News May 2005

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

Blue-chip investors back largest carbon fund

Leading institutional investors, including Credit Suisse, HSBC and SocGen, have together put £135 million ($258 million) into a new carbon fund known as Trading Emissions.

The fund is structured as a public limited company and was listed on the Alternative Investment Market of the London Stock Exchange on 21 April. It is the largest carbon investment vehicle created to date and, like the European Carbon Fund, launched by Caisse des Depots and Fortis Bank, its main investment strategy is to take a ‘long’ position in carbon assets – mostly EU Allowances and carbon credits arising from Clean Development Mechanism and Joint Implementation projects under the terms of the Kyoto Protocol.

The company expects such a position to be profitable as it believes the price of carbon emissions will rise, particularly in the second phase of the EU Emissions Trading Scheme (2008–12).

Kyoto Protocol boost for renewable technologies

Renewable energy technology companies listed in countries that have ratified the Kyoto Protocol performed better in the first quarter of this year than those listed in the US and Australia, according to New Energy Finance’s new Global Energy Innovation Index (GEIX).

“It’s too early to tell whether the very marked ‘Kyoto effect’ is a one-off, or whether it will drive a sustained divergence in the value of new energy stocks in Kyoto and non-Kyoto countries,” says Michael Liebreich, chief executive of UK-based New Energy Finance, which provides information and analysis to the renewables sector and investors. “It does indicate, however, that Kyoto has improved the prospects of European renewable energy technology companies vis-à-vis their US counterparts.”

The GEIX, launched at the end of last year, tracks the performance of the 50 largest listed companies focusing on low-carbon or renewable energy technologies.

Utilities predict nuclear rebirth, as renewables struggle

Electricity utilities expect to see countries turn to nuclear power to meet their climate change obligations, as growth in renewables fails to keep up with overall increases in power demand, according to a global survey* from PricewaterhouseCoopers (PwC).

Almost a third of utility company respondents said that climate change policies were already having an effect on their choice of fuel for new generation capacity, and on their energy trading strategies. And around three-quarters of those in utilities expect the ‘encouragement of renewable energy’ to be a major trend in the energy sector over the next five years.

However, the survey predicts that, while the total amount of renewable energy generation will increase over the next 10 years, renewables’ market share “will remain virtually the same” as demand for power increases.

Meanwhile, more than half of respondents from the utility sector thought that concerns about climate change would lead to an increase in nuclear power generation in their region.

* Under pressure: Utilities global survey 2005, PricewaterhouseCoopers

Barclays eyeing weather market entry

Barclays Capital is understood to be preparing to enter the weather derivatives market. The London-based bank – the investment banking arm of the UK’s Barclays Group – is reported to be in the process of establishing trading systems, buying market data and talking with brokers about its planned participation in weather trading.

However, Clare Harris, the executive responsible for Barclay’s push into weather, told Environmental Finance that it is “early days” for the bank, and that “nothing is concrete”. She declined to elaborate on Barclays’ plans for the market.

ECAs to adopt new rules for backing renewables

The world’s export credit agencies (ECAs) are to adopt a European Commission proposal to make it easier for them to underwrite renewable energy projects. However, a question mark hangs over the treatment of hydro projects under the new rules.

At a meeting in Paris in April, the Commission proposed extending the maximum allowable repayment period for export credits underwriting renewable energy and water projects to 15 years, from up to 12 years at present.

However, concerns about whether large dams – which the ECAs define as those with a height of 15 metres or more from their foundations – should qualify mean that the proposal has not yet been adopted.

Industry, NGOs savage Canada climate plan

The Canadian government’s new C$10 billion (US$8 billion) climate change plan, announced on 13 April, has been derided as “inadequate” to reach its Kyoto Protocol emissions target by 11 NGOs, while business groups have criticised the sums of money pledged as insufficient.

But, with the minority Liberal government facing a no-confidence vote, the country’s approach to meeting its Kyoto commitments remains in question.

The long-awaited announcement updates Canada’s 2002 climate plan, and is designed to reduce greenhouse gas emissions to 6% below 1990 levels over 2008–12. It reduces the burden on the country’s ‘large final emitters’ – companies in the mining, manufacturing, oil and gas, and power industries – while promising to buy emissions reduction credits from domestic and foreign projects.

REACH not as expensive as chemical industry fears – study

The proposed REACH Directive on the testing of chemicals may not prove as expensive as the European chemicals industry had feared, according to an impact assessment* commissioned from KPMG. The findings, released at the end of April, follow a speech by European Environment Commissioner Stavros Dimas quashing rumours that the EU Directive may be re-drafted by the new Commission (see Environmental Finance, December 2004–January 2005, page 18).

REACH – which stands for the Registration, Evaluation and Authorisation of Chemicals – was adopted by the Commission in October 2003, and is now being considered by the European Parliament. It will make chemical suppliers responsible for proving the safety of their products, shifting the burden of proof from regulators.

KPMG calculates that the additional testing and registration for suppliers of pigments and additives would lead to no more than a one-off increase in costs of 20%, and points out that this can be passed on to customers over several years. Some previous estimates from industry had suggested that the costs of complying with REACH would be crippling, with a fifth of chemicals having to be withdrawn.

* REACH – further work on impact assessment: A case study approach, KPMG

SO2 auction heats up allowance market

Sulphur dioxide allowance prices raced up to $880/ton following a record interest in the annual allowance auction run by the Environmental Protection Agency on 28 March. By the month’s end, prices had retrenched a bit – to $845 per ton as of 26 April – but demand remained strong and supply looked sparse.

“Demand was strong, price was obviously strong and then you had an X factor with guys like Man [Financial] and Alpha [Energy Partners] taking in supply,” Francisco Padua, a Houston-based emissions broker with Amerex, says regarding the auction.

In fact, the auction average price of $702.51 – where utility Ameren scooped a third of current year allowances – was only slightly higher than the then market price of $690/ton. But new participants helped keep perennial electric utility players from grabbing tons on the cheap. These included brokerage Man Financial; Alpha Energy Partners, a hedge fund started by former American Electric Power traders; and investment bank Credit Suisse First Boston, which took a large chunk of the 2012 allowances on sale.

More than $1 billion of new cat bonds expected in 2005

At least $1 billion of bonds linked to natural catastrophes (cat bonds) are likely to be issued this year, according to reinsurance giant Swiss Re. This would put 2005 issuance at a similar level to 2004, when $1.143 billion of new cat bonds were issued.

“Approximately $1 billion of bonds are scheduled for maturity in 2005”, say Swiss Re analysts in a recent study – Insurance-linked securities quarterly. “However, there is little doubt that 2005 new issuance will more than compensate” for these maturing bonds, they say.

Around $915 million of bonds matured in 2004, leaving a total of just over $3 billion outstanding in the secondary market.

Funding boost for emerging market SRI providers

Alois Flatz, the former head of research at SAM Group, has set up a not-for-profit organisation to promote sustainable investment in emerging markets. VantagePoint will provide advice and funding to local companies that “engage in sustainable investment services, including activities such as corporate governance, microfinance, research, rating, benchmarking, due diligence and indexing”. It will initially focus on Brazil, China, India and South Africa.

“I’m convinced that if we want to encourage sustainable development, we need to focus more on emerging markets,” says Flatz, VantagePoint president. “And there’s so much interest in emerging markets SRI.”

Australian states agree on ETS

The first ministers of all Australia’s states and territories have reached agreement on 10 design principles to underpin a planned national emissions trading scheme (ETS). States and territories have been working for several months on a proposal to introduce a national scheme jointly, despite the federal government’s steadfast refusal to implement a trading regime.

Any Australian scheme should adopt a cap-and-trade approach and should cover all six greenhouse gases under the Kyoto Protocol, a communiqué from the states and territories says.

The communiqué, released on 30 March, also noted that a national Australian scheme “could, in future, link Australia to international carbon markets”, and cites the EU’s recently launched ETS.

Corporate China shows tinge of green

Some of China’s biggest companies have surprised WWF by showing an unexpected level of commitment to environmental issues. A recent survey* carried out by the conservation NGO showed that a fifth of the 61 respondents are implementing tougher environmental standards than legally required.

“The survey shows that a significant group of Chinese companies are more environmentally aware than they are often portrayed,” says Peng Lei, of WWF’s trade and investment programme.

Noting that 13% of survey respondents would welcome stricter environmental regulation, WWF calls for the Chinese government to heed these demands and create financial incentives for leading companies to improve their performance.

* Chinese companies in the 21st century: Helping or destroying the planet?, WWF

CSR pays, sustainability less so, finds AMP

Companies rated highly for corporate social responsibility (CSR) clearly outperform those that are not, according to a study* from Sydney-based AMP Capital Investors. But the picture becomes murkier when an attempt is made to determine whether companies in more sustainable industry sectors outperform companies involved in less sustainable activities.

The study looked at the share performance of about 300 listed Australian companies between 31 December 1994 and 1 January 2005. It found that companies with a high CSR rating – based on an assessment of their relationship with employees, customers, shareholders and the environment – outperformed low-ranked companies by 4.8% a year over four years and 3.0% a year over 10 years.

However, AMP Capital found the performance of companies selected by ‘industry sustainability’ was less clear statistically and would require a longer-term study.

* Financial Payback from Environmental and Social Factors in Australia, AMP Capital

go to Features April 2005