News December 2003-January 2004

The following are summaries of news stories that appeared in the December 2003-January 2004 print edition of Environmental Finance magazine

Russia casts shadow over Kyoto ‘sinks’ deal

The latest UN climate change meeting ended with a victory for advocates of greenhouse gas (GHG) forestry ‘sinks’ project – but the outcome was overshadowed by growing concerns about Russia’s attitude towards the Kyoto Protocol.

COP 9 – the ninth annual meeting of the parties to the United Nations Framework Convention on Climate Change – ended in Milan on 12 December. Most of the rules surrounding the Kyoto Protocol, which sets GHG reduction targets on industrialised countries over 2008–12, had already been resolved, leaving little to be decided in Milan.

Following US withdrawal from the Protocol in 2001, its entry into force hangs on ratification by Russia. Although President Vladimir Putin has previously said the country will ratify, messages from Moscow have become increasingly mixed over recent weeks. Few analysts now expect an answer one way or another before presidential elections in March.

‘No rush’ to replace Clemmons at XL Weather

XL Weather & Energy (XLW&E) “is in no rush” to find permanent replacements for president Lynda Clemmons and CEO Jeff Bortniker, following the pair’s surprise departure in November. “The business is ticking along just fine,” Robert Lusardi, CEO of XL Financial Products and Services, and the unit’s interim CEO, told Environmental Finance.

A restructuring of the team over the summer under two product heads – for weather and energy – means that the business is running itself, Lusardi said. He added that XLW&E, part of Bermuda-based reinsurer XL Capital, which offers weather and energy risk management products, plans to roll out a new range of ‘dual trigger’ weather and energy hedges in 2004, and is to increase the size of hedges it offers against ‘power outages’.

IFC under fire for BTC oil pipeline loan

The International Finance Corporation’s (IFC) recent decision to approve a $250 million loan for the controversial Baku–Tbilisi–Ceyhan (BTC) oil pipeline project violates the Equator Principles, which it is urging banks to adopt, say environmental pressure groups.

The UK-based Baku–Ceyhan Campaign argues that the project breaches the Principles on at least 127 counts, in areas such as environmental assessment, natural habitats and involuntary resettlement.

The IFC, the private sector arm of the World Bank, disagrees. The BTC pipeline decision has long been seen as the acid test of the new Principles, which have won the public backing of 19 project finance banks as well as the IFC.

Carbon market volumes doubled – World Bank

Volumes of greenhouse gas reductions traded in the first three quarters of 2003 were double those in the whole of 2002, according to a new report from the World Bank. Ninety per cent of the 70 million tonnes of carbon dioxide or equivalent came from reduction projects in developing countries, or economies in transition, the report finds. It also notes that Japanese private sector companies have emerged as major buyers in the market.

But the report, State and Trends of the Carbon Market 2003, notes that continuing uncertainty over the entry into force of the Kyoto Protocol on climate change – to which the majority of trades are linked – is slowing the market down. It also notes that the window of opportunity to develop Joint Implementation and Clean Development Mechanism projects that can deliver reductions in time for the Protocol’s first, 2008–12, target period, is fast closing.

Agreement reached on export credit rules

Thirty OECD governments have reached agreement on environmental and social rules for projects underwritten by export credit agencies (ECAs). But green groups have attacked the so-called Common Approaches as “business-as-usual”.

A draft recommendation was finalised in November, following two years of disagreements among ECAs over which environmental and social standards should be followed in assessing the impacts of projects that ECAs underwrite. ECAs finance, insure or guarantee hundreds of billions of dollars of exports each year. They had also disagreed over the extent of environmental information that should be made publicly available.

US energy bill fails, hits renewables

The federal production tax credit (PTC) for renewable energy production is among the casualties of the US Senate’s decision to reject a comprehensive energy bill on 21 November. The PTC rewards some renewable resources, particularly wind energy, with a 1.8¢ per kilowatt hour subsidy over the course of 10 years.

“The PTC is a sort of foundation for the market,” says Randall Swisher, executive director of the Washington, DC-based American Wind Energy Association. “It is essential to continue the level of investment we’ve seen in the past.”

The PTC has expired in the past, contributing to a ‘boom-and-bust’ cycle for wind energy construction in the US (see Clearing the wind breaks). The energy bill had contained provisions to extend the PTC for three years. Instead, it is set to expire on 31 December 2003.

US screened funds rise by $137bn – SIF

Assets in US funds applying one or more social or environmental screens rose by $137 billion between 2001 and 2003, according to figures from the Social Investment Forum (SIF). However, when all socially responsible investment strategies are considered, total SRI assets dropped to $2.16 trillion from $2.32 trillion over the period, largely due to the actions of one pension fund heavyweight, it says.

Assets in screened funds rose to $2.14 trillion at the end of 2002, up from $2 trillion at the end of 2000, according to SIF’s report, published in December. Investment in these funds “proved remarkably robust” as the economy receded and the overall stock and bond markets lost ground, says Tim Smith, president of SIF. Socially responsible mutual funds saw net inflows of $1.5 billion during 2002, whereas US diversified equity funds posted outflows of nearly $10.5 billion, according to figures from Lipper, a US fund analysis firm.

