News April 2005

The following are summaries of news stories from the April 2005 print edition of Environmental Finance magazine

Prices soar in EU emissions scheme

Prices in the EU Emissions Trading Scheme (ETS) hit record levels on 22 March – reaching €16.50 ($21.45) per tonne of carbon dioxide for vintage 2005 allowances. The market also experienced record volumes on the same day, with more than 2.3 million tonnes traded in the brokered market.

Traders and brokers give mixed reasons for the high prices, which have risen from lows of €6.35/t on 10 January, according to the Carbon Finance mid price. Some cited strong speculative demand against weak supply, as well as high natural gas and oil prices.

Broker Evolution Markets said that natural sellers of EU allowances are currently “few and far between”, while one trader at a European utility said the record highs were down to speculation from market participants with no natural positions. “The fundamentals are the same as last week. It is pure speculation,” he said.

Legal risk from Equator Principles?

Signing up to the Equator Principles could have an opposite effect to that intended – namely increasing the environmental risk that signatory banks face, according to a report* by Freshfields Bruckhaus Deringer.

“In the past there has been concern that lenders should not become liable under environmental law simply by transacting their normal business,” says Paul Watchman, a UK-based partner at the international law firm. “However, the Equator Principles have the power to change that.”

The principles, launched in June 2003, are voluntary social and environmental guidelines that apply to project finance deals greater than $50 million. There are currently 29 signatories, representing some 80% of project financings, with a number stating that they view the principles as adding an additional layer of risk management to their operations.

Signatories are privy to more information about the environmental impact of a project than they would have been previously, says Watchman, and as result are more likely to be aware of any breaches in environmental law. Simply failing to report these breaches could make them criminally liable in countries such as the Netherlands and Belgium, he says.

In other countries, including the UK, they may be deemed as being in control of the polluter and thus could be accused of ‘knowingly committing pollution’, he warns.

* The World Bank is not enough: The Equator Principles Survey 2005

AIG Private Bank to launch weather, cat bonds fund

AIG Private Bank, the Zurich-based arm of US financial services giant AIG, is to launch an ‘insurance-linked’ fund to invest in weather derivatives, catastrophe (cat) bonds, and other ‘non-natural’ insurance risks. The fund, which follows a cat bond fund launched by the bank last October, is due to be launched in May or June, pending completion of the regulatory approval process.

SFM plans $300m of forestry investments

Sustainable Forestry Management (SFM), a pioneering London-based investment company, has secured commitments to invest up to $300 million over the next three to four years in “forestry investment assets”. The company is designed to generate returns from both traditional forest products – such as timber – as well as from emerging environmental markets, including carbon.

The company has been a long time in development – it was launched at the World Summit on Sustainable Development in 2002 – but “the last six to nine months has seen a significant rise in the appetite for high-quality natural resource assets,” says its CEO Alan Bernstein.

Canada’s budget steps up to climate challenge

The Canadian government has earmarked more than C$5 billion (US$4.1 billion) in its latest budget for environmental and climate change initiatives. Environment minister Stéphane Dion called the budget, which was unveiled in late February, “the greenest budget Canada has ever seen”.

The largest portion of the C$5 billion – of which C$3 billion is new money – goes to a C$1 billion Clean Fund, to encourage greenhouse gas emission reductions. It is to purchase carbon credits directly from domestic offset projects, subsidise long-term private sector emission reduction projects, and may be used to purchase credits in the international market. Government officials could not provide details on when the Fund will begin operating.

A Partnership Fund, intended to complement the Clean Fund, is to receive at least C$250 million over the next five years. This fund will support large-scale emission reduction projects agreed upon with the provinces, by purchasing a portion of the generated credits.

Gap in HSBC’s SRI effort, as research revamped

HSBC has unveiled a new, long-term approach to the production of its ‘mainstream’ equity research, but its pioneering provision of sell-side socially responsible investment (SRI) research is in limbo, following the departure of its London-based SRI analyst.

Environmental Finance has learnt that Mike Tyrell has left the bank. Tyrell declined to comment on the reasons behind his departure, and is currently taking time off to consider his next career move.

The suspension of the bank’s SRI research comes at an awkward time for HSBC. Generally, the bank is making a push for environmental leadership – revamping its environmental lending policies, and undertaking initiatives on climate change (see Environmental Finance, December 2004–January 2005, HSBC takes carbon lead).

