News April 2000 Castlebridge tie-up comes undone A plan between Castlebridge Partners and Carr Futures to create a new entity to trade weather derivatives and energy products has fallen at the final hurdle. Legal technicalities derailed the tie-up between Castlebridge, a Chicago-based trading and advisory firm, and Carr Futures, a US-based brokerage owned by French bank Credit Agricole Indosuez (CAI). The problems stemmed from Castlebridge's former partnership with American Re. Since July 1998, Castlebridge had traded weather derivatives on behalf of the US reinsurer. The agreement came to an end at the end of March 2000. However, Castlebridge is understood to have agreed not to enter into a relationship with any direct competitor of Am Re's for 18 months after this date. Lawyers were concerned that CAI's European reinsurance operations could violate this, market sources say. European weather market opts for swaps A European weather derivatives market is evolving fast, with more data becoming available at lower cost and with swaps greatly outnumbering options contracts, traders say. "We now have the beginnings of a true European market," said Cindy Buggins, until recently responsible for weather derivatives at energy brokers Spectron, at the launch meeting of the Weather Risk Management Association (Europe) in London on 17 March. Since the first European weather trade - a swap between Enron and Scottish Hydro - in September 1998, there have been some 40-50 trades, Buggins estimated. Companies in Belgium, France, Germany, the UK and the Netherlands have all participated, and they include genuine end-users hedging their revenues against adverse weather. EU lays out emissions trading options Observers have welcomed an aggressive timetable set out in the European Commission's Green Paper on a European Union (EU) greenhouse gas (GHG) emissions trading scheme. But some analysts are concerned about how domestic emissions trading schemes will fit into an EU system. And environmentalists have criticised its failure to consider an 'upstream' trading system. "This is an ambitious timetable," says a Commission source in Brussels. The Commission invites responses to the Green Paper, which sets out possible options for the design of an emissions trading scheme, by 15 September. Analysts say that a White Paper will have to be issued next year if a trading scheme is to be in place by 2005. Credit Lyonnais eyes carbon fund French banking giant Credit Lyonnais and Arthur Andersen, the international consultancy, plan to launch a $400 million fund to invest in energy infrastructure projects which are intended to generate carbon credits. The fund is still at the planning stage, says a source close to the initiative, and other private sector institutions may also participate. It is due to be launched later this year. The bank and Arthur Andersen declined to give further details. Prime investment targets are likely to be projects in developing countries which would be expected to qualify as Clean Development Mechanism projects under the terms of the Kyoto Protocol. This means the cash returns to investors could be boosted by the creation of 'carbon credits' - effectively permits to emit greenhouse gases - which are expected to acquire a monetary value when the detailed structure of the CDM is defined. Ontario looks across borders The Ontario provincial government is planning an emissions trading scheme that could establish an international market in nitrous oxide (NO) and sulphur dioxide (SO2) permits. From January 2001, emissions from electricity generators in the Canadian province - its most populous - will be capped, but the government plans to allow them to buy emissions reduction credits from emitters in the US, as well as from each other. "We're considering allowing credits from emitters within the 'airshed', up to 1500 kilometres upwind of Ontario, that meet our requirements," says Tony Rockingham, director of air policy and climate change at the Province of Ontario's Ministry of the Environment. "Down the road, we'd also like to set common rules on what constitutes a credit [with the US authorities]." Green light for greenhouse gas trades in UK A domestic UK scheme for trading greenhouse gas emission permits has moved a step closer after getting the green light from Chancellor Gordon Brown in his 21 March budget. The government "sees merit" in the argument that "some form of financial incentive will be required for companies to take on binding emission targets that generate additional emission reductions," he said in documents accompanying his annual budget speech. He gave no indication of the likely size of such an incentive and stressed that it would have to be consistent with European Union rules on state aid to industry. A senior government official told Environmental Finance that several options were being considered but that any incentive would be temporary. "April 2001 remains an achievable but challenging target (for the launch of a trading scheme)," she added. Sweden's government adopts SRI Sweden's state-run pension funds will incorporate environmental and ethical factors into