Savvy investors don’t like polluting firms

I put up a rather dull post a few days ago showing how water restrictions were having some obvious market effects that would enhance water conservation. For example, households have incentives to invest using use grey water for their gardens or covers to prevent evaporation from their swimming pools.

More importantly concerns over high fuel prices and climate change are having intriguing effects on equity markets. The Bulletin (subscription only, 30/1/07) has a piece by Giles Parkinson ‘Emission Impossible’ (I’ll attach a link if one becomes available) arguing that savvy investors are avoiding companies that pollute.

For example Citygroup have slashed their valuation on BMW even though the firm has forecast a 20% increase in sales. The reason? BMW is heavily exposed to likely new carbon emission regulations. On the other hand firms like Peugeot Citroen, the ‘small car kings’ and firms like Toyota and Honda are being heavily backed because of their heavy investment in fuel-efficient technologies.

Concern for the environment is not only a moral issue – the big polluters are just high risk firms that are a bad bet for savvy investors..

Citigroup have just compiled a study on ‘Climate Change and the ASX’ which studies the implications of global heating for the 100 top ASX companies in Australia. The presumption is that 2007 will see a major turnaround in thinking on climate change – the IPCC release their 4th assessment report on February 2 – and markets will adjust accordingly.

The Australian Investor Group on Climate Change, which manage $200 billion, surveyed 150 local companies (report here) and got responses from 57%:

• 94% recognise the potential for climate change related issues to impact future earnings, liabilities or firm risk profiles.
• 83% recognise the physical risks associated with climate change (eg. drought, extreme weather events) that impact upon their businesses.
• 31% have established clear internal accountabilities for climate change.
• 9% fully disclosed their emissions profile from owned and controlled entities (including 3rd party verification).
• 9% have established formal GHG emission reduction targets with clear timelines.
• 9% provided total energy costs and demonstrated a clear understanding of potential impact on profitability of changes in energy pricing.
  

So what are the good and bad equity buys? Well of course you want to avoid stocks with heavy carbon imprints such as traditional energy stocks and choose those without. Citicorp’s rankings were:

• Possible winners: Investa Property, Origin Energy, Sims Group, Lend Lease, AGL, GPT Group, DB Reef, Macquarie Office, Stockland, AMP.
• 'At risk' stocks: Rio Tinto, OneSteel, Iluka, Bluescope Steel, BHP, Woodside, Transurban, Toll Holdings, Santos, QBE, Centro Properties.

I’ll leave you to ponder these using Google since my interest here is to show that this investment advice is being given rather than to help you make money.

Finally, Goldman Sachs has launched a mutual fund KLD Global Climate 100 index which selects firms which show leadership in handling climate risk and the ability to prosper in a carbon-constrained environment.

These are interesting developments. Consumers have incentives to avoid goods that they expect to be subject to hefty restrictions on use or carbon taxes. Investors with foresight have incentives to place low valuations on firms that produce such products and these low valuations restrict the ability to grow and expand.

Pursuit of the almighty buck helps to drive yet another socially worthwhile outcome.