It’s taken a while, but now the big beasts in the City are finally waking up big time to the threats and opportunities of climate change. And interestingly, they are seeing some upsides, not just doom and gloom – perhaps a modern version of the old business saying “where there’s muck, there’s brass”.
Stern said that the costs of inaction now outweigh those of action. What the City is saying now is that those who act can profit from the shifting ‘tectonic plates’. New business opportunities for mitigation (action to reduce green house gas emissions in the short to medium term) and for adaptation (as we all adjust to the reality that the climate has changed and will go on changing, however successful mitigation proves). For non-City readers of Briefing, you are probably finding that many of your colleagues belatedly recognise the need to do more. So use the arguments made in these reports to have a well-informed discussion about business strategy, not just on offsetting programmes to cover your ‘PR backs’ in the short term. When investors and financiers ‘get it’, senior executives tend to too.
RELATED NEWS
Climate change criteria for companies
The FTSE4Good Index has introduced a new range of criteria that focus on climate change. These will require companies to take steps to offset global warming through business strategy and reporting, or face removal from the index.
The new guidelines are an indication that investors are increasingly starting to value companies’ approach to climate change. This view was supported by David Miliband, environment secretary, who cautioned that companies that neglect environmental considerations could risk becoming unprofitable.
The guidelines will be implemented in January 2008 and will be applied to 255 companies identified as having the highest impact on climate change. These companies will be helped by FTSE4Good’s responsible investment unit to understand the criteria, what they need to do to comply, and the time limits. These firms will have two years to comply with the new standard. Companies that enter the index for the first time next year will be expected to comply with the criteria immediately.
Companies that attempt to stop the public policy process on climate change will be removed from the index at its discretion. There is also the possibility that the index will “name and shame” companies that do not respond to inquiries regarding their actions in meeting FTSE4Good criteria. Companies that do not make improvements and respond to requests for information will be removed from the index.
Investment banks must start thinking about the risks global warming poses to the industry and what steps can be taken to mitigate this.
Lehman Brothers and UBS simultaneously published reports acknowledging the risk that investment firms run with regard to climate change, thereby opening the dialogue between financial companies and investors over the issue of global warming.
The UBS report – Climate Change: Beyond Whether – considers separate aspects of the phenomenon, and comes to the following conclusions:
– Science: As surface temperatures rise, the risks increase
– Link between energy use and climate change: Fossil fuel use must be reduced by two-thirds
– Economics of the phenomenon: reducing emissions and mitigating the effects comes at a cost but doing nothing may be even more costly
– Sources of greenhouse gas emissions: Although options of reducing emissions are available, outright reductions are unlikely
– Investment risks and opportunities: UBS provides a blueprint for thinking about the risks and opportunities for the global business and investment sector
– Response the financial sector should take: There are two options – to react and adapt or to mitigate the impact of global warming through policy.
The Lehman Brothers report – The Business of Climate Change: Challenges and Opportunities – also looks at the science that supports climate change as well as the economics. It further considers the impact global warming will have on major business sectors namely automobiles, aviation, banks, capital goods, chemicals, consumer, healthcare and pharmaceuticals, insurance, integrated oil, media, mining and metals, real estate, retail, technology, telecoms and utilities. According the report’s author, John Llewellyn – senior economic policy advisor at Lehman Brothers – climate change is a “tectonic force” which “gradually but powerfully changes the economic landscape”. Even though this poses challenges to firms, it also presents opportunities, he added. “Firms that recognise the challenge early, and respond imaginatively and constructively, will create opportunities for themselves and thereby prosper. Others – slower to realise what is going on or electing to ignore it – will likely do markedly less well.”
Contact – Kurt Reiman, UBS, 020 7567 8000, www.ubs.com; John Llewellyn, 020 7102 2272, www.lehman.com
Getting rich by going green
Companies can make money if they implement environmental policies in their business strategy according to a report by Goldman Sachs. The US investment bank – which published its 2006 Year-end Report with regard to its environmental policy on January 21 – believes setting environmental goals can be directly beneficial to the profit-making activities of the financial sector.
The bank established an environmental policy framework in November 2005, and this year it weighed up the impact of its efforts, and found that there are “effective, market-based opportunities to positively impact the environment though our businesses”, while still “creating long-term value for our shareholders and serving the best interests of our clients”. The report further calls for regulatory policy and for other companies to engage in the debate around reducing carbon emissions. Goldman has also established the Center for Environmental Matters that grants $2.3.m towards research into market-based solutions to climate change challenges.
