Green Investment Strategy

Are you investing in firms that are killing the earth?
by Timothy Barber
(from City A.M. newspaper, London 19/02/2008)


ENVIRONMENTALIST Al Gore didn’t mince his words last week when he warned a meeting of Wall Street leaders and institutional investors at the United Nations about the dangers of investing in carbon-intensive businesses.

“The assumption that you can safely invest in assets that come from business models that assume carbon is free is an assumption that is about to go splat,” the former US presidential candidate said.

He compared companies attempting to to drug addicts injecting into their toes having run out of veins in their arms, and told those assembled: “I guarantee that if you really take a fine-tooth comb and go through your portfolios, many of you are going to find them chock-full of ‘subprime’ carbon assets.”

Comparing the tribulations of the energy industry to the mortgage calamities of last year is perhaps as big a stick as any for the Nobel prize-winner to have shaken, and the battle surrounding energy markets in the era of climate change is only set to get fiercer. Last week James Mulva, chairman of energy corporation ConocoPhillips, told the annual meeting of the Cambridge Energy Research Associates in Houston, Texas, that the debate over climate change was slipping away from the energy industry.

REVOLUTIONISE SOCIETY

“The train is leaving the station without the industry on board,” he warned. Uncertainty over the risks that climate change represents stretches far beyond the energy industry, with rising energy costs playing a major role. Increasingly in recent years, investors have been seeking assurances that corporations have clear, defined strategies for dealing with carbon emissions and the risks associated with growing carbon taxes and regulations.

“Climate change is going to completely revolutionise the way human society produces and consumes energy,” says Paul Dickinson, chief executive of the Londonbased Carbon Disclosure Project (CDP). “That has massive fiscal implications for almost every company, and investors will be looking to sort the wheat from the chaff.”

The Carbon Disclosure Project was set up in 2000 as a way of addressing the potential commercial impact of climate change on shareholder value and commercial strategy.

DISCLOSE EMISSIONS

Its signatory members are made up of 385 institutional investors, including such major players as Merrill Lynch, Barclays, HSBC, AXA and AIG, with collective assets under management estimated at $57trn (£29trn).

Annually since 2002, the project has asked companies to measure and disclose their greenhouse gas emissions and report on their strategy for dealing with the risks and opportunities associated with climate change. The information supplied is displayed publicly on the CDP website, and the responses from the world’s 500 largest corporations are analysed in the organisation’s annual FT500 report.

For investors, it can prove crucial in assessing the risks and opportunities posed to the companies by climate change, and offers a more reliable, centralised resource than institutions were previously able to access. “We are concerned to know whether companies we are investing in are adequately taking account of climaterelated risks,” said Joachim Faber, board member responsible for asset management at Allianz. “However, the data is often not available, sometimes not comparable or of poor quality.

“As a part of the Carbon Disclosure Project, we hope to collect more reliable data, so eventually a common emissions measurement methodology can be developed.”

CALL FOR INFORMATION

The increasing importance of the information CDP gathers can be gleaned from the fact that in 2002 the collective assets under management of participating investment institutions was just $4trn. This year it has leapt by more than 30 per cent from 2007’s total of $41trn, with more than 70 new investors joining the fray.

Meanwhile, the call for information has this month gone out to 3,000 companies globally — including the entire FTSE 100 and FTSE 350 — compared to 2,400 last year. With signatory investors readily identifying which companies in their portfolio are either not responding to the request or providing unsatisfactory answers, it is arguable that companies failing to engage with the process put themselves in increased commercial danger.

“These are funds that could potentially be withdrawn from companies that look like they’re going to lose money because of climate change,” says CDP’s Dickinson. “The carbon price is rising, and things are going to change on a ratchet. We can now really see the signs of that: industry is in a fierce debate with government about energy prices and tough decisions are going to be made about how we invest for the only future that’s possible.” The signs are positive.

Between 2006 and 2007 response rates among FTSE 350 companies increased from 49 per cent to 70 per cent, while 92 of the FTSE 100 firms responded last time.

FALLING SHORT

The information companies are asked to provide to CDP can sometimes be revealing in unexpected ways. For example, US grocery giant Wal- Mart was surprised to discover that carbon emissions caused by its haulage fleets were rather less than those caused by its refrigerators. This led to the company extending the carbon self-audit to its supply chain, an initiative that has now been joined by several other major corporations under the banner of the CDP Supply Chain Leadership Collaboration.

Currently being piloted, the scheme will be rolled out in May this year, meaning the climate change concerns of the world’s largest investors and corporations will begin to reach even deeper into business infrastructures.

“Climate change is very, very serious, and the political process is falling short,” says Dickinson. “So the corporate communities have to have look at each other and think: ‘are we going to allow this car crash to happen, or are we going to do something about it?’”

For investors, the results are now increasingly visible.

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