UK ups renewables target

The UK renewables industry has enthusiastically welcomed the increase in government targets for power generated from renewables. But the rise in the Renewables Obligation from 10.4% of electricity supplied in the UK in 2010 to 15.4% by 2015 has met with more cautious support from financiers.

“This is a wonderful early Christmas present for the UK wind and renewables industry,” says Marcus Rand, CEO of the British Wind Energy Association (BWEA). “We are delighted that the government has listened to advice and acted so decisively”. The increased certainty provided by the higher target will help secure the necessary financing to build the required new renewables capacity, the BWEA claims.

However, George Rogers, in the energy team at Investec, an investment bank, says that, while the increased target “is a great step forward, it doesn’t go anything like all the way towards making [projects] bankable”.

EMA plans new structure, name

The Emissions Marketing Association (EMA) is planning to rename itself and adopt a regional federal structure. The association is initially to set up US, European and Canadian associations, operating as a federation.

“There’s so much going on, we can’t manage it out of one office,” says Dan Chartier, the EMA’s US-based president. The EMA would be renamed the Environmental Markets Association, and further chapters – such as in Latin America, Asia and Australia – could be added later, Chartier says.

Banks disagree on SRI performance

The debate about the extent to which socially responsible investing (SRI) contributes to financial performance shows no sign of abating, with recent reports throwing up differing results. Separate studies from Morgan Stanley Dean Witter and Oekom Research, and from AMP Henderson Global Investors found that SRI funds outperformed their benchmarks. But findings from Pictet Asset Management showed that performance is highly dependent on how sustainability criteria are weighted across a portfolio.

EPA tables mercury trading proposals

The US Environmental Protection Agency (EPA) offered two proposals to limit mercury emissions from coal-burning power plants on 15 December, meeting its legal deadline for regulating the hazardous material.

The first, under Maximum Available Control Technology (MACT) standards, would reduce emissions by 14 tons by 2007. Currently, emissions of mercury from the nation’s 1,100 coal-fired power plants, which release an estimated 48 tons of mercury each year, are not regulated.

The second proposal, however, is a ‘cap-and-trade’ scheme which would require facilities to reduce mercury emissions by 70% by 2018. It mirrors the programme proposed in the Bush administration’s Clear Skies Initiative, which has failed to be taken up by Congress for the past two years.

UK ducks NOx, SO₂ trading decision

The UK government has deferred a decision on whether to introduce a nitrogen oxides (NOx) and sulphur dioxide (SO₂) trading scheme for large emitters, following the lack of a consensus emerging from a recent consultation exercise.

In June, the government published a consultation paper setting out two options for implementing the European Union’s Large Combustion Plant Directive, which covers emissions of NOx, SO₂ and dust (particulates) from 2008. It offered a choice between setting limits on a plant-by-plant basis, or establishing a national ‘bubble’ for each pollutant, within which trading between plants could take place.

“No consensus has emerged from the responses to the consultation [which closed on 30 September],and there are strongly held views in favour of both implementation options,” government minister Ben Bradshaw said in a November statement.

ADB backs FE clean energy fund

The FE Clean Energy Group has secured $30 million in commitments to its latest energy efficiency, renewable energy and carbon fund. The FE Global Asia Clean Energy Services Fund is expected to reach its first closing target of $50 million by the end of January, following pledges in December from the Asian Development Bank (ADB) and Japan’s Chubu Electric Power company.

The ADB has committed $20 million to the fund, which will invest in energy service companies (ESCOs) in Asia and Europe, via a master fund and Asian and European sub-funds. Chubu is to invest $10 million. Gayle Jackson, managing director of FE Clean Energy Group, the fund’s manager, says she is awaiting board sign-off from the Mitsubishi Corporation for a further $10 million.

Investors waking up to climate change

Mainstream investors are increasingly addressing the financial impacts of climate change on their portfolios – but pension fund consultants and sell-side brokers haven’t woken up to the implications for long-term investment, says the Institutional Investors Group on Climate Change (IIGCC).

The IIGCC – a collaboration of European investors managing assets of more than €700 billion ($855 billion) – held its first conference in London on 26 November, attracting more than 200 members of the financial community.

“It hit the group of people that we were hoping to get” rather than simply the ‘usual suspects’, says Nick Robins, London-based head of socially responsible investment research at Henderson Global Investors and an IIGCC workstream co-ordinator.

Quality standard launched for SRI research firms

A quality standard for sustainability research has been developed by a group of European socially responsible investment (SRI) research firms. The standard is intended to make such firms more transparent and accountable about the research they produce, and create a benchmark for the industry.

The Corporate Sustainability and Responsibility Research Quality Standard, launched in November at the Triple Bottom Line Investing Conference in Amsterdam, is a set of voluntary ‘equality’ and ‘integrity’ principles, that asks signatories to commit to using independent sources to assess companies; being transparent on the methodology they use; and being independent of outside influence, for example.

go to Features December 2003-January 2004