Climate change could boost the global economy, according to Barclays Capital, which describes this as an energy revolution – similar to the dot.com boom seen in the 1990s.
The bank’s 2007 Equity Gilt Study, published on February 7, looks at the relationship between the energy market and climate change policy, concluding that the global economy is going to restructure itself significantly over the next 25 years.
The report concludes that investors need to think seriously about climate change and “place the nexus of climate change policies and energy scarcity at the centre of their asset allocation process” with the expected outcome being “highly stimulatory for the global economy”.
Private equity can affect the environmental credentials of the energy industry positively as proven in February by the buyout of the TXU Corporation, the largest power producer in Texas. The buyout, by a group of private equity firms, has lead to stronger environmental policies and new investments in alternative energy by the company with it pledging to take the following steps:
– Planned coal-fuelled generation power stations will be decreased from 11 to 3, cutting carbon emissions by 56m tonnes.
– Invest $400m in conservation and energy efficiency activities over the next five years.
– A commitment to exploring renewable energy sources and investing in alternative energy technologies.
– The buy-out is supported by environmental organisations – Environmental Defense and the Natural Resources Defense Council.
TXU will also create an independent sustainable energy advisory board that will represent environmental interests, customers, Texas’ economic development and Electric Reliability Council of Texas reliability standards. The takeover is by private equity firms Kohlberg Kravis Roberts and Texas Pacific as well as a number of backers. TXU has in the past been lambasted by the environmental lobby in the US due to its large-scale development of coal-fuelled power stations.
Technology, media and telecoms companies will face increased risks in the future as the global digital economy grows. A report – Managing Access, Security & Privacy in the Global Digital Economy – identified the risks facing technology, media and telecoms companies such as:
– conflicting pressures from governments, customers and pressure groups
– censorship requirement
– growing sophistication of internet fraud and software viruses
– public concerns over privacy and safety when using the internet
The report, published by F&C Asset Management, also makes recommendations for good practice and thirteen companies participated in the study and warned that long-term investors must make sure that companies are taking steps to avoid problems and risk.
The companies that took part in the study are BT, Deutsche Telekom, Ericsson, Google, Intel, Microsoft, Motorola, Sony, Telecom Italia, Vodafone and Yahoo.
Two major investors have sold their shares in Reed Elsevier, the information services provider, in protest of the company’s involvement in running arms fairs. The Joseph Rowntree Charitable Trust sold its shares in Reed on February 12 due to its “concerns over the company’s involvement in arms fairs” and was followed by F&C Asset Management, which also sold its shares. Reed organises the Defence Systems and Equipment International fair, which is held in London every two years.
One of the US’s largest socially responsible mutual funds, Calvert, has formed a partnership with the Sudan Divestment Task Force, lending its analytical expertise and offering advocacy support to assist the growing Sudan disinvestment campaign.
SDTF is a project of the Genocide Intervention Network, and is working with the Save Darfur Coalition to further its cause. Calvert’s senior vice president of social research and policy, Bennett Freeman, said on the launch of the partnership: “Calvert was at the forefront of the South Africa divestment movement and today we are committing to support the most significant push for divestment since that successful campaign.”
The campaign has already been supported through Harvard, Yale and Stanford Universities’ disinvestment in stock in PetroChina and Sinopec, both thought by the campaign to be helping to financing genocide in Sudan. Calvert is supporting the targeted investment approach which focuses on companies operating in ways that support the Sudanese government’s essential revenue base and capability to prolong the conflict.
New responsible investment guidelines now include recommendations on the link between executive pay and environmental, social and governance issues. The Responsible Investment Disclosure Guidelines, published by the Association of British Insurers on February 1, take new EU and UK legislation, such as the Companies Act, into consideration and now expect companies to disclose their management of environmental, social and governance (ESG) risks and opportunities. The guidelines also include a section on executive remuneration and that the company must take into account “performance on ESG issues when setting remuneration of executive directors”.
What’s interesting about these revised guidelines is what has changed and what has not, since they were first issued in 2001. A new acronym ESG replaces SEE (which never caught on) – out goes ethical, in comes governance, rightly. The board must now be honest about shortfalls in performance and base reporting on KPIs, rightly. And executive pay comes into the spotlight – do remuneration schemes discourage doing the right things or longer term minimisation? Good question. What has not changed is ABI’s insistence these matters are addressed in the annual report, not just CSR reports. All in all, a very sensible revision.
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