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Climate Change: Investors' Next Global Mega-Trend?

Warning to U.S. companies: Just because national lawmakers are dawdling on global warming, don't think your business can dawdle, too. While U.S. policymakers are running in place on climate change, global investors are moving quickly to make money from its far-reaching risks and opportunities.
by Mindy S. LubberHarvard Business Review Posted on Aug 01, 2008

Warning to U.S. companies: Just because national lawmakers are dawdling on global warming, don't think your business can dawdle, too. While U.S. policymakers are running in place on climate change, global investors are moving quickly to make money from its far-reaching risks and opportunities.

One Wall Street firm is calling climate change the "next global mega-trend," after the opening of the Iron Curtain and the Internet revolution. Despite losses from the subprime debacle, European and US investment firms are ramping up their global warming research, trading desks, investments strategies and capital. Smart companies are readying themselves as these investors pour billions, and eventually trillions, of dollars, into businesses with new technologies and products that reduce global warming pollution.

Not surprisingly, European investors were the early adopters. Deutsche and HSBC are just two of the many mainstream EU firms that have ramped up their climate-related investments and begun offering carbon-sensitive investment products for large and small customers alike. "In a little more two years, we estimate retail customers all over the world have pumped $66 billion into the more than 200 newly launched mutual funds and exchange traded funds investing in companies that help to mitigate or adapt to climate change," wrote Kevin Parker, head of Deutsche Asset Management, in a Financial Times commentary in March.

And interest continues to grow -- just this week, HSBC announced a another new Global Climate Change Fund. But U.S. investment firms are catching on to the European trend quickly. We're now seeing a steady stream of Wall Street reports analyzing the business implication of climate change -- nearly 100 research reports in the last year alone. Virtually all have the same message: climate change will have far-reaching financial implications, creating both enormous risks and opportunities. Potential winners and losers from carbon-reducing regulations are an especially big focus. Others highlight water availability concerns in places such as China, Australia and the southwest U.S.

But reports are just one sign. U.S. firms are also jumping in with new investment vehicles geared to climate change solutions. Some funds are tapping energy efficiency, renewable energy, and other low-carbon technologies that stand to benefit as carbon regulations take hold worldwide. Among the funds that come to mind (and, please be aware, I am not endorsing either of them): Merrill Lynch launched an Energy Efficiency Index last summer made up of 40 global companies in the auto, building materials, capital goods and semiconductor sectors that are embracing improved energy efficiency. Merrill Lynch's analysts project that the global manufacturing industry could improve its energy efficiency by 18-26 percent overall (and at the same time reduce the sector's CO2 emissions by 19-32 percent). "Energy efficiency remains an area that is relatively unexplored," said Asari Efiong, a Merrill Lynch equity analyst.

KLD Research and Analytics launched a Global Climate 100 Index, a mix of 100 global companies selected for their involvement in renewable energy, future energy fuels, clean technology and energy efficiency. The index has posted a 57 percent return (17 percent annualized) since its launch three years ago.

So what does this all mean for companies? Everyday, more and more money is flowing towards businesses that are demonstrating an understanding of how climate change is impacting their business and are implementing actions to thrive in the new, carbon-constrained global economy. They are limiting their carbon exposure, maximizing energy use and evaluating products and supply chain impacts. And they're out-competing their dawdling peers in the increasingly competitive global market for capital and consumer dollars.

Mindy S. Lubber is president of Ceres, a leading U.S. coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change. Lubber also directs the Investor Network on Climate Risk, a network of 65 leading investors with collective assets totaling $5 trillion focused on the financial risks and opportunities from climate change.

Read the post at Harvard Business Review

Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the president of Ceres and a founding board member of the organization. She also directs Ceres’ Investor Network on Climate Risk (INCR), a group of 100 institutional investors managing nearly $10 trillion in assets focused on the business risks and opportunities of climate change. Mindy regularly speaks about corporate and investor sustainability issues to high-level leaders at the New York Stock Exchange, United Nations, World Economic Forum, Clinton Global Initiative, American Accounting Association, American Bar Association and more than 100 Fortune 500 firms. She has led negotiating teams of investors, NGOs and Fortune 500 company CEOs who have taken far-reaching positions on corporate practices to minimize carbon emissions, water use and other environmental impacts. She has briefed powerful corporate boards, from Nike to American Electric Power, on how climate change affects shareholder value.

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