News November 2004

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

Critics assail EPA enforcement

A series of reports released in October added fresh ammunition to those arguing that the US Environmental Protection Agency (EPA) is inadequately enforcing environmental laws under the Bush administration. A report from the EPA’s Inspector General, the former director of the EPA’s Office of Regulatory Enforcement, and comments from a former assistant administrator for enforcement and compliance assurance, Bush appointee J P Suarez, all criticise the EPA’s enforcement efforts, especially regarding the Clean Air Act and its New Source Review (NSR) programme.

“It became clear to me, during my tenure at EPA, that the goal of NSR reform was to prevent any enforcement case from going forward,” Suarez revealed in an interview in the Environmental Law Reporter’s October issue.

After the Clinton administration filed a wave of lawsuits in 1999 against power companies for violating NSR provisions – which required power plants to install pollution controls when undergoing upgrades that went beyond “routine maintenance” – the Bush administration changed the rules in August 2003. The new rules allow plants to avoid NSR enforcement if the “routine maintenance” involved replacement parts that are functionally the same or cost less than 20% of the value of the entire unit.

‘Critical mass’ reached for EU ETS

The EU Emissions Trading Scheme (ETS) has reached the “critical mass” needed to start on time in January, according to Jos Delbeke, the Commission official leading its implementation. His comments, at the Environmental Finance Emissions Trading conference in Brussels in late October, referred to the Commission’s assessment of the second batch of eight ‘national allocation plans’ (NAPs), which set greenhouse gas emissions targets for the roughly 12,000 industrial installations covered by the scheme.

However, companies in Germany and the UK face continued uncertainty. The German emissions authority has delayed until later this month the installation-level NAP that was due to be published on 1 November, blaming incomplete applications to participate in the ETS.

APP curbs logging pending environmental review

Asia Pulp & Paper (APP) has halted logging operations in several parts of Indonesia, following pressure from investors and export credit agencies earlier this year to institute better environmental controls.

On 28 October, APP announced that it would add the Siak and Serapong areas of Sumatra to the list of potential ‘High Conservation Value Forests’ currently under review by the Rainforest Alliance’s SmartWood programme.

Investors to tempt brokers to broaden research

An alliance of leading European institutional investors has come together to use their commission fees to encourage stockbrokers to produce research on non-financial issues. The investors are to ringfence more than €4 million ($5.1 million) in commissions in 2005, to be allocated to brokers who produce sell-side research that considers longer-term factors, such as environmental issues and corporate governance, as well as shorter-term investment criteria.

Under the scheme – known as the Enhanced Analytics Initiative – the institutional investors, who collectively manage more than €364 billion, have pledged to spend 5% of their broker commissions on extra-financial sell-side research.

Siemens heads into wind

German giant Siemens is to enter the wind energy market with the purchase of Danish turbine manufacturer Bonus Energy, indicating a significant vote of confidence in the industry.

Bonus Energy has installed more than 5,000 turbines and generates annual sales of around €300 million ($381 million), making it one of the five major suppliers of turbines worldwide. The two companies have agreed a deal, and are now awaiting approval from competition regulators. Closure is expected in December.

Despite Kyoto progress, first CDM project is blocked

The day after Russia’s upper house voted to ratify the Kyoto Protocol, one of the international climate agreement’s key tools – the Clean Development Mechanism (CDM) – was dealt a blow by its own overseeing body. On 28 October, the first project due to be registered under the CDM was blocked by three ‘requests for review’ by Executive Board members – the day before it was to get the green light to begin generating carbon credits.

The developers of the Indian project – which destroys HFC23, a potent greenhouse gas (GHG) – argue the issues raised are, at best,“minor and procedural”, and will be resolved at the next Executive Board meeting, on 1–3 December. But emissions market experts say that the hitch will further discourage business involvement in this crucial GHG mitigation tool.

Weather hedge powers Tokyo Gas profits

Weather hedging has helped propel Tokyo Gas (Togas) to stronger than expected income growth, the Japanese utility announced when reporting its half-year results in October. Net income at the company for the six months to the end of September was up 23.6% compared to the same period last year, to ¥27,444 million ($258 million). This was bolstered by a pay-out of ¥1,994 million – or more than $18 million – from its weather hedging programme.

“Tokyo Gas’ profits from gas sales have strong correlation with temperatures in the Tokyo area,” says Kanako Nakayama, a deputy manager of corporate planning at Togas. “Though I cannot disclose the details of the transactions, the weather derivatives, which covered some of our gas sales volume risk, contributed to stabilising profit fluctuations caused by temperatures.”

US generators see GHGs as a political, not scientific, problem

Less than half of large US power producers believe the build-up of greenhouse gases (GHGs) is a genuine scientific problem, although 95% see it as creating a political problem. This is one of the striking findings of a recent survey, by PA Consulting, of the sector’s attitudes to a range of environmental issues.

Most of the respondents expect Congress to pass mandatory regulation of emissions of carbon dioxide (CO₂) – the main GHG – within 10 years, but less than half the companies are currently incorporating CO₂ into their business planning.

Environmental credit risk moves into mainstream

The majority of large financial institutions now see environmental and social issues as significant risk factors, according to a survey* of 38 of the world’s largest banks by consultancy Environmental Resources Management (ERM).

“The situation is no longer a matter of reputation management or keeping the NGOs happy, but one that has become a compulsory consideration for any major structured finance transaction,” says ERM’s US-based business development director Carlo Alberto Marcoaldi. “It makes sound economic sense for long-term credit portfolio quality and overall financial performance.”

Of the banks surveyed, more than 90% now employ staff dedicated to the credit and operational implications of social and environmental issues.Two thirds of the banks are also establishing new or more extensive programmes to identify, manage and mitigate these risks, and nearly all of them question their existing and potential clients about these issues before funds are committed.

* Banking Industry Integrating Environmental and Social Issues: How Much and How Fast? www.erm.com

IFC extends first ‘sustainability-targeted’ credit line

The International Finance Corporation (IFC) has extended a $51 million credit line to Banco ABN Amro Real to support “sustainability-targeted” lending at the Brazilian bank. The deal – the first of its kind by the IFC – represents a progression in the type of support the IFC offers to client banks, in that it is partly designed to ameliorate environmental problems, rather than simply prevent them from happening in the first place.

The credit line will be used to support two types of long-term lending at the bank: general purpose loans to family-owned, middle-market companies that improve their corporate governance standards; and financing to firms for specific environment-related projects.

go to Features November 2004