their investment strategies from next January, under legislation to be put before Parliament on April 12. However, fund managers say that environmental policies are way down their list of priorities, as they grapple with the wholesale reorganisation of Sweden's pension system. Under the reforms, the assets of the five largest national insurance pension funds are to be re-organised into four funds, of around SKr140 billion ($165 billion) each. The reforms will also introduce private pension funds to Sweden, from January 2001. Natsource goes global with Tullett Leading financial markets broker Tullett & Tokyo Liberty has bought the remaining 75% of specialist energy and environmental broker Natsource that it did not already own in an all-paper deal. Tullett bought an initial 25% stake in New York-based Natsource in March 1999. "It was a mutual decision," says David Tuffley, chief executive officer of Tullet. "And it. fits well with our move towards electronic broking," The company announced in late March that it had appointed Donaldson, Lufkin & Jenrette to advise it on how to respond to the global trend away from voice broking to electronic broking. Environmental reporting under spotlight UK companies could face legislation forcing them to report on their environmental performance, Environment Minister Michael Meacher has warned. "If the voluntary approach is not leading to fast enough progress, we will resort to mandatory measures," he said when presenting the 1999 UK Environmental Reporting Awards on 1 March. The awards are organised by the Association of Chartered and Certified Accountants and were sponsored this year for the first time by KPMG. Submissions to the scheme totalled 64, a 50% increase on the previous year and for a few it is the tenth year in which they reported on environmental issues, Meacher noted. But, "there are still many slackers out there," he said. "I will name you publicly in the near future if you don't make the effort that you should," he warned. By the end of 2001, he wants all companies in the FTSE 350 index reporting to a common standard on their environmental performance. Cat bonds bounce back Higher prices for reinsurance, following the storms that hit Europe over Christmas which cost reinsurers at least $5 billion, could see increasing issuance of catastrophe bonds some dealers predict. Two bonds, worth almost $350 million, were placed with investors in March, and dealers are hopeful that 2000 will see a pick up in interest from reinsurance companies in the products. The latest deal, a $200 million issue, bought Scor, the French reinsurer, three years of cover for its property and construction portfolio against earthquakes in the US and Japan and severe windstorms in Europe. The bonds were issued through a specially-incorporated company, or special-purpose vehicle (SPV), Atlas Re, based in Ireland, and were lead managed by Goldman Sachs and Marsh & McLennan. UK firms bad on big picture UK companies are making great strides in environment management at the operational level, but are not adopting environmentally sound strategic targets, according to Derek Higgs, chairman of Business in the Environment (BiE), an industry-led campaign group. "Companies are failing to adopt strategies that will lead to sustainable development," Higgs said, speaking at the March launch of the BiE's 1999 Index of Corporate Environmental Engagement. For example, only one company in the FTSE 350 has announced greenhouse gas reduction targets above the UK's international target under the Kyoto Protocol. UK raises target for GHG emission cuts UK emissions of greenhouse gases (GHGs) in 2010 should be 21.5% below their level in 1990, according to deputy prime minister John Prescott. This is almost double the UK target set under the Kyoto Protocol of a 12.5% reduction. GHG emissions this year should be 15% below their 1990 level, he added. The 1997 Kyoto Protocol is a legally binding agreement by industrialised nations to cut their emissions of GHGs. The UK forecast for 2010 corresponds to a fall of 17.5% in emissions of carbon dioxide, the main greenhouse gas, which compares with the UK's far more difficult, self-imposed, goal of a 20% reduction for this gas alone. Additional policies, ignored in the main forecast, should ensure this target is also hit, government officials said. Pavilion rolls out new SRI fund Pavilion Asset Management has launched an environmentally screened fund aimed at UK pension funds in advance of new rules on SRI (socially responsible investment) disclosure. The Eco Friendly Fund, an actively managed pension fund pooled vehicle, uses both positive and negative screens provided by the Ethical Investment Research Service (EIRIS). The fund is being marketed to local authority pension funds, and the funds of those companies that have performed well under the EIRIS screening, says Christopher Edge, chief executive of Pavilion, which is based in Brighton. "It seems logical to use the screening process to help target company pension schemes which are likely to be interested in the fund," he says. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE