It pays off to be seen as green

West Australian
Wednesday 1/11/2006, Page: 53

With a carbon tax a strong possibility, investors are favouring companies that are well prepared for climate change

Renewable energy companies are poised for growth as Australian investors wise up to the economic implications of climate change and the increasing likelihood of carbon emission regulation.

AMP chief economist Shane Oliver said it was inevitable that Australia would have some form of restrictions on carbon emissions, either in the form of a tax or a carbon trading system within five years.

"If you are prepared to take a five year view then solar and wind power companies or companies based around biofuels should do pretty well, not so much because they will be subsidised but because the cost to the consumer will go up as restrictions on carbon usage start to kick in," he said.

Traditional power stations, airlines, transport and oil companies are among the industries to be hardest hit if carbon control was implemented.

Dr Oliver said investors were already beginning to discriminate between companies that were well prepared for climate change and the ones that were not.

"Investors will want to know those companies that are less well prepared or are heavily exposed to climate change and those companies will see their share price underperform relative to companies that have started adjusting or finding ways of mitigating the problem," Dr Oliver said.

A recent survey co-sponsored by Goldman Sachs JBWere, of the S&PASX 100 listed companies has revealed 94 per cent of respondents thought that climate change was going to have a material effect on their earnings.

Portfolio Partners manager of sustainablity Amanda McCluskey said gas and LNG producers would be the first to benefit from growing awareness of climate change whereas low carbon fuel producers and renewable energy producers would benefit over the medium to long term.

Ms McCluskey said companies such as AGL, Woodside, Origin Energy and Energy Developments would gain in a new low carbon framework whereas companies involved in metal smelting and building materials faced downside risk.

More speculative investments such as geothermal energy company, Geodynamics and carbon offset firm, C02 Australia, also offer long-term investment opportunities.

Ms McCluskey warned against immediate reweighting of portfolios.

"From an investor's perspective, to put too much into these sectors is fraught with risk, that being regulatory uncertainty," she said. "Anybody who invested in biofuels would know the regulatory risk associated as government's flip-flop around." Policies such as the Victorian Government's move to supply 10 per cent of households with alternative energy by 2016 and the Federal Government funding of the construction of the world's biggest solar plant and a brown coal drying and carbon capture pilot project are considered harbingers of a fundamental shift on climate change.

Global warming is increasingly under the spotlight. On Monday World Bank chief economist Sir Nicholas Stern launched a damning report about the economic impact of climate change, which estimates that climate change could shrink the global economy by 20 per cent.

The report coincided with United Nations figures showing greenhouse gas emissions were increasing.