Even after Durban, investors interested in CO2 emissions

by Dr Ingeborg Schumacher, Director, Responsible Investing, Kaiser Partner

The climate negotiations in Durban certainly didn’t live up to everyone’s expectations. Many criticized the long timeframe before legally binding agreements actually come into force, for example. But whatever the uncertainty at the political level, climate change remains very relevant to the financial markets. In 2010, as part of the Carbon Disclosure Project, more than 550 institutional investors questioned companies about their climate data and risks, and about the concrete measure they were taking to protect the climate. As part of this consortium of investors, Liechtenstein-based Kaiser Partner Group is directly encouraging companies to take the issue seriously.

Different observers and commentators have passed very different judgments on the climate negotiations that took place in Durban in mid-December. Greenpeace called them “a backward step for climate protection” (Link in German). The environmental organization declared that neither the decisions taken about the Kyoto Protocol nor the timetable for a new global climate agreement were enough to keep global warming below two degrees centigrade. Scientists at the ETH Zurich take a rather more pragmatic view: Professor Bernauer wrote in the ETH climate blog (Link in German), that “measures were decided that will keep the negotiation process alive”. He emphasized the small amount of progress made after the conference had at one time seemed on the brink of collapse. The EU undertook to place its commitment to reduce greenhouse gases (by 20% from the 1990 level by 2020) within the legally binding framework of the Kyoto Protocol. In return, more than 190 member states of the framework climate convention agreed to enter negotiations next year with the aim of achieving a universally binding agreement by 2015. This agreement should come into force by 2020 at the latest.

Tough negotiations between those wanting reductions and the big emitters

The complex formulations used reflect how difficult negotiations between the “progressive” Europeans on one side and the big emitters – the Americans and emerging economies – on the other were. And then on the day after the meeting, Canada, a major producer of greenhouse gases, announced that it was withdrawing from the Kyoto Protocol. It seems that the country was not in a position to fulfill its legally binding reduction commitments.

For existing mechanisms such as the EU Emissions Trading Scheme, the agreement means that current incentives to cut emissions will be extended. Given the long timetable before binding goals can be negotiated and implemented, is it is unrealistic to hope that the broadly accepted goal of limiting global warming to two degrees will ever be met. Our experience to date has shown that the emerging markets’ hunger for energy has wiped out all the savings that may have been made elsewhere.

What does this mean for the financial markets? Analysts identified climate change and carbon finance relatively early on as issues worth exploring. Typical questions they now ask are: What is the impact of rising energy prices and CO2 emissions on different sectors of the economy and on the profitability of individual companies? Will the tourist industry be a loser or a winner? Which companies within a particular industry will be most affected by likely regulatory and price changes?

In January 2007 Klaus Wellershoff, at that time Head of UBS Wealth Management and Research, said: “Whether or not you agree with the view that human activity is influencing the climate system is largely irrelevant to the investment thesis. What is important is that numerous policies to combat the threat of global warming are converging to influence people’s behavior, alter the risk profile of various businesses, and improve the investment outlook for others.”

In 2000 a group of investors who wanted to use their power as shareholders to influence the climate debate met up to launch the Carbon Disclosure Project (CDP). The aim was to create more transparency about emissions of climate-damaging greenhouse gases. To do this, the CDP conducts an annual survey in the name of an impressive number of investors, including Kaiser Partner. Using standardized questionnaires, the survey asks companies to volunteer information about their CO2 emissions, climate risks, reduction targets and strategies. In 2011 more than 550 institutional investors, managing more than 71 trillion dollars between them, requested information from more than 3,000 companies in approximately 60 countries. This exercise helps accelerate solutions to climate change issues by making the relevant data available to the companies themselves, to politicians, but also to potential investors. At the same time, simply by asking for the information the CDP raises awareness of climate issues.

As the saying goes, “what get’s measured, get’s done”. But it’s up to individual investors what they do with the data. Which is why the CDP Carbon Action Initiative was launched on the back of the Carbon Disclosure Project. Individual pension funds and asset managers have taken their climate change activity to the next level. They are now talking directly to individual companies about accelerating emission reduction measures in order to improve the financial sustainability of their investments. And the Initiative has indeed highlighted many opportunities for profitably reducing emissions – i.e. there is now a clear business case for taking action.

The Durban climate negotiations did not result in more precise or tighter regulations on limiting greenhouse gases, but the financial markets continue to give businesses clear signals that they need to manage the related risks and take action where necessary. This opens up plenty of opportunities for investors, for example in the area of energy efficient technologies. Kaiser Partner Privatbank’s portfolio managers specifically target and invest in products that have this kind of focus.

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