Merrill, JP Morgan, Lehman Place Bets On Climate Change
There’s lots of controversy swirling around the issue of global warming, and climate change in general. The doomsayers predict catastrophic consequences unless urgent action is taken to reduce CO2 emissions and the deniers who believe the entire issue has been fabricated or blown out of proportion.
But the consensus is emerging that the problem of global warming is intensifying. Institutional investors have begun to push companies into greater disclosure of how the environment impacts their operations and prospects.
And many of the large private banks are beginning to advise their clients of the negative investment consequences and of the opportunities climate change presents.
“Going forward, we believe companies will find it harder to hide behind bad environmental habits while governments impose legislative changes, investors become more engaged in these issues and demand more transparency on the supply chain,” says Zoe Knight. Knight is head of socially responsible investment research for Merrill Lynch and author of a recent study, “Combating Climate Change—Opportunities and Risks.” The report outlines some of the harsh consequences of climate change including global warming, decrease in water availability, decline in crop yields, increase risk of flooding, disease and more. Surely not a pretty picture.
Investors Seek Greater Corporate Transparency
The Merrill report also describes the very important Carbon Disclosure Project, a formal effort by investors to gain access to GHG (greenhouse gas) emissions data. Some 2400 large corporations were sent questionnaires and asked to report on emissions and related issues. Institutional investors hope the data will help them compare newly set environmental valuation measures and force companies to be more proactive on the issue.
“Companies which are aware of the impact their business practices have on the overall environment, including climate change, and proactively take actions to mitigate any unfavorable impact, may create a significant competitive advantage compared with companies, which through lack of awareness, become blindsided by regulation,” notes a new report from Lehman Brothers, “The Business of Climate Change.”
The author of the report, Dr. John Llewellyn, Lehman senior economic policy advisor, also advises investors that there is potential for attractive investment opportunities from new industries and business that may be created to address the challenges of global climate change.
Lehman is closely following companies to determine:
- What strategy, if any, a company has in place regarding climate change;
- What data they manage and disclose, and
- What types of systems are in place to support their strategies.
The Lehman report also notes that firms are working against conflicting pressures—on the one hand to maximize short-term performance investors are seeking and on the other hand to address and invest in the issues of climate change which has more longer-term implications and paybacks.
A Closer Look at Some Investment Opportunities
If you are like most socially responsible investors, being a good citizen is one side of the coin. The other: How do I invest and realize a good return?
To be sure, the investment side of climate change is just emerging. You’ll hear lots of talk about the global carbon-trading market. The idea: companies that generate carbon dioxide and other greenhouse gases receive credits that allow them to emit a certain amount of gases. If they emit less than their credits allow, they can profit by selling the excess credits on the open market.
While about $40 billion of CO2 permits will be traded this year the market could end up growing to $3 trillion, according Global Change Associates, an energy consulting firm. Banks and brokers and other firms with energy trading desks are becoming active in the carbon market. Two in particular: JP Morgan and Morgan Stanley.
Still the jury is out on carbon trading, with some observers saying it’s ineffective, and hard to police. So far, it’s growing in Europe more than in the U.S.
In another development, consumers as investors are getting an opportunity to voice their satisfaction or discontent with company performance on climate change. A new website, www.climatecounts.org., publishes a climate change “scorecard” which ranks firms in various industries on how they measure greenhouse emissions, plans to reduce the pollutants, opposition to regulation and how they disclose their activities.
Another area that holds out promise, especially for longer-term minded investors is “carbon sequestration,” or the process of burying carbon dioxide captured from power generation and manufacturing that would otherwise spread into the atmosphere.
“Over time, we anticipate that carbon capture and sequestration (CCS) will develop into an extremely large industry involving hundreds of chemical-type plants and extensive pipeline networks,” conclude researchers at JP Morgan.
In their report, “Capturing the Gains from Carbon Capture,” researchers emphasize not to expect much in the near term–“we see little prospect of substantial revenue or profit over the next five years.”
But, CCS could be commercially attractive beginning in Europe, say by 2013.
Also, keep in mind that firms that develop expertise or proprietary technology may gain market advantages as the demand for carbon sequestration grows.
The three phases of the process are: capturing the CO2; transporting it to an injection site, and then injecting the CO2 800 meters or more into the ground.
“We recommend that investors focus on technological potential as they scrutinize companies active in CCS,” notes the JP Morgan report.
Below is a chart of companies involved in various technologies and activities related to CCS.
Some Companies With CCS On Their Minds
Carbon Capture:
Alstom, Conoco Philips, Eastman Chemical, Fluor, General Electric, Honeywell, Praxair, Shawn Group, Siemens, Washington Group.
Transport:
Dresser-Rand, National Oilwell Varco.
Sequestration:
Chevron, Denbury Resources, Emerson Electric, Hallibuton, Occidental Petroluem, Schlumberger.
(Based on data provided by JP Morgan in “Capturing the Gains from Carbon Capture”)
In the final analysis, no one is quite sure where the traps and treasuries of climate change investing are buried. But we definitely see a consensus developing to the tune of: this could be one of the largest new growth industries to pop up in a long time. So better do our homework and at least find out who the starting players are , and get some education on the technological and business options.
If the major banks such as JP Morgan, Merrill Lynch, Lehman Brothers and others are combing the globe for opportunities, maybe the least you can do is play follow the leader, at least for now.