Hill Heat

At yesterday’s Investor Summit on Climate Risk, McKinsey’s economic research arm, the McKinsey Global Institute, released the report The Case for Investing in Energy Productivity (lead authors Jaana Remes and Diana Farrell).

The report finds that global investments on the order of $170 billion annually through 2020 ($38 billion in the US) in energy efficiency (what they call “energy productivity”) would deliver annual returns at a rate of 17 percent. Furthermore, these investments would reduce energy demand at half the cost of building out infrastructure to meet that demand. (For a sense of scale, $170 billion is 1.6 percent of global fixed-capital investment today.)

Fuel subsidies that directly discourage productive energy use; a lack of information available to consumers about the kind of energy productivity choices that are available to them; and agency issues in high-turnover commercial businesses.

• Set energy efficiency standards for appliances and equipment
• Finance energy efficiency upgrades in new buildings and remodels (see Architecture 2030)
• Raise corporate standards for energy efficiency
• Invest in energy intermediaries (such as energy service companies aka ESCOs)

For more, read the full report.

The 2008 Investor Summit on Climate Risk will bring together more than 450 institutional investors, Wall Street leaders and CEOs from around the world to consider the scale and urgency of climate change risks, as well as the economic opportunities of a global transition to a clean energy future.

Purpose

The purpose of the Summit is to provide a high-level forum for state treasurers, leading institutional investors, and financial services firms from around the world to consider the scale and urgency of climate change risks, as well as the economic opportunities of a global transition to a clean energy future.

Objectives

• Examine recent scientific findings on climate risk and technological solutions
• Assess potential capital flows into energy efficiency and clean technologies
• Learn how treasurers, institutional investors and financial services firms worldwide are factoring climate risk into their policies and strategies
• Consider prudent steps investors can take to address climate risk and opportunities

Background

The 2008 Summit builds on the groundbreaking success of the first two UN Investor Summits on November 21, 2003, and May 10, 2005. Hundreds of institutional investors and asset managers from around the world, representing trillions of dollars in assets, attended the previous Summits. The information they shared raised profound concerns about investor exposure to climate risk, the future security of investment assets, and the fiduciary duty to take prudent steps to address climate risk on behalf of shareholders and beneficiaries. Information on previous Summits can be found at the Investor Network on Climate Risk website.

Climate Risk – and Opportunity

Climate change poses regulatory, legal, physical and competitive risks for companies. In the two years since the 2005 Summit there has been a growing recognition that climate change presents serious risks, not only for businesses and investments, but also for the global economy. Left unattended, risks from climate change will worsen over time, harming company assets and global investment portfolios. Leading economists, investors, and business leaders have stated recently that the costs of action to reduce greenhouse gas emissions are both affordable and significantly lower than the costs of inaction. Where there are risks, there are also opportunities, and the business opportunities posed by addressing climate change are significant. With the proper government policies and market conditions, low-carbon technologies that are available today could be more broadly deployed, and significant reductions in emissions could be achieved over the next few decades—all while creating vast new economic opportunities and new jobs.

On Monday Citi Group, Morgan Stanley, and JPMorgan Chase announced the establishment of an “enhanced diligence” framework for judging proposed financings of certain new fossil fuel generation.

The framework, according to the joint press release, sets principles for energy efficiency (including “regulatory and legislative changes that increase efficiency in electricity consumption”), renewable energy and low-carbon distributed energy technologies, and assessing the “financial, regulatory and certain environmental liability risks” of CO2-emitting fossil fuel power generation. The group intends to “encourage regulatory and legislative changes that facilitate carbon capture and storage (CCS) to further reduce CO2 emissions from the electric sector.”

The group, which as the Rainforest Action Network’s Understory blog notes does not include major investor Bank of America, consulted the power companies American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Company and the environmental organizations Environmental Defense and the Natural Resources Defense Council.

Ceres is the dominant organization in climate-related investment, with the mission of “integrating sustainability into capital markets for the health of the planet and its people.” Their Investor Network on Climate Risk represents corporations and institutions controlling $4 trillion in assets calling for corporate climate disclosure, emissions-reduction legislation, renewable energy investment, and related actions.

J. P. Morgan is one of the few investment majors with a dedicated climate change research division.

Calvert, one of the main players in the “socially responsible” investment space, has Calvert Global Alternative Energy Fund (CGAEX).

Guinness Atkinson has the Guinness Atkinson Alternative Energy Fund (GAAEX).

PowerShares offers various index funds, including Global Clean Energy Portfolio (PBD) (WilderHill New Energy Global Innovation Index (NEX)), Global Water Portfolio (PIO) (Palisades Global Water Index (PIIWI)), Cleantech Portfolio (Cleantech Index (CTIUS)), Water Resources Portfolio (Palisades Water Index (ZWI)), WilderHill Clean Energy Portfolio (WilderHill Clean Energy Index (ECO)), and the WilderHill Progressive Energy Portfolio (WilderHill Progressive Energy Index (WHPRO)).

Winslow Management specializes in “green” investment, offering Green Growth (WGGFX) and the new Green Solutions mid-cap (WGSLX).

Green Century Funds offers the Green Century Balanced Fund (GCBLX) and Equity Fund (GCEQX).

Forward Management has the Sierra Club Stock Fund (SCFSX).

Innovest recently released the report Carbon Beta and Equity Performance based on their work on the Carbon Disclosure Project.

CSRWire has a newsfeed of environment-related corporate press releases.

Green Chip Stocks is a green penny-stock tip sheet.

A briefing hosted by the Investor Network on Climate Risk (INCR) on key findings of a new analysis by Citi and INCR titled CAFE and the U.S. Auto Industry: A Growing Auto Investor Issue, 2012-2020, which shows that automakers’ shareholders can thrive while the automakers build cars and trucks that are better for our health and reduce global warming pollution.

Automakers have an opportunity to both advance fuel efficiency technology and become more globally competitive and sustainable in the process. The report’s results found that increasing corporate average fuel economy (CAFE) standards by 2012 could modestly benefit General Motors, while foreign automakers profits are largely unaffected.

In order to assess how Wall Street should react to an increase in fuel economy, Citi’s Equity & Debt Research group teamed up with the Investor Network on Climate Risk – which represents over $4 trillion in institutional investors – along with industry experts at the Planning Edge, University of Michigan Transportation Research Institute, and NRDC to conduct a forward-looking simulation of the five-year earnings impacts of changes to the CAFE program.

• Russell Read, Chief Investment Officer, CalPERS ($208 billion public pension fund)
• Walter McManus, Director, University of Michigan’s Transportation Research Institute
• David Gardiner, Senior Advisor to the Investor Network on Climate Risk (formerly Executive Director of President Clinton’s White House Climate Change Task Force and EPA’s Assistant Administrator for Policy)

The analysis employed a complex proprietary model combining supply- and demand-side simulations with Citi’s financial models. The report finds that tougher CAFE standards can be met “with modest additions of existing technologies” and will likely be “most beneficial to GM and least beneficial to Chrysler.” Other key findings:

• Most automakers’ earnings will be largely unaffected by the CAFE standards in the 2012 time horizon, but some companies, like GM, could gain as much as $0.25 per share.
• Automakers are expected to modestly shift their sales mix to more fuel-efficient models to meet tougher CAFE standards, but the most profit-maximizing approach appears to be through investments in fuel-savings technologies-higher efficiency internal combustion engines, in particular-applied to cars and trucks.
• Suppliers of technologies such as turbochargers, automated manual transmissions and diesel engine fuel injectors may gain $4.3billion in growth by 2012 and even more by 2020.

For more information contact Miranda Anderson at: [email protected] or 202-285-2018; or, Ladeene Freimuth at: 202-550-2306 or [email protected].

The Carbon Disclosure Project, a non-profit that advocates corporate climate change disclosure on behalf of a large pool of institutional investors (funded by WWF, government environmental agencies, and various foundations), released its fifth annual report with great fanfare yesterday. In proceedings moderated by Harold E. Ford Jr. (DLC, Merrill Lynch) and keynoted by Bill Clinton (with a video message from Rupert Murdoch), the CDP’s Paul Dickinson announced the results from their questionnaire, sent to 2400 companies around the world. 1300 responded, including 77% of the Financial Times 500, compared to 72% in CDP4, 71% in CDP3, 59% in CDP2, and 47% in CDP1. 76% of responding FT500 companies reported implementing a GHG emissions reduction initiative compared to 48% in CDP4. Europe-based firms had the highest response rate with 83%. However, North America-based firms demonstrated significant improvement with a CDP5 response rate of 74%, compared to 66% in CDP4. South America-based firms also increased their response rate to 60% in CDP5 from 50% in CDP4. The website allows users to search responses by company name (some responses are not publicly available). The executive report is also available.

It’s interesting, for example, to contrast BP with ExxonMobil, both of whom offer detailed disclosures. BP has active wind, solar, biofuels, and CCS divisions, and is concerned by melting permafrost; ExxonMobil sees climate change as an opportunity for growth in the natural gas sector and is looking to reduce flaring in its natural gas wells in Nigeria.

In coverage, the New York Times notes that Gas Emissions Rarely Figure in Investor Decisions and the Washington Post and Business Week cover the Wal-Mart press release about setting up a program to measure its supply chain footprint. Agence-France Presse emphasizes the finding that World companies show big interest in climate, US firms lag, whereas Reuters sees the positive message that Climate change spurs industry restructuring. Forbes discusses Sun Microsystems’ launch of OpenEco, a corporate social-networking website for tracking GHG emissions.