News December 2004-January 2005

The following are summaries of news stories that appeared in the December 2004-January 2005 print edition of Environmental Finance magazine

Kyoto Protocol and CDM advance – but wrangles continue

The Kyoto Protocol is to enter into force on 16 February, after Russia submitted its “instrument of ratification” to UN Secretary General Kofi Annan on 18 November. Almost at the same time, the first Clean Development Mechanism (CDM) project was formally registered – finally marking the operationalisation of this crucial market mechanism.

The CDM allows emission reduction projects in developing countries to generate and sell carbon credits, which can be counted towards greenhouse (GHG) reduction targets in the industrialised world. The NovaGerar landfill gas-to-energy project, a Brazilian project under development by environmental consultants EcoSecurities, engineering and construction firm SA Paulista and the World Bank, became the first CDM project to be registered, also on 18 November.

However, many in the business community consider the CDM to be overly bureaucratic and risk-prone – a view which has been reinforced by the continued stalling of the first two projects due to be registered. The two – both under development by UK chemicals company Ineos Fluor and local partners – destroy HFC23, a potent GHG which is a by-product of the manufacture of refrigerants.

IFC extends Safeguard review, as criticism mounts

The International Finance Corporation (IFC) has added an extra round of consultation to the review of its new social and environmental standards, in response to concerns that the process is being rushed.

The move follows growing criticism from outside the World Bank Group – and disquiet within – about how the process is being managed. Indeed, at a recent conference in Amsterdam, mining giant Rio Tinto took the side of a number of environmental groups that are boycotting the consultation process.

VCs eye the environment

Recent weeks have seen a flurry of activity in the private equity market with several firms marketing sustainable and clean technology funds, and the UK’s Environment Agency committing £50 million ($97 million) to the sector.

“There’s growing enthusiasm for the [sustainability] sector,” believes Rob Wylie, director at UK-based Wheb Ventures, which announced the first closure of its clean technology fund in September and is looking for final closure of £25 million towards the end of February.

The private equity arm of boutique merchant bank Climate Change Capital is also raising money for a planned £25 million venture capital trust (VCT), in this case focused on small onshore wind projects. The bank hopes to reach first closure of the Ventus VCT in January, and final closure in April, says Mark Woodall, its head of financial advisory services.

Two other firms, with existing private equity sustainability funds, have launched new ones. The first, US-based Chrysalix Energy, is looking to raise $60 million–100 million for a second clean energy fund, which will invest along the same lines as its Clean Energy Limited Partnership fund, launched in 2001. The second, Netherlands-based ethical bank Triodos, hopes to close another sustainability fund within the next few weeks, fund manager Alexander Schwedeler told the Triple Bottom Line Investing conference in Amsterdam in November.

EU ETS forces Holcim greenhouse review

The EU Emissions Trading Scheme (ETS), which begins in January, could have exactly the opposite effect than intended on greenhouse gas (GHG) emissions from some companies – with Holcim claiming it may delay reductions because of the scheme’s design. The Swiss cement giant’s executive committee has reviewed its voluntary GHG reduction programme, in response to what the company sees as perverse incentives created by the EU ETS.

“We will pursue our voluntary commitments outside Europe,” Bruno Vanderborght, vice president of environmental strategy, told Carbon Finance, Environmental Finance’s sister publication. “But within the EU, we will have to strike a careful balance between our short-term business interests and our long-term commitments.”

The problem, Vanderborght said, is that the system that EU governments have chosen to allocate allowances – the so-called ‘grandfathering’ approach – penalises those companies that cut emissions faster than required.

Biodiversity pilot projects planned

Insight Investment, a UK-based asset manager, and Washington-based NGO Forest Trends are to run a series of biodiversity offset pilot projects over the next 18 months.

The move follows the recent publication of a report* by Insight and conservation group IUCN on biodiversity offsets – that is, conservation projects designed to compensate for losses in biodiversity through development elsewhere. “The purpose [of the pilot projects] is to have a go in practice at implementing the things mentioned in the report,” says Kerry ten Kate, director of investor responsibility at Insight.

The two organisations “aim to work with the companies and developers involved in a handful of projects around the world – with different industry sectors and different scales of operation – to help them design and implement biodiversity offsets,” says ten Kate. But she says that she cannot reveal more details of the projects at this time.

* Biodiversity offsets: Views, experience, and the business case

UK mulling ‘renewable heat obligation’

The UK government is considering the introduction of a ‘renewable heat obligation’, backed by tradable certificates, in an effort to boost biomass, combined heat and power, and on-site micro-generation. The Department of Trade and Industry is about to award a contract to a consulting firm to carry out a study into potential mechanisms to support renewable heat, due to be completed by April.

“This would be a much more cost-effective way of supporting renewables than the existing Renewables Obligation,” says Stewart Boyle, a director at Wood Energy, a supplier of wood-fuelled heating systems. “It would take an obligation set at only around £10/MWh to get a lot of projects running.” The renewables obligation is currently costing electricity suppliers around £45 ($86)/MWh.

Credit derivatives go ethical with new index

The fast-growing credit derivatives market has become the latest part of the financial world to receive the SRI treatment. In November, E-Capital Partners, a Milan-based socially responsible investment advisory firm, launched the first ‘ethical’ credit default swap index. And an investment bank – rumoured to be JP Morgan Chase – is marketing a ‘collateralised debt obligation’ (CDO) using research provided by the company.

