News December 2000/January 2001 COP 6 blow for carbon funds The UN climate change meeting in The Hague has thrown the future of carbon funds into doubt. The apparent acceptance of a position held by G77 countries - notably India and China - to restrict the trading of credits sourced from the developing world may make it impossible, or at least very expensive, to structure such funds, which repay investors partly or wholly with carbon credits, say analysts. "This would make our life very complicated," says Chandra Sinha, senior environmental specialist at the World Bank's Prototype Carbon Fund (PCF). "If the language stays as it is, private sector carbon funds won't be able to operate." EMDG aims for 'fungible' carbon credits The newly formed Emissions Market Development Group (EMDG) plans to create a repository or 'bank' which will allow the inter-changeability of the various emission reduction products which are envisaged. This will help generate liquidity in the fledgling market for greenhouse gas (GHG) emissions reduction credits, says Frank Joshua, global director for greenhouse gas emissions trading at Arthur Andersen in London. Proposed US carbon exchange sets targets A proposed voluntary market in greenhouse gas (GHG) emissions for the US Mid-West will set participating companies a 2002 target of cutting their emissions by 2% below their 1998 level. Thereafter, the target will fall by 1% for each of the next five years, according to plans drawn up by Chicago-based Environmental Financial Products (EFP). As US emissions are currently growing by around 1.5% a year, this would represent a substantial reduction on business as usual projections, says Richard Sandor, chairman of the company. "This goal has some teeth," he told a presentation on November 14 in The Hague. In June EFP was awarded a one-year $347,000 grant from the Chicago-based Joyce Foundation to design a pilot market covering seven states which account for some 25% of US manufacturing capacity and 19% of the population (see Environmental Finance June 2000 page 6). In addition to its huge industrial base, the region includes a wide diversity of sectors - manufacturing, transport, energy, agriculture and forestry - noted Sandor. It will therefore "demonstrate the concept on a relevant scale," and "trading will be meaningful," he stressed. Co2e.com logs first trades Co2e.com has announced the first greenhouse gas (GHG) deals transacted via its online trading platform. Ontario Power Generation bought 1.3 million tonnes of GHG reductions and GEMCo - the Greenhouse Emission Management Consortium - bought an option on 600,000 tonnes of reductions. The seller in both cases was Houston-based Petro Source Carbon Company. At its formal launch in The Hague during the COP 6 climate change conference in November, C02e.com also announced its "associate companies" - firms that are featured on the website as sources of expertise in particular aspects of carbon risk management. Australia embraces early action The Australian government is proposing a voluntary 'credit for early action' programme that will see companies offered 100 million tonnes of carbon credits in advance of the Kyoto Protocol taking effect. These credits would be exchangeable for emission allowances ('assigned amount units' or AAUs). If the Kyoto Protocol enters into force, Australia will be granted around 750 million tonnes of AAUs over 2008-2012. "This would encourage business to invest early in relatively low-cost abatement opportunities," says environment minister Senator Robert Hill. "It would also respond to industry concern that it might be disadvantaged under "Kyoto rules" by taking early action." Japanese industry rules out 'cap and trade' scheme Japanese industry remains firmly opposed to a domestic 'cap and trade' emissions trading regime, despite signs that it will not meet it's voluntary targets for cutting greenhouse gas emissions. "We will note accept any 'cap and trade' regime as our domestic system," Yasuo Hosoya, chairman of the Japanese Federation of Economic Organisations (Keidenran) taskforce on climate change mitigation told a side meeting during the COP 6 climate change conference in The Hague in November. California's power crisis triggers $17m NOx fine A record $17 million fine for excessive nitrogen oxide (NOx) emissions was imposed on generating company AES Alamitos in December amid renewed turmoil in the Californian power market. The South Coast Air Quality Management District (SCAQMD) announced the fine on 13 December for what its executive officer Barry Wallerstein described as "one of the most egregious air pollution violations in this agency's history." AES is one of around 330 companies governed by the SCAQMD's Regional Clean Air Incentives Market (Reclaim) which caps emissions to try to reduce smog in the Los Angeles basin. AES exceeded its year 2000 NOx emissions allocation by 685,000 pounds in the third quarter and "may exceed its fourth quarter allocations by about 500,000 pounds," the air authority said. In addition to the cash fine, $13 million of which has to be paid in 30 days, AES will have to deduct these excess emissions from its future year allocations and buy sufficient credits to make up for its excess 2000 emissions. Weather shake up at Swiss Re Swiss Re New Markets has reassessed its weather derivatives strategy and will now both buy and sell the contracts. In an unconnected development, Peter Gakos, the former head of structured products (which includes weather) has left the firm. Previously, Swiss Re was only a buyer of weather contracts, but the growing liquidity in the market will now allow its weather team to more actively manage its exposures, says Frank Caifa, associate director at Swiss Re in New York. Swiss roll into renewables Credit Suisse Asset Management (CSAM) has followed the lead set by Merrill Lynch Investment Managers by launching a new fund focussing on renewables and alternative energy. Known as the Prime New Energy Fund, it raised Sfr120 million ($71 million) in its first round of financing in November. Initially structured as a closed-end fund and launched as a private placement, principally with the pension funds of Swiss Railways and the Credit Suisse Group, the CSAM fund will be opened for a second round of