Copenhagen Deal To Help Boost Climate Fund Flows
Author: Natsuko Waki - Analysis
LONDON - Agreement in Copenhagen next month on a new pact to fight climate change will encourage long-term investors to move into firms better placed to cope with a likely and eventual rise in the cost of carbon emissions.
A strong political deal including targets for emission cuts at the Dec 7-18 summit might be just enough to accelerate moves by investors such as pension funds or sovereign wealth funds to adjust portfolios to better reflect long-term risks from climate change, asset managers reckon.
It is also likely to boost growth rates of firms which are either energy self-sufficient or engage in alternative energy such as wind or solar, while pressuring emission-intensive industries such as utilities, aluminum or car makers.
And a more concrete deal -- such as a legally binding target to cut emissions -- would likely to prompt funds to start to change their asset allocation now to protect portfolios from the impact on companies hit by a rising cost of emissions.
"It's effectively a global treaty to control pollutants. You are intervening in the economy to control and internalize the cost of carbon," said Bruce Jenkyn-Jones, managing director of listed equities at Impax Asset Management.
"The idea that... people will pay for carbon right across the economy will have an impact on products and services. Big energy producers, utilities and industrials will be affected."
Impax manages a total of 50 million pounds in global equities for the UK Environmental Agency's Active Pension Fund.
The strength of a Copenhagen deal is still very uncertain. At a preparatory UN meeting in Barcelona last week, developed countries played down expectations of agreement on a legally binding text, saying that would take an additional 6-12 months.
But developing countries are suspicious of backtracking on commitments from rich nations which have promised to lead in the fight against climate change. They insisted on a legally binding deal in December.
"Politicians have done a good job of lowering expectations. That's exactly why there's real opportunity here. Decisions made in Copenhagen will dramatically influence growth rates of companies you are investing in," said Simon Webber, fund manager at Schroders.
He reckons immediately affected industries from a concrete deal included power generation, utilities and transport, citing that some utilities -- such as Germany's RWE -- could face higher carbon costs that are equal to almost a third of operating profits in the next few years.
He added the $26 billion deal in November by Warren Buffett to buy railway firm Burlington Northern Santa Fe highlighted the long-term viability of rails.
"(An aggressive deal) will mean nuclear power and solar growth rates will take off in these industries. There will be a major shift from combustion engine cars to electric vehicles. There's no other way of meeting tough initial targets," he said.
Malcolm Gray, portfolio manager at Investec Asset Management, says energy self-sufficient industries such as sugar can better cope with emission reductions and will attract flows. Some utilities in the traditional thermal space and aluminum producers that are not diversified will be exposed.
As the cost of goods will be adjusted to take into account the increased cost of production as a result of high carbon prices, consumers with less disposable income and some high-volume low-margin retail business might also be losers.
"We are faced with a world which has a lot more embedded inflation than people currently realize. You could be caught up with a slightly more aggressive inflation cycle globally compared with the deflating world we're currently in," he said.
RISK MITIGATION AND OPPORTUNITIES
The outcome of Copenhagen talks would enable investors to mitigate portfolio risks by better forecasting the likely pace of the rise in the cost of carbon emissions, and seek new investment in industries which benefit from alternative energy.
Long-term investors, such as sovereign funds, are already getting increasingly active in environmental investing, at a time when private sector involvement has been somewhat slow.
Norway's $400 billion-plus oil fund, the biggest owner of European stocks, is investing more than $3 billion over five years into firms engaged in environmental technologies. It is also pushing companies it holds to tackle climate change harder.
"We're best served by promoting good standards of corporate behavior. This is something very consistent with pursuing long-term investment objectives," Martin Skancke, director general of Norway's Ministry of Finance Asset Management Department, told Reuters last month.
Rabobank says the Copenhagen outcome will clarify the framework for the unlisted Dutch bank which is already taking into account the cost of carbon emissions as a risk factor in granting credit facilities.
"We will deal with risk mitigation and business opportunities will come in time," said Ruud Nijs, head of corporate social responsibility at Rabobank.
"If the costs of climate change were taxed -- suddenly we will look at the credit portfolio in a different way. If one of our customers now has to pay for the price for climate, then the risk factor to that customer will change dramatically."
The bank has been investing in renewables in deals worth over 4 billion euros, with its investments in its credit investment portfolio in the past 18 months all in clean technology.
It is a sole debt provider to the Belfuture solar project, worth a couple of hundreds of million euros. It has given project financing of senior debt and equity financing worth 620 million euros for the Belwind offshore wind farm project.
"Copenhagen brings us a better framework to do business with. The positive outcome will automatically generate big cleantech deals, investment in solar, wind and biomass technologies. The pipeline will also increase," Nijs said.
(Editing by Toby Chopra)