FXSTD – Alternative Energy Center

By: Sebastian Hays
Corporate response: Competitive response and risk management

Corporations are faced with meeting economic, environmental and social goals. There are two key ways in which corporations will respond within the economics of climate change:

· Competitive response and developing the opportunity set - mainly focuses on mitigation. Climate change becomes a focus of corporate attention and corporations launch new business opportunities;

· Risk management - mainly focuses on adaptation and corporate responsibility. Increasingly, markets will start to focus on the net carbon position of companies and businesses will integrate climate change risk into their policies and procedures.

Increased corporate focus on climate change

Over the past year, the public discourse on climate change has been active:

· In advance of the Bali conference, 150 leaders of global companies issued a communiqué underscoring the urgency of climate change action. The business leaders wrote that a legally binding UN agreement to reduce greenhouse gas emissions is necessary for businesses to make the right investments in clean technologies and infrastructure, and that an extended carbon market needs to be part of the framework because it allows for flexibility and a low-cost transition to a low-carbon economy;

· As businesses have advocated for a robust post-Kyoto agreement, companies are channelling funds towards increasing the supply of clean technology and investment in the sector has grown;

· Businesses also have been vocal at the G8, underscoring the need for a 'rapid and fundamental strategy to reach a low-carbon world economy' in a paper delivered to Prime Minister Fukada of Japan at the G8 meeting in Hokkaido-Toyako;

· A McKinsey survey reveals that 60% of global executives regard climate change as strategically important and a majority consider it important to product development, investment planning and brand management. 34% of executives in China, 37% of those in Europe and 40% of respondents in India report that their companies frequently or always consider climate change in overall strategy.

Competitive Response - Where are the opportunities?

Markets for climate change products and climate change-related businesses are growing fast:

· In 2007, there were nearly 500 Private Equity and Venture Capital deals in climate change - representing $13.5 billion of investment. This is up 46% from 2006;

· There were 1,900 Private Equity and Venture Capital investors in climate change in 2007;

· In 2007, Germany, China and the United States were the leading investors in new renewable energy capacity with $14 billion, $12 billion and $10 billion respectively;

· There are close to 300 mutual fund managers acting in the climate change space, along with a growing number of hedge funds and private equity managers;

· No less an oilman than T. Boone Pickens has announced plans to build 4 GW of wind capacity in Texas - and is running commercials promoting alternative energy;

· Renewable businesses are growing to scale. Iberdrola Renovables was the second biggest IPO of 2007 by funds raised, with a deal value of $6 billion - and the funds raised by IPOs for clean tech companies across the board increased by over 300%, from $7.5 billion in 2006 to $32 billion in 2007;

· As part of the Masdar Initiative, Abu Dhabi - an emirate that holds about 8% of the world's oil reserves - broke ground in 2008 on a revolutionary clean city. The broader initiative, which was launched in 2006, aims to promote energy efficiency and develop alternative sources of energy and $15 billion has been announced for new green investments;

· Alternative energy dominates capacity additions in some markets: wind made up 40% of newly installed electric power generation capacity in Europe in 2007;

· Estimates show that the global market for emissions trading will soon be worth $150 billion;

· Global investment in sustainable energy broke all previous records with $148.4 billion of new money raised in 2007, an increase of 60% over 2006;

· The IEA forecasts a massive scale-up of investment to $45 trillion in order to meet the joint objectives of build-out of the energy infrastructure and mitigation of climate change.

Risk Management - What are the risks and how are they being managed?

· The insurance industry has already begun to feel the effects of climate change and takes the issue seriously. In the US insurers have started to cancel homeowner policies in hurricane and wildfire risk areas;

· In 2007, a group of global insurers, re-insurers and brokers developed a set of 'ClimateWise' principles in response to global warming, designed to promote greener policies. The principles will enable companies throughout the world to build climate change into their business operations;

· Some insurance companies are already adjusting their products and services to suit emerging markets that have resulted from climate change such as weather risk, carbon trading and the clean technology industry;

· The Carbon Disclosure Project (CDP) operates to create lasting relationships between shareholders and corporations regarding implications for shareholder value and commercial operations presented by climate change. It represents 385 institutional investors with a combined $57.5 trillion of assets under management;

· A coalition in the US, led by Ceres, has encouraged improved climate change disclosure and governance at dozens of companies and has engaged with regulators such as the Securities and Exchange Commission by calling for publicly traded companies to assess and fully disclose their financial risks from climate change;

· We are seeing more attempts to measure the net carbon position of companies and then assess carbon risk or carbon beta.

In summary, Climate Change awareness and Clean Technology is here to stay, and is rapidly becoming a mainstream agenda item for most companies - regardless of the product, demographic, and sector.