Paolo Sardi, a director at E-Capital, says that the ‘Credix’ index demonstrates the reduction in credit risk that can be obtained by using its methodology. “Our research showed a reduction in the risk of default of the monitored names of 71% in the last three years. We excluded Enron eight months before it went bankrupt,” he adds.

HSBC takes carbon lead

HSBC – the world’s third largest bank – has staked a claim to a leadership position in addressing climate change, pledging to become the first major bank to go carbon neutral.

HSBC’s new carbon management strategy has three strands, says Francis Sullivan, the bank’s advisor on the environment. First, it will improve its energy efficiency. Second, it will purchase electricity from renewable sources wherever possible. Finally, it will offset its remaining emissions through purchasing carbon allowances or credits.

Investment grade rating for GuaranteedWeather

Standard & Poor’s (S&P) has awarded GuaranteedWeather a BBB, ‘investment grade’, credit rating, the rating agency announced in November. S&P said the rating reflected the firm’s “very strong” risk controls, and projects 20–30% growth in revenue over the next three years based on the expansion of weather risk hedging beyond the utility sector.

As well as endorsing GuaranteedWeather’s capital support, management team and risk management approach, the rating report provides an insight into the often opaque weather risk industry. For example, it estimates that the company has underwritten nearly $1 billion in risk since its inception in April 2003, or around a fifth of the total market. For that, it has earned $77 million in premiums.

State officials withdraw from aviation scheme

State and local air pollution control officials withdrew in November from negotiations with the US Environmental Protection Agency (EPA) and the Federal Aviation Administration (FAA) over a voluntary emission reduction programme for the aviation sector.

The withdrawal of the officials – represented by the State and Territorial Air Pollution Program Administrators and the Association of Local Air Pollution Control Officials – calls into question the development of such a programme, a process started in 1999.

“More than five years later, we are extremely disappointed that no progress was made concerning the primary objective of reducing aircraft emissions,” the associations wrote in a letter to the EPA and FAA formally notifying the agencies of their intent to withdraw. Over the course of five years, the process, which also included representatives of the aviation industry, produced only a memorandum of understanding to address nitrogen oxide emissions from ground service vehicles and equipment at airports, not from aircraft engines.

Netherlands announces final NOx market plans

The Netherlands is set to become the first European country to establish a trading scheme for nitrogen oxide emissions from industry, after the Dutch cabinet’s recent approval of the new market’s rules.

The proposal has now been passed to Parliament for consideration, with a recommendation that it be implemented as soon as possible after 1 January 2005 so that it can run in parallel with the EU Emissions Trading Scheme for carbon dioxide, says a spokeswoman from the Dutch environment agency VROM. The scheme was first discussed in 1999, but has suffered a number of delays, and been overtaken by the EU ETS which starts on the 1 January.

Houston–Galveston proposes VOC trading

The Texas Commission on Environmental Quality (TCEQ) has announced plans for tradable emission allowances in Highly Reactive Volatile Organic Compounds (HRVOCs) as part of new rules to address ozone pollution in the Houston–Galveston Area (HGA).

HGA has had a programme for trading emissions of nitrogen oxides since January 2002 under its State Implementation Plan but the HRVOC programme would represent the first time a trading programme has incorporated such pollutants.

The TCEQ has defined HRVOCs as ethylene, propylene, 1,3 butadiene and all isomers of butene. Emitters in the region will be required to submit their emissions data by the end of April and allocations are expected to be complete by the last quarter of 2005.

New reporting requirements unveiled in UK, Germany

The UK government has watered down the requirements for companies to report on social and environmental issues in their Operating and Financial Reviews (OFR). Changes to the guidelines – published in late November – delay the implementation of the OFR rules, lower the legal standard to apply to reviews, and reduce the role of auditors in the process.

Meanwhile, the German parliament has also passed a law introducing similar mandatory reporting of social and environmental factors. However, accountants say that such issues need only be reported if they are “material” to the company’s business, and most – if not all – companies who would qualify under that definition are already reporting.

The OFR – a new section of companies’ annual report and accounts – is intended to “improve the quality, usefulness and relevance of information provided by quoted companies, helping shareholders get a better understanding of a quoted company’s business and future prospects,” according to the Department of Trade and Industry (DTI).

SRI research industry must work on quality – Environment Agency

Firms that provide research on corporate environmental performance to socially responsible investors need to improve their transparency and quality assurance, according to a study carried out for the UK’s Environment Agency by consultancy URS.

“The level and type of information presented by research organisations varies widely,” says the study, Corporate Environmental Research. “Many of these organisations present relatively little clear, user-friendly information on what is being assessed and how. Some companies and users may find the services of [corporate environmental research] organisations interesting and valuable; others may find them confusing and difficult to use effectively.”

New studies link financial, environmental performance

There is a clear link between the environmental performance of businesses and their financial performance, yet many companies are still failing to recognise this, according to two recently published studies.

The first*, from the UK’s Environment Agency and US-based socially responsible investment research firm Innovest Strategic Value Advisors, is based on a literature review and 15 case studies, and comes to the conclusion that “good environmental performance helps to deliver better financial performance”.

Similarly, the second report**, an analysis and ranking of companies’ non-financial reports by UK-based consultancy SustainAbility, in conjunction with the UN Environment Programme and ratings agency Standard & Poor’s (S&P), also suggests that awareness of social and environment issues pays financial dividends. Of the 50 companies judged to have the best reports, the “overwhelming majority” had an above-average investment rating from S&P, says the study.

* Corporate Environmental Governance: A study into the influence of corporate environmental governance and financial performance

** Risk & Opportunity: Best practice in non-financial reporting

go to Features December 2004-January 2005