In March, HSBC announced a new approach to the equity research that its brokerage arm produces for clients. It is to replace traditional research notes, based on a short-term view of the prospects for an individual company, and instead produce longer ‘themed’ pieces, focused on sectors or countries. The move will also see it doubling the number of analysts it employs, to around 100. Such a long-term approach should, in theory, fit well with the type of research carried out by SRI analysts.

China’s renewables law to raise wind prospects?

China passed its first renewable energy law at the end of February – drawing praise from Greenpeace, and taking the country on its first step towards meeting its stated target of generating 12% of its power from renewable sources by 2020.

But, while renewable energy specialists note that details of local targets, financial incentives, and penalties for non-compliance remain to be decided, foreign wind turbine manufacturers are increasingly targeting what promises to become an enormous market.

Industry experts expect China to install around 1,000MW of new wind energy capacity this year.

ForestRe launched to plug insurance gap

A new company has been launched to provide specialist insurance for forestry projects and, going forward, ecosystem services. London-based ForestRe is to be backed by a specialist Canadian insurer – which cannot be identified ahead of contractual closure – and has a target of generating $15 million in premium income in the first year.

“We’ve been set up for two reasons,” says Phil Cottle, project principal, and formerly with reinsurer Partner Re. “To improve financial flows into forestry by providing insurance to a market that needs it, including to SMEs and co-operatives; and to improve the process of underwriting forest risks.”

Cottle says that some insurance has been made available to the sector, but a lack of capacity is constraining growth outside North America and Australia. “There’s been a global decline in insurance capacity for forestry, from around $140 million a year in the early 1990s, to around $50 million now.”

“But it’s not just about providing capacity, it’s also about developing tools to allow an objective global assessment of risks to forests,” he adds.

FTSE4Good expels 23 companies for environmental failings

In the latest of its twice yearly reviews, index provider FTSE has dropped 23 companies from the FTSE4Good series after they failed to meet its upgraded environmental criteria. The net effect of the review,however, has been an increase in the number of companies in the socially responsible investment index series to 923, following the addition of 61 firms.

FTSE increased the stringency of its environmental criteria in May 2002, and has phased in the changes gradually. Those not meeting the new standards include: Texas-based business services firm Electronic Data Systems; UK retailer Matalan; Italian broadcaster Mediaset; US media giant News Corporation; Canadian financial services firm Toronto-Dominion; US-based retailer Toys ‘R’ Us; and US publishing group Washington Post.

A further three companies were excluded for not meeting FTSE4Good’s new human rights standards, and one was dropped for not complying with requirements on stakeholder relations.

UBS enlists Innovest for new sustainability effort

The investment banking arm of financial giant UBS plans to integrate environmental and social risk management across its business, and has hired Innovest Strategic Value Advisors to provide the necessary research.

“As a financial institution, UBS Investment Bank feels it is important to consider the ‘downstream effect’ of our lending and investing activities on the environment, the rights of workers, communities and indigenous people,” says Joel Forbes, global head of environmental risk management at UBS Investment Bank.

New York-based Innovest will make its research available through a specially designed website, accessible only to UBS staff.

German solar company approaches $1 billion valuation

Conergy, a German solar energy company, has become the second largest alternative energy company by market capitalisation, following a successful initial public offering (IPO) in Frankfurt last month.

On 16 March, Conergy placed 4.5 million shares, at €54 each, on the Frankfurt Stock Exchange’s Prime Standard market. At the height of a post-IPO rally, which took the stock to €73.35, the company became worth €733.5 million, or $953 million, although the shares had slipped to €68.35 by 23 March.

Conergy provides solar photovoltaic power and solar heat systems for domestic and industrial users. In 2004, it made a profit of €11 million on revenues of €285 million – up 133% in revenue terms on 2003.

Clean technology sees third year of VC growth

Venture capital investors pumped $1.21 billion into ‘clean technology’ companies last year, marking the sector’s third consecutive year of growth, according to the Cleantech Venture Network. Last year’s ‘cleantech’ investment, up $40 million from that in 2003, represented around 6% of total venture capital spending, says Cleantech, which offers information and networking services to investors and clean technology companies.

The investments made in 2004 involved more than 360 different investors, and averaged $6.2 million. Around half went into the energy sector, it adds.

go to Features April 2005