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Is Climate Change the Next Big Investment Opportunity?
Joel Makower, 20 Jun 06

Here's an inconvenient truth: For all the handwringing over the negative bottom-line impacts of climate change for most companies, a handful of large corporate interests may come out winners, creating potentially profitable opportunities for forward-thinking investors.

To be sure, such proclamations border on the Pollyannish, but they're real. Or so says Citigroup Investment Research, in partnership with the World Resources Institute's Capital Markets Research Team, in a just-published investment advisory, Investing in Solutions to Climate Change.

"Wall Street tends to focus on the negative effects of climate change issues on companies: Utilities must adopt cleaner technology and reduce emissions, leading to higher costs; domestic automobile manufacturers are pressed to meet cleaner-air standards, possibly putting jobs in jeopardy," the authors write. And while there appears to be little going on at the federal level to address climate change, there is "notable activity" in the current Congress, and a great deal of activity going on at the state and local levels. "Neither has received much attention," they point out.

They add:

While there are companies that will suffer from climate policy changes, there are companies that will benefit as well. Someone must sell the products and services that will help companies meet, say, emissions targets should they become law; and companies are clearly responding to perceived public demand that they address environmental issues (viz. GE's "Ecomagination" campaign.) Which companies can benefit from these trends?

The report names twelve, and profiles each of them. In a nutshell, they include:

  • Archer Daniels Midland - the largest U.S. investor in ethanol, a clean-burning, high-octane fuel.

  • Caterpillar - produces low-emission diesel engines for trucks, clean gas turbines for power generations, and has a substantial parts recycling and remanufacturing business.

  • Cypress Semiconductor - supplies the solar power industry via its Sunpower subsidiary.

  • Eaton Corp. - produces a hybrid diesel-electric truck powertrain, currently being tested by Federal Express.

  • General Electric - produces a range of products and services that enable climate change mitigation, including wind turbines, hybrid rail engines, and lightweight composites, among many other things.

  • Hydrogenics - involved in the commercialization of hydrogen and fuel cell technology.

  • Itron - its remote control automated meter readers provide utilities cost savings and improve reliability of the power grid.

  • Johnson Controls - the largest provider of facilities management services to the Fortune 500, focusing on services for comfort and energy efficiency.

  • Kinder Morgan Energy Partners - it stores and transports carbon dioxide for enhanced oil recovery operations, enabling it to take the lead on carbon capture and sequestration.

  • Magna International - makes lightweight, high-strength auto body parts that can help improve vehicle fuel efficiency.

  • Monsanto - focuses on agricultural productivity, including technology to increase the corn yield per acre, a boon to ethanol production.

  • Waste Management - its Wheelabrator division generates energy from landfill gases and independent power plants, converting methane, a potent greenhouse gas, into electricity.

Keep in mind that this is by no means a list of "sustainable" companies -- only those that stand to profit from the transition to a carbon-constrained economy. And it's far from a complete list: almost any renewable energy company could have been included here, not to mention dozens of companies focusing on energy efficiency, grid optimization, waste management, and other resource-efficient businesses.

And Citigroup and WRI gloss over some big hairy questions: How might catastrophic weather disrupt some of these companies' operations? (For example, Dupont, another company that has set its sights on sustainability-minded products and services, suffered $150 million in damages incurred from Hurricanes Katrina and Rita.) What about the impacts of drought on water-intensive manufacturing processes? Or shutdowns from rolling brownouts resulting from peak energy use during heat waves? Such scenarios aren't addressed.

Still, the report is instructive. The detailed analyses it provides of each of these companies' abilities to cash in on their respective technologies -- improving energy conversion efficiencies, scaling up low-carbon energy technologies, introducing carbon capture and storage, and displacing high-intensity with low-intensity carbon sources -- affords us a window on a more sustainable economy. And it can help everyone -- investors, corporate executives, job seekers, and others -- assess how, and how well, certain companies are poised to survive and thrive in a climate-changed future.

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From something I wrote a while back which may be apt:

We have about 30 quadrillion dollars of capital in the world, of which almost all is black capital. Our problem is that we need to turn black capital into green capital, without losing capital in the process. If the conversion process is inefficient - say 30% of the capital gets lost in the transformation - people will resist the transformation because it will make them all poorer. If moving from coal to wind wipes out 30% of your assets, few will do it, and the ones who do will have lost our economic game in the process.

Posted by: Vinay Gupta on 20 Jun 06

Vinay, thanks for your comments. I read your blog. Is this why so little has been done with RMI's "Winning the OilEndgame" and "Small is Profitable"? (great ideas by the way, they just don't seem to have gained much traction).

Posted by: JN2 on 22 Jun 06

Thanks, John!

I think that a lot *has* happened because of WTOEG and SIP. Small is Profitable is going to take a *long* time to really be visible as a turning point - the investment cycles are so incredibly slow in the power industry that it will probably take a generation before we see gross changes, and SIP will be responsible for those changes only as one catalytic factor among many. At the end of the day it's a book for power company executives.

WTOEG however, was almost certainly critical in legitimizing vehicle efficiency and no-more-oil thinking to the point where President Bush could say "America is Addicted to Oil" in the State of the Union and not cause a stampede at the door. I think the ideas have gained enormous currency and traction.

Yes, a lot more could be done, but what do you expect from the Republicans? It's not until we see a greener government that we'll really see the agenda in WTOEG rolling out, imho.

Two more years I hope! In the mean time, the car companies can be getting ready, right? :)

ciao, vg.

Posted by: Vinay Gupta on 22 Jun 06

I am also part of a renewable energy company as my regular (thats the 9 to 5-er job)in the Philippines. Although RE is a bit slow in these countries, we are proud to say that we ar slowly achieving what we planned to do. We will begin constructing cogeneration and ethanol plants in our project sites. People are getting interested in us. People want to get in (even if its the bandwagon mentality) and get involved. I think that if we can sustain their interest, if we can show them that these things really work, its all for the benefit of the environment.

So yes, investing in renewables is the way to go!

Posted by: reden on 22 Jun 06



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