Business & Money

Investors are asking utilities questions about environmental and social risks. Answers can be a challenge.

When the tech-stock bubble burst in 2001, investors were outraged to learn that many stock analysts were being paid to over-hype stocks. The following year, Enron's ugly public death revealed the presence of a virulent infection in governance of many large and respected companies. Then, in 2003, just as the Sarbanes-Oxley serum appeared to have purged most of the sickness, reports of improprieties spewed forth from the mutual fund industry. And less than halfway into 2004, questions about oil and gas companies' characterizations of "proven" reserves have started to emerge.

Needless to say, investors are sick and tired of shysters and scandals, and they're not going to take it anymore.

In this context, a letter sent recently to Securities & Exchange Commission (SEC) Chairman William Donaldson bears consideration. The letter, signed by the state treasurers of Connecticut, California, Oregon, Maine, New Mexico, and Vermont, calls upon the SEC to require that publicly traded companies disclose the effects of climate change on their businesses. The group estimates that climate-change costs could total as much as 15 percent of the market capitalization of some companies.

"Our investment portfolios were hurt by irresponsible corporate governance," said Denise Nappier, treasurer of the state of Connecticut, speaking at a press conference. "We've seen some positive moves from the SEC as pertains to Sarbanes-Oxley, and in new stock-exchange rules, but much more needs to be done. Climate risk should be part of routine analysis disclosed to shareholders."

The SEC letter indicates the pressure that is building to encourage companies to report their environmental risk exposure.

"Investors are very interested in knowing what pollution control will cost going forward," says Ed Tirello, managing director and senior power strategist with Berenson & Co. in New York. "This is becoming a key issue, and if Democrats win the White House it will become a major factor for the next four years."

Sustainable Profits

In the post-Sarbanes-Oxley world, investor demands are moving beyond environmental issues. Investors are increasingly aware of social and cultural factors that can affect a company's long-term financial health-cumulatively termed "sustainability."

While sustainability reporting stems from green roots, its effects transcend ideological or philosophical boundaries. In the wake of corporate-governance scandals and stock meltdowns, more investors are reading-and scrutinizing-companies' financial reports. Accordingly, their expectations are rising.

"Investors are demanding this information from big, publicly traded companies," says Alyson Slater, an associate director with the Global Reporting Institute (GRI) in Amsterdam. "That's where the hottest demand is today, and where companies feel the most pressure to report this information."

Indeed, nearly one-third of the companies in the Fortune 500 are now issuing sustainability reports using GRI guidelines. U.S. utilities, however, have been relatively slow to adopt such practices, with only about 10 U.S.-based investor-owned utilities issuing standardized sustainability reports of one kind or another ().

"Compared to other industries, utilities are not leading, but they definitely are progressing," says Urs Schön, a sustainability analyst with Zurich, Switzerland-based SAM Research, which developed and