investment in January, says Philipp Burger portfolio manager at CSAM in Zurich. It is likely to be opened up to retail investors in March, he adds. The fund will invest mostly in North American and European listed shares, although it can invest up to 30% in private equity. The sectoral split is 50% energy technology, 35% renewable energy and 15% energy-related information technology, Burger explains. Finance firms offered help with reporting Two new sets of guidelines to help financial institutions improve their environmental reporting were unveiled in November. A group of seven large firms, known as the Forge Group, produced guidelines under a UK government-sponsored initiative, while a group of 11 Swiss and German institutions, assisted by E2 Management Consulting, issued a separate report on indicators for measuring the environmental performance of financial firms. Nikko goes global with new green fund Nikko Asset Management has launched a new 'green' fund - the Nikko Global Sustainability Fund - to satisfy growing demand from retail and institutional investors in Japan for environmental investment products. The new fund will invest in companies - drawn from more than 20 countries - which are "environmentally conscious, socially responsible and financially effective," says Takejiro Sueyoshi, executive vice-president of Nikko Asset Management. The move follows unexpectedly strong demand for the Nikko Eco Fund which was launched in August 1999 and invests only in Japanese companies. Nikko would have considered the Eco fund a success if it had attracted $100 million, Sueyoshi told the annual meeting of the United Nations Environment Programme's Finance Initiatives in Frankfurt on November 16. In fact, it pulled in more than $230 million within two weeks and by October this year had attracted a total of $1 billion, he said. BAA tops reporting survey The British Airports Authority and Norwegian pharmaceuticals company Novo Nordisk produce the highest quality sustainability reports, according to a survey* of the 50 leading reporting companies carried out by the United Nations Environment Programme and SustainAbility, a UK consultancy. European companies lead the rest of the world in corporate reporting, the survey found, taking the top six positions. And the pharmaceuticals and oil and gas sectors garnered the highest average scores, with the chemicals sector doing worst. Willis stake buoys I-WeX Willis, the world's third biggest insurance broker, has acquired a 19% stake in I-WeX, the London-based portal for risk management, as a result of its purchase of the Worldwide Intellectual Resources Exchange (WIRE), one of I-WeX's founder shareholders. The price paid by Willis was not disclosed. German Greens lobby for pensions SRI rule Germany's Green Party is pushing for a socially responsible investment (SRI) disclosure requirement in the country's forthcoming pension scheme reform. The party - a junior coalition partner of the Social Democratic Party - wants to see a rule that pension funds annually set out the extent to which they take ethical, social and environmental issues into account in their investment policies. The proposal mirrors a similar rule in the UK, which came into force in July 2000, which is credited with boosting SRI. RBS takes new approach to selling weather hedges The Royal Bank of Scotland (RBS) is to begin offering weather hedges to its clients early in 2001. And the bank is taking a novel approach to building a weather derivatives business. With a client-base made up predominantly of UK-based companies, the RBS will find itself with a geographically concentrated book of weather risk, explains Gareth Edwards, head of derivatives structuring. Most weather dealers, in contrast, tend to rely on geographically diversified portfolios to reduce the risk of positions turning against them. However, Edwards is confident that the bank's deep penetration of the UK corporate market - it claims relationships with over 30% of UK firms - will allow it to find clients with offsetting exposures, enabling the bank to run a relatively balanced weather book. Exchanges in race for weather contracts Deutsche Borse has joined the race to launch Europe's first exchange-traded weather derivative contracts. In November, the Frankfurt-based exchange began publishing weather indexes on 30 European cities. It plans to launch contracts on the indexes - which are available at no cost - at a later date. But the London International Financial Futures and Options Exchange (Liffe), a fierce rival of the German exchange, remains confident that it will be the first to list actual contracts - and has announced novel reference indexes on which its derivatives will be based. SERM, BV to join up The SERM Rating Agency is to announce a tie-up with French verification firm Bureau Veritas (BV) in January. The collaboration will allow the UK-based environmental rating company to apply its rating methodology - which measures a company's environmental and social risk against its market capitalisation - beyond the UK, says SERM managing director Jonathan Barber. "We will be able to use Bureau Veritas' global reach to internationalise the whole process," he says. BV will also enhance the credibility of SERM's rating process by verifying the ratings, says the firm's UK chief executive, Geoff Baker. BV also plans to work with clients to help them improve their ratings, he adds. Storebrand bond fund puts governments in the dock Storebrand, the Norwegian financial services group, is launching a new socially responsible European bond fund - which will involve rating the environmental and social performance of government and quasi-government issuers. The Storebrand Principle European Bond Fund is understood to be the first of its type, and will invest primarily in investment grade bonds (that is, bonds with a high credit rating) issued by European companies, governments, quasi-governmental issuers such as multilateral development banks, and euro-denominated bonds of non-European companies and quasi-governmental issuers. Storebrand has raised E30 million in seed capital, and hopes to have approval from Luxembourg's regulators by the end of 2000 to begin marketing the fund in earnest. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE