Warming could throw cold water on returns

The Age
October 29, 2006

GLOBAL warming is no longer a fringe environmental issue but one that could soon have serious implications for investment returns. This is according to a group of mainstream institutional investors who are pushing companies to deal with the risks and opportunities a warmer climate holds.

They say climate change has the potential to affect the future earnings, liabilities and general risk profiles of thousands of companies.

"What this means is that anyone with money (to invest) needs to know if a company has a plan to tackle the risks involved in climate change," said Corin Millais, chief executive of the Climate Institute.

The Investor Group on Climate Change, which represents 16 mainstream institutional investors with more than $195 billion funds under management, recently surveyed most of Australia's and New Zealand's largest companies.

While 94 per cent of companies recognise the potential for climate-related issues to affect earnings and liabilities, only 9 per cent have a fully disclosed emissions trading profile. Three per cent are actively trading emissions, 19 per cent are engaged in limited trading and 17 per cent are considering a strategy.

Andrew Gray is head of quantitative research at Goldman Sachs JBWere, which co-sponsored the report. He said it was intended to encourage companies to reveal how they were dealing with climate change to allow potential investors to make informed decisions.

"Clearly there are impacts in terms of profitability and risk profile," Mr Gray said. "Investors use price to earnings, or various other measures, to assess whether to invest in a company. This study allows them to measure any potential impact from climate change.

"How companies manage risk or take opportunities could have a direct impact on their profit and loss, revenue and costs going forward. Future earnings is a key factor that investors need to consider, so the extent climate change will impact that is a potentially relevant consideration."

Although the Federal Government has so far refused to introduce a system of carbon trading similar to the $30 billion European scheme, AMP Capital's head of investment strategy Shane Oliver reckons it's only a matter of time, with some states already adopting their own system.

"To get a reduction in carbon emissions, you need to put a price on emissions and that's what carbon trading is attempting to do," Mr Oliver said. "The bottom line is, the cost of dirty energy will go up in time, which in turn would make cleaner technologies more competitive in the marketplace."

Mr Oliver said investors should look towards low carbon producing companies, such as wind farms and solar energy businesses, particularly now that the Victorian Government has set a target of alternative energy supplying 10 per cent of household needs by 2016.

"It is important for investors to be aware of the risk companies are facing and those companies that are taking action or are aware of the problem will probably do quite well," he said.

"For retail investors it's just a matter of being aware of what companies are doing and … staying away from the companies which are carrying on regardless of the problem."

The companies that are taking action on climate change*

• Banks: ANZ, NAB, Westpac
• Construction materials: Boral
• Energy: Origin Energy
• Food: Goldman Fielder, Lion Nathan
• Health care: DCA Group, Symbion Health
• Leisure: Tabcorp Holdings
• Industrials: Transurban
• Information technology: Computershare
• Insurance: IAG
• Metals and Mining: BHP Billiton, Rio Tinto
• Property trusts: GPT Group, Investa, Mirvac
• Retail: Warehouse Group
• Telecommunications: Telstra
• Utilities: AGL

Source: Carbon Disclosure Project, based on self-disclosure

* Only top three included