Financial services – Banking on climate change’s consequences

By Mike Scott

Financial services providers are now addressing what climate change means for their businesses and providing risk assessment advice for their clients

Climate change has taken centre stage in the finance world, as bankers focus on its implications. In a flurry of research, Citigroup, Lehman Brothers, UBS and Merrill Lynch have all published major reports on the issue in the last six months.

There is a remarkable consensus in the documents – climate change is on the agenda for governments, regulators, consumers and businesses and this is creating some major risks, but also opportunities.

Physical threats, such as increased droughts, more frequent and more intense storms and a general trend towards warmer winters and hotter summers will boost the income of water suppliers, as well as insurance companies, as premiums go up.

Increased biofuels production promises growth for farm equipment companies and agricultural biotech groups.

Merrill warns that regulation is coming, and businesses will be rewarded for being proactive. Increased regulation will boost renewable energy suppliers, companies focused on energy efficiency and green buildings, and car companies offering hybrid cars.

Moves by companies to change their behaviour will create a boom for climate consultancy services and those involved in carbon trading.

The winners

In “Climatic Consequences: Investment Implications of a Changing Climate”, Citigroup’s Edward Kerschner and Michael Geraghty highlight 74 companies across 21 industries and in 18 countries that seem well positioned to benefit from climate change.

These range from Spanish water group Aguas de Barcelona, which is likely to benefit from an increase in drought conditions in Spain, to Deere, the US maker of farm equipment that is likely to benefit from higher crop prices and the drive to produce more biofuels.

There will be an increased momentum to cut emissions from cars, and this will boost carmakers such as Toyota, with its hybrid technology, Honda and Peugeot Citroen, which are introducing advanced diesel technology. Also likely to benefit will be parts makers such as BorgWarner (fuel efficiency) and Magna International (vehicle load reduction).

Citi says clean power companies, including nuclear power groups such as EdF, Gazprom, the sole exporter of Russian natural gas to Europe, along with wind and solar power groups, are well placed to profit from the changes climate change will bring.

Companies involved in boosting energy efficiency, such as Itron, Siemens and Johnson Controls, are likely to benefit from changes in regulation.

Climate chemistry

Biofuels groups in the US and Brazil, as well as chemicals companies such as DuPont, Monsanto and Syngenta that are looking at ways to improve yields will be part of the solution to vehicle emissions.

The growing number of companies able to generate emissions reduction credits will benefit from increased regulation and the growth of the carbon markets. This is also going to provide a fillip to those that service the carbon markets, such as the Chicago Mercantile Exchange, AIG and Swiss Re.


"Climate change is on the agenda for governments, regulators, consumers and businesses and this is creating some major risks, but also opportunities"


Zoe Knight, head of SRI research at Merrill Lynch, says in “Combating Climate Change – Opportunities and Risks” that tackling environmental challenges will allow all businesses to cut energy and transport costs and minimise the risks of disruption to their supply chains and workforce. But they can also come up with new products and set the agenda on regulations and policies such as the upcoming carbon trading schemes in the US.

Legislation is likely to get tougher and affect a wider variety of sectors, she adds. As quantifying and publicising emissions data becomes the standard, investors will judge companies on new environmental valuation measures such as revenues per tonne of CO₂.

Owning up on emissions

All the reports highlight the importance of the Carbon Disclosure Project, which comprises 280 investors with $41 trillion assets under management asking for information on emissions from 2,400 companies around the world.

The UBS report, “Climate Change: Beyond Whether”, is slightly more cerebral than the others, with contributions from leading scientists and environmental figures such as Amory Lovins of the Rocky Mountains Institute and Dieter Imboden, president, Research Council of the Swiss National Science Foundation. “Ultimately, the risks of climate change are tied to the world’s approach to energy use,” the report says.

Imboden outlines the concept of the “2,000 Watt Society”, which maintains that a country like Switzerland can survive on energy use of 2,000 watts per capita while still enjoying uninterrupted economic growth and an equivalent quality of life.

To put this in context, he says, per capita energy consumption in Africa is 500 watts, in western Europe it is 6,000 watts, and in the US it is 12,000 watts.

To reach this target, energy demand, particularly in developed countries, will have to be cut and fossil fuels will have to be replaced by renewable energies. UBS admits the concept is “somewhat utopian”.

But Lovins highlights a theme that runs through UBS’s analysis: “The technologies that are already on the market offer everything we need and more, to reduce greenhouse gas emissions dramatically.”

Meanwhile, Lehman’s John Llewellyn, in “The Business of Climate Change: Challenges and Opportunities”, says businesses need to develop new products and services that tackle climate change and introduce energy-efficient processes, which will give them a cost advantage over their rivals.

Merrill’s Knight concludes, optimistically: “What has changed of late in our view is that the benefits of addressing environmental issues … are beginning to outweigh the costs.”

Lehman’s dour conclusion is that if companies do not adapt to climate change, they may well not survive.

And ultimately, what is bad for business is bad for their bankers.