A small but growing number of investors are starting to call on companies to act on climate change. Among the most prominent of these are pension funds.
Pension trustees have a legal responsibility to act in the best interests of policyholders, whose money they are investing for the long term. To ignore climate change could be to breach their fiduciary duties.
"Pension fund companies can see that if things continue as they are, they are going to be using pensioners' money to ruin the economy for pensioners," says Paul Dickinson, project manager of the Carbon Disclosure Project, a charitable foundation partially funded by the pensions industry.
The Project quizzes companies about the risks their businesses face from climate change and what they are doing about them.
Since 2000 it has sent four tranches of questionnaires to the world's largest companies, and each time more come back. Last September, 82 of the 100 largest companies quoted on the London Stock Exchange responded.
Some investment fund managers, particularly those with an environmental mandate, are starting to take carbon emissions seriously. Karina Litvack, head of socially responsible investing at F&C, says: "The frequency of severe events is increasing. Either insurance companies will pick up the cost, or companies will. Either way we are exposed."
Carbon Trading
F&C and a loose coalition of blue-chip companies are lobbying government for tighter regulation. They ultimately want to make burning fossil fuels so expensive that heavy investment in alternatives becomes desirable. According to the environmental consultancy Trucost, approximately 50% of the rise in European electricity prices is the result of the introduction of the EU Emissions Trading System (ETS) in January 2005.
The ETS caps the carbon emissions of the industries that pollute the most: electricity generation, pulp and paper, metals, oil and gas, bulk chemicals, and cement.
If companies exceed their cap they must offset the excess by buying credits representing carbon saved by other companies. Although some companies may not reduce their emissions because of the cap, overall emissions should fall as companies that can cut emissions cheaply do, and dirtier companies pay them.
Carbon Footprints
The amount of carbon dioxide a company emits by burning fossil fuels is known as its 'carbon footprint'. Emissions are most obvious for companies that consume coal, oil and gas directly, like power generators. But service companies are also indirectly dependent on carbon - through electricity and transportation, for example.
HSBC is one of a handful of large companies aiming to reduce its emissions - mathematically at least - to zero, at a cost of approximately $3.5 million a year. "We have effectively applied an additional tax to the business," says Francis Sullivan, an adviser to HSBC on the environment. "Taxes change behaviour. By applying a voluntary tax on the business it makes us look at the offices, the real estate and the cars we buy."
Low-carbon Contracts
BT has a larger problem. Because it runs the telephone network it pays one of the nation's biggest corporate electricity bills. Instead of offsetting its emissions, BT has negotiated the world's biggest low-carbon energy contract.
Half of BT's power comes from renewable energy sources, and the other half from combined heat and power, which is more efficient than conventional power generation. The result is a 60% reduction in the company's carbon footprint.
BT is considering offsetting the remaining 40%, although Dr Chris Tuppen, head of sustainable development and corporate accountability at BT, says: "If everyone seeks to solve carbon issues by buying offsets, it's going to work." So BT is now experimenting with small wind turbines on exchanges, installing more efficient equipment, and developing climate-friendly products and services.
Other opportunities abound. Video conferencing reduces the need for executives to fly, for example, saving on fuel costs and pollution. But at the moment companies buy it because it boosts productivity, not to reduce their carbon footprint.
Low-carbon Funds
Measuring a company's carbon emissions per pound or dollar of turnover allows investors to compare the exposure of companies to the cost of carbon. Trucost has ranked 44 UK investment funds based on the footprints of the companies they invest in.
It found that funds with a socially responsible mandate generally have smaller footprints, but there are no guarantees. Jupiter Environmental Income is only average, for example, and Old Mutual Ethical fund is ranked 40th - its footprint is more than four times the size of the diminutive Scottish Widows Environmental Investor. Fourth-ranked Lazard UK Alpha is a mainstream UK fund.
Trucost claims that low-carbon funds performed just as well as the rest over the last three years, so private investors can choose funds that minimise environmental impact without sacrificing returns.
Mike Appleby, an analyst at Morley Fund Management, which manages Norwich Union's Sustainable Future funds, claims that a focus on climate change gives funds "a competitive advantage that will lead to outperformance". So it makes financial, not just environmental sense.
Perseverance pays
Private investors have found capitalising on climate change more tricky. Low-carbon investments can be synonymous with relatively risky high-technology funds like Merrill Lynch New Energy Technology and Impax Environmental Markets. At times these investment trusts have been highly profitable, but it's a roller-coaster ride. Nevertheless, investors may find perseverance pays off.
HSBC's Francis Sullivan says: "Climate change is going to be a major challenge in the decades ahead. We need to adapt to it. Companies and economies that get it wrong are going to be punished. But those that get it right are going to be winners."
