change statement is entirely political.  Companies, as stated above, aren't really that concerned about the physical risks of climate change.  And an analysis of the regulatory risks would be speculative at best.

All this seems to FLG like a way for environmentalists to require corporations to do research and analysis that environmentalists ought to do themselves.   And since FLG views the demand for environmentally friendly products and services as, and he repeats himself, fundamentally political and not economic it seems difficult to assess or quantify many of the most relevant risks.  Moreover, if FLG were a CEO, he'd be extremely hesitant to invest large amounts of money in green projects precisely because the demand will be created politically.  Green energy will be made cost competitive, in the short to medium run, only by subsidies or raising the price of carbon emissions.  Neither of these is economic.  Both are the result of possible political decisions.  You cannot accurately estimate a demand function with massive discontinuities created by public policy shifts years down the line.

1 comment:

David said...

10-K filings already contain several pages of risk disclosures, which are sometimes amusing to read ("our East Podunk plant could be destroyed by herds of inexplicably-infuriated farm animals"), but most of these things (like danger of a uranium shortage) don't go on the balance sheet, but are merely qualitative statements to try to protect against future litigation.

Also, I sent you another email Tuesday...may have gone into spam folder again.

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