Profiting from Climate Change

July 12, 2005

An emerging consensus agrees that the world must take steps to reduce emissions of greenhouse gases; KLD’s new index tracks the companies that will profit from the effort.

At the G-8 summit meeting in Gleneagles, Scotland, last week, President Bush finally admitted the connection between human activity and global warming. He did it reluctantly, and with caveats a-plenty; but he did it nonetheless.  And with that admission, he set in motion a series of steps that will eventually lead to caps and cuts in the global emission of greenhouse gases.  They will be limited at first, but they are now inevitable.  Companies that are prepared for this reality - and companies that develop technologies that will let us reduce greenhouse gas emissions on the cheap - will prosper.

To capture that opportunity, KLD Research & Analytics - the company famous for developing the first socially-responsible investing (SRI) index - launched a new index last week focused on companies creating solutions to the problem of climate change.  The launch of the KLD Global Climate 100 Index actually came before the G-8 summit, on July 6, but the timing was too sweet to be a coincidence.

"The Global Climate 100 includes companies making meaningful contributions to the commercialization of renewable energies such as solar and wind, future fuels such as natural gas and hydrogen, and innovations or applications of new technologies that help to reduce emissions of greenhouse gases," said Peter D. Kinder, founder and president of KLD Research & Analytics, Inc