News February 2004

The following are summaries of news stories that appeared in the February 2004 print edition of Environmental Finance magazine

UK blazes trail with EU emissions plan

The UK government has published its draft plan for greenhouse gas (GHG) targets under the European Union’s Emissions Trading Scheme (EU ETS) – to howls of protest from industry and plaudits from environmental groups. Analysts predict that this first draft National Allocation Plan (NAP) – which one expert described as “extremely cleverly put together” – will influence those from the other 24 states of the enlarged EU.

The NAP, which covers around 1,500 industrial installations responsible for around 50% of UK carbon dioxide (CO₂) emissions, sets the country on a path to exceed its commitments under the Kyoto Protocol on climate change. It is in line with a UK government target of reducing CO₂ by 16.3% below 1990 levels by 2010, and 20% by 2012. This compares to a 12.5% target for 2008–12 under the Protocol.

In general terms, the UK’s NAP – which covers the first phase of the EU ETS, from 2005 to 2007 – places much of the burden of GHG reductions on the power sector. The government expects the NAP to increase industrial power prices by around 6%, based on a price of CO₂ allowances of €5 ($6.38)/ tonne.

WRMA expects weather insurance move to fail

Weather dealers and derivatives lawyers are confident they can head off a suggestion that US insurance commissioners should reclassify weather derivatives as insurance. Such a decision, as recommended in a draft report, could significantly reduce the size of the weather risk market, derivatives experts say.

The report, from a committee of the National Association of Insurance Commissioners, an organisation of insurance regulators from each of the US states, says bringing weather derivatives under the ambit of insurance regulators would increase consumer protection. It would also mean these products would be subject to a tax on premiums, from which derivatives are exempt.

But the Weather Risk Management Association says such a move would: contradict the views of individual state regulators and of the legal profession in general; raise questions about the status of derivatives written on other asset classes; and could lead to a turf war between federal regulators, which are responsible for derivatives, and state regulators, which oversee insurance.

Activists applaud new Citigroup policies

The world’s largest financial institution, Citigroup, has adopted “a comprehensive environmental policy” that the Rainforest Action Network (RAN) says is “the strongest of any private financial institution in the world”. The policy – which follows a four-year campaign by RAN – sets standards relating to investments involving endangered ecosystems, illegal logging, sustainable development and climate change.

“We aspire to operate according to the highest standards in every arena in which we do business, and the environment is no exception,” said Charles Prince, Citigroup’s CEO, in a statement. “We believe we can make a difference by holding ourselves accountable for our own impact on the environment, by embedding our commitment to environmental responsibility in our lending practices, by embracing sustainable business opportunities, and by engaging in the public domain on these issues.”

MEP suggests linking EU ETS to US, Australia

The European Union’s Emissions Trading Scheme (EU ETS) could be linked with other regional and national greenhouse gas trading schemes, according to the MEP leading the European Parliament’s deliberation of the so-called Linking Directive.

Green Party MEP Alexander de Roo told Environmental Finance’s sister publication, Carbon Finance, that he wants to include wording in the Linking Directive to connect future regional schemes, such as those planned for the northeast US and west coast of the US or the Australian states, to the EU ETS. The European Commission is looking into the legal ramifications, he adds.

EDF issues cat bond to protect pylons

Electricité de France (EdF), the monopoly French electricity company, became the first utility in the world to issue a catastrophe bond last month. The bond, which is also the first cat bond to be issued in euros and the first by a European company, is intended to protect EdF from damage to its distribution and transmission network by wind storms.

“Utilities are very vulnerable to transmission and distribution risk but insurers are reluctant to write traditional protection because the risks of loss are relatively high,” says Robert Muir-Wood, chief risk officer at Risk Management Solutions (RMS).

Utilities have tended to bear these risks in the past partly because, historically, most have been public sector concerns and could thus spread the risk from year to year, Muir-Wood explains. But since most European utilities have become privately owned, risk management has become more important to maintain value for shareholders, and utilities are gradually waking up to this sort of risk, he notes.

Australian SRIs welcome disclosure guidelines

Australian socially responsible investment (SRI) specialists have welcomed guidelines on SRI disclosure issued by the Australian Securities and Investment Commission (ASIC) in December. The ASIC guidelines follow a reform of Australia’s Corporations Act in 2001, which requires vendors of investment products to provide statements disclosing how they take labour standards and social, environmental and ethical (SEE) factors into account when making investments.

Duncan Paterson, CEO of the Centre for Australian Ethical Research, describes the guidelines as “a good step forward”, adding that they contain “more detail” than similar rules that came into force for UK pension funds in 2000. “To an extent, some lessons have been learnt in Australia,” he says.

Robeco aims for $200m SRI private equity fund-of-funds

Robeco, the Dutch fund management firm owned by Rabobank, has launched what it believes to be the world’s first sustainable private equity fund-of-funds. The firm aims to raise $200 million into the dollar-denominated global fund, called Robeco Sustainable Private Equity.

The fund will attempt to encourage mainstream private equity funds to employ sustainability criteria in their investment selections, as a precondition to investing in them, says Ad van den Ouweland, a managing partner in private equity at Robeco in Rotterdam. It will also invest in existing sustainable private equity funds, and make direct investments in sustainable companies and sustainable project financing investments.

Company CSR policies under fire

The chief executives of the UK’s 100 largest companies are being urged by their counterparts in five leading activist groups to consider the reputational risks of disparities between their public positions and behind-the-scenes lobbying.

This comes after a report issued last month by the World Economic Forum, in advance of its annual meeting at Davos, that says that “a major cause of distrust [regarding corporate citizenship], among investors as well as other stakeholders, is inconsistent messages and incoherent policies from business”.

Meanwhile, Christian Aid has published a report claiming corporate social responsibility (CSR) is often “a carefully manufactured image”, and calling on governments to regulate rather than relying on voluntary initiatives to ensure good corporate behaviour.

In a letter to the CEOs, the heads of Greenpeace, Green Alliance, the New Economics Foundation, Sustainability and WWF note that “companies’ reputations risk being undermined by their public affairs activities, where these are not consistent with their CSR policies”.

E. Europe should boost incentives for renewables, say NGOs

Between €18 billion and €40 billion ($23 billion–51 billion) could be invested in renewable energy projects in the East European states that are due to join the European Union, if suitable incentives are introduced, says a new study by WWF and several regional NGOs.

For such investment to be forthcoming, the authors say the eight countries must urgently modify their incentive schemes to provide developers of renewables projects with more predictable returns on their investments.

UK eyes emissions trading to tackle aviation pollution

The UK Department for Transport (DfT) is backing the use of emissions trading to tackle various pollution problems caused by the country’s rapidly growing aviation sector.

In its White Paper, The Future of Air Transport, published in mid-December, the DfT says “we intend to press for the inclusion of intra-EU air services in the forthcoming EU emissions trading scheme … with a view to aviation joining the scheme from 2008”.

The EU ETS, which is due to begin in January 2005, is intended to help the EU meet its obligations to curb its emissions of greenhouse gases (GHGs) under the terms of the 1997 Kyoto Protocol. In its initial phase (2005–07) it will cover only five industry sectors: ferrous metals; building materials; pulp and paper; oil refineries; and power generation. The DfT notes, however, that on some projections GHG emissions from UK aviation could account for about a quarter of the national contribution to global warming by 2030.

“The best way of ensuring that aviation contributes towards the goal of climate stabilisation would be through a well-designed emissions trading regime,” says the DfT. “We will press hard for this approach both in the EU and globally,” it adds.

Sharp rise in natural catastrophe insurance losses – Munich Re

Insured losses from natural catastrophes rose sharply last year, according to data from Munich Re. The German reinsurer – the world’s largest – estimates total insured losses in 2003 at around $15 billion, up from $11.5 billion in the previous year. The rise is a result of a range of disasters including a heat wave in Europe, forest fires in the US, Canada, Europe and Australia, and earthquakes in Iran, Algeria and California.

Total economic losses rose less sharply – to $60 billion from $55 billion – but natural catastrophes claimed the lives of around 50,000 people, compared with 11,000 in 2002. Such a high number of victims has been recorded only four times since 1980, according to Munich Re.

No change for Australia’s 2010 renewables target – report

The 2010 target for new capacity mandated under Australia’s renewable energy tradable certificates scheme should not be raised, but a target for 2020 of 20,000GWh should be set, according to a report commissioned by the Australian government released on 15 January.

Introduced in 2001, the Mandatory Renewable Energy Target aims to generate an additional 9,500GWh of renewable energy annually by 2010 and through to 2020. This amount was expected by the scheme’s designers to equate to an extra 2% market share for renewables compared to 1997 by 2010. However, the report – released by acting federal environment minister Robert Hill – acknowledges that it is likely to deliver an increase in market share of only 0.2%, due to a greater-than-expected rise in overall electricity consumption.

Climate leadership continues to grow

Ten more corporations have announced greenhouse gas (GHG) reduction targets under the US Environmental Protection Agency’s (EPA) voluntary Climate Leaders programme, and 13 more have signed up. International Paper, Kodak and 3M were among the companies announcing targets in January, ranging from a 30% reduction in total US GHG emissions by 2007 against 2002 levels from 3M to a 10% reduction in worldwide GHG emissions by 2008 from the same year from Kodak.

“Industry-government partnerships are good for the environment and good for business,” said Hays Bell, director of health, safety and environment at Kodak. “As charter partners in the EPA’s other programmes – Waste-Wise and Energy Star – we strongly believe in the value of these voluntary initiatives.”

SO₂ prices continue climb

US sulphur dioxide (SO₂) allowance prices have gained more than $50 per ton in the last two months – trading at $253 on 22 January – and trading volumes have increased as well, according to brokers. Factors fuelling the rise include strong natural gas prices, a cold winter, dwindling banks of excess allowances, and speculative action.

“The reason people are starting to buy is that the bank isn’t getting any bigger and the funds to install [SO₂ removing] scrubbers just aren’t there,” says Tom Gibson, at Houston-based brokerage United Power.

EU could have 34% green power by 2020

Renewable sources of energy could contribute 34% of total electricity production and 20% of energy consumption in the European Union by 2020, says the European Renewable Energy Council (EREC).

The group of renewables companies, trade bodies and research organisations says these conclusions are based on the first co-ordinated analysis of the market out to 2020.

go to Features February 2004