Absent from the debate over the environmental and economic ramifications of the Kyoto Protocol has been an answer to one question: what Kyoto means to the health of the stock market and investors' portfolios.
According to a new report released in New York City on Tuesday by the Carbon Disclosure Project (CDP), a coalition of influential fund managers with more than $6-trillion in assets under management, shareholders of companies that are ignorant about the coming carbon-constrained economy will not enjoy much bliss.
The report, which surveyed chief executives of the FT 500 Global Index companies, found that 80 per cent of respondents explicitly acknowledge the importance of climate change as a business risk, but less than half are taking concrete action. Alarmingly, heavy-industry companies that are ill-prepared to deal with the challenges of climate change are reported to risk a share devaluation in the order of 40 per cent.
As an investor, the trick is to determine which companies will be the losers in the global climate change game, and which will be the winners. The CDP provides some clues on this question.
In the energy-intensive chemical industry, companies will need to prepare for higher operating costs because of higher energy prices and adjust their product pipeline to satisfy the demand for clean technology-related specialty chemicals. E.I. du Pont de Nemours & Co. is the leader in this sector. The company has a sophisticated GHG emission reduction strategy, trades emission credits and developed a clean energy fuel cells business in 2001.
Suppliers to the agriculture industry, such as Potash Corp. of Saskatchewan Inc. -- which has already suffered as a result of the drought on the Prairies -- will need to be wary of permanent shifts in land productivity and disruptions to the grain and wheat markets.
As far as banking is concerned, risk is determined by credit exposure to high-impact sectors such as oil and gas and construction. Royal Bank of Canada is a global leader in this sector. RBC has a "superior awareness of climate change risks and opportunities," according to the CDP. Among other things, the bank has energy efficiency targets, uses green power at its head office, and has set up a $50-million Alternative Energy and Power Technology Fund.
Bank of Nova Scotia,in contrast, responded to the CDP survey with a statement to the effect that, as a financial services firm, it would not be affected by climate change. Given that 28 per cent of the bank's loan portfolio is directed toward high-carbon-risk sectors, the CDP estimates that its share price could drop by as much as 18 per cent if climate change-related factors affect debtors' abilities to pay up.
In the automobile sector, Volkswagen AG's four-pronged approach (reduce emissions at operations, improve emissions profiles of its products, invest in fuel switching, and capitalize on offset projects through Joint Implementation projects) is among the strongest in the sector; General Motors Corp. and DaimlerChrysler AG are the most GHG-intensive.
In the metals and mining sector, Rio Tinto PLC, Alcan Inc. and BHP Billiton Ltd. of Australia have dedicated significant senior management resources to co-ordinate climate-change response. This is hardly surprising. Last summer, shares of Xstrata PLC,BHP Billiton and Rio Tinto -- three of the world's largest coal companies -- dropped 6 per cent on average the day after a new Japanese carbon tax. Japan has also threatened to impose import duties on coal from countries such as Canada if Kyoto targets are not met.
Alcoa Inc. and Alcan both provide lightweight transportation applications that improve energy efficiency. One tonne of aluminium used in auto applications saves 20 tonnes of GHG over the life of the vehicle.
In contrast to some of its peers, Barrick Gold Corp. is lacking in a GHG strategy, possibly because most of the countries it operates in are not bound by Kyoto targets.
In the oil and gas sector, BP PLC, Statoil of Norway and Royal Dutch/Shell Group are in front of the pack. Shell and BP have invested the most in the solar, wind and the hydrogen economy. Both BP and Statoil have shifted assets from coal to gain greater natural gas exposure in recent years.
Exxon Mobil Corp., in contrast, denies it makes any contribution to global warming and despite having the highest GHG intensity in its operations, is alone among oil majors in not having a GHG emissions reduction strategy in place.
Although they are not part of the FT 500, Suncor Energy Inc. and Petro-Canada are also good examples of carbon-conscious companies. Both are steadily building dominant positions in the global clean energy sector, a market the World Energy Council estimates will be worth $234-billion (U.S.) to $625-billion by 2010 and $1.9-trillion by 2020.
The bottom line is that, as an investor, it pays to be aware of environmental issues when selecting stocks.
Toby Heaps is editor of Corporate Knights magazine and Martin Whittaker is an Adjunct Professor of Environmental Finance, University of Toronto, and Managing Director at Innovest, the firm that prepared the CDP report.
© The Globe and Mail
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