News October 1999 Investors eye new weather structures Two Wall Street banks are close to completing innovative structures that are set to bring institutional investors to the weather derivatives market. The two deals, which securitise portfolios of weather swaps and options, are designed to create a new asset class which is uncorrelated with equity or bond markets. The structures are also designed to increase the capacity of the weather derivatives market to absorb new trades, say sources close to the deals. Merrill Lynch is in the process of marketing $105 million worth of five-year bonds referenced to a portfolio of options for Enron, the US energy giant. At the time of going to press, Goldman Sachs was pricing a portfolio of swaps and options that will raise around $200 million for Koch Energy, the energy trading subsidiary of Koch Industries, a Kansas-based energy group. The bonds are being pitched as private placements to reinsurance companies, hedge funds, and pension funds, say sources. BP Amoco goes global with emissions trading BP's internal trading programme for greenhouse gas emissions is to be greatly enlarged to reflect the company's merger with Amoco of the US at the start of this year. From 1 January 2000 all 127 business units will be included in the programme, up from just 12 at present, and methane emissions will be brought into the scheme for the first time. The pilot programme, which oil major BP launched in September 1998, is restricted to emissions of carbon dioxide (CO2), the main greenhouse gas responsible for global warming. Methane is the second most important greenhouse gas and has become a more significant concern for the company as Amoco has far more natural gas activities than the old BP. Amoco had no emissions trading scheme of its own before the merger. Internet exchange planned for European weather trades An internet-based exchange for trading European weather derivatives is due to be launched next year. The project is being developed by Intelligent Financial Systems, a London-based research and development company specialising in the application of modern software technologies to problems in the financial sector. IFS expects to complete a pilot study of the new exchange - known as EIWeX - in December and is currently looking to put together a consortium to develop the concept further. More catastrophes; more opportunities Global climate change offers individual insurance companies the chance to gain a competitive advantage over their rivals, says Andrew Dlugolecki, director of general insurance development at UK insurer CGU. But, as it will mean more extreme events and therefore more catastrophic losses, it also demands a collective response from the industry, he told a risk management seminar organised by the Geneva Association in London on September 17. Achieving such a response, however, is proving difficult due to the wide range of views about the subject. Many US insurers, he said, still dismiss the issue as "a pinko plot". Their Japanese counterparts are convinced there is a problem but are worried about the market reacting too quickly, while most European companies agree the issue is serious but do not see it as an insurance industry problem, he added. Race begins for exchange-based carbon trading US exchanges risk being left behind in the race to corner the expected global market for carbon trading. Exchanges in Europe and Australia are well ahead in preparations for trading emissions credits, with two - the International Petroleum Exchange (IPE) and the Sydney Futures Exchange (SFE) - releasing plans in the last month to set up markets. The SFE is furthest advanced, with plans to launch a market for carbon sequestration credits - which are generated by the planting of forests which remove CO2 from the atmosphere - by mid-2000. The London-based IPE's proposals are at a more embryonic stage, but the exchange hopes to establish a market for CO2, N2O, and CH4 (methane) emissions credits sometime in 2001. Cloudy start for CME contracts The jury remains out following the launch of the world's first exchange-traded weather derivative contracts. On September 22, the Chicago Mercantile Exchange (CME) listed futures contracts linked to temperatures in four US cities. Trading has so far been patchy, but most observers say its too early to judge whether the contracts will succeed or sink. "I've seen so many contracts get off to a great start, then fail, and so many get off to a poor start and then succeed, to be able to conclude anything at this stage," says Alan Kurver, managing director of US broker the SDI Energy Group. . EIRIS to assess funds' company engagement claims The UK's Ethical Investment Research Service (EIRIS) is to thrash out the final details of its 'company engagement' indicators over the next few months with fund managers and independent financial advisors (IFAs). EIRIS says that the indicators will provide the first objective assessment of the extent to which ethical and environmental funds use their influence to encourage socially responsible behaviour among the companies they invest in. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE