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 user 2005-08-20 at 7:58:00 am Views: 48
  • #12773

    City traders facing up to climate change

    The winner-takes-all
    world of stock markets and financial trading is not one you usually
    associate with attempts to save the planet.

    Yet if some of Britain’s biggest pension funds get their way, City
    traders will soon be discussing how climate change could affect the
    stock prices of FTSE 100 companies.

    Nick Robins, of Henderson Global Investors, believes it might not be
    long before the market sees a profit warning from a company as a result
    of a failure to grasp the impact of emissions on business.

    “It is probable that some corporations will have made investments
    without taking into account the likely tightening of limits under the
    Emissions Trading Scheme (ETS),” he warns.

    This European Union scheme, launched in January, aims to reduce
    emissions of carbon dioxide, the main gas that causes global warming.

    Pollution permits

        We’re not trying to save the world – what we want is
    for people to realise that climate change is an issue that can affect
    the value of their investments
    Peter Scales, Institutional Investors Group on Climate Change

    Under the ETS, installations such as power stations are given
    allowances to emit CO2. If they become more efficient and use less than
    their allocation, they can sell their spare permits.

    If they exceed their limit, they must buy extra allowances to avoid fines.

    The price of an allowance per tonne of CO2 emitted shot up from 6 euros
    ($7.5; £4.1) when trading began to nearly 30 euros in early June.

    It has now fallen to around 22 euros, but this is still higher than many analysts had expected.

    The driving factor is the jump in oil and gas prices, which has led
    some power companies to decrease their use of natural-gas power plants
    and switch to coal generation instead.

    “As coal emits much more CO2, they have to buy more credits, making
    carbon emissions a real cost for some companies. Investors have a
    legitimate right to know about such liabilities,” says Simon Thomas,
    chief executive of environmental research organisation Trucost.

    A recent report published by Henderson and Trucost estimates that
    greenhouse gas emissions from the UK’s one hundred largest companies in
    2003/04 accounted for about 1.6% of the global total.

    Moreover, it calculated that up to 12% of the pre-tax earnings of FTSE
    100 firms could be at risk from measures required to incorporate the
    cost of emissions into market prices.

    Environmental impact

    The actual impact of emissions on profits and share prices will depend
    partly on the extent to which companies can pass on that cost to

    Mr Thomas points out that those operating in national markets such as
    electricity generation have more freedom to raise prices than those in
    sectors where there is fierce international competition, such as
    aluminium smelting.

    If European materials manufacturers want to keep prices as low as their
    Asian and US rivals – which are not subject to the same emissions
    regulations – they have little choice but to cut their carbon costs.

    “If we look at all the climate change issues that could affect
    companies’ bottom lines, it is clear that for many there will be an
    impact,” says Peter Scales, of the UK-based Institutional Investors
    Group on Climate Change (IIGCC).

    This network, which includes large public pension funds as well as
    investment management firms, works to promote better understanding of
    climate change among investors.

    “We’re not trying to save the world, what we want is for people to
    realise that climate change is an issue that can affect the value of
    their investments,” says Mr Scales.

    Climate reports

    A recent report by the IIGCC and the Carbon Trust warned that
    “virtually all” types of pension asset could be affected by climate

    It defines a number of areas of concern, including regulatory risk -
    such as emissions trading, and physical risk – such as extreme weather

    To help evaluate those risks, some investors are calling on companies
    to publish better information about their greenhouse gas emissions and
    how they plan to mitigate the impact of climate change.

    In July, a group of 15 leading US investors with more than $550bn of
    funds under management asked the electricity sector’s biggest
    greenhouse gas emitters to report on how possible future limits on
    emissions could affect their bottom lines.

    Prior to that, four power companies had already published ‘climate risk’ reports.

    According to Dan Bakal of Ceres, a coalition of investors and
    environmental groups which backed the initiative, the uncertainty of US
    government policy on climate change is a key problem for corporations.

    “There is a growing sense that there will be greenhouse gas regulation,
    but they don’t know how that will be developed. In the US, investors
    and companies are working in a void, and there is a need for
    information to fill that gap,” he says.

    Yet it is not only the negative repercussions of climate change that investors want to hear about.

    Many are also looking to invest in the growing number of companies
    planning to make money from technologies that support a low carbon

    In May, US giant General Electric announced it would double both its
    investment in research on clean technologies and its revenues from
    products and services that provide “environmental performance
    advantages” by 2010.

    Henderson’s Mr Robins believes that some greener companies offer good
    investment opportunities, describing firms that provide goods and
    services to improve energy efficiency as “buried treasure”.

    In the coming years, green may well become the new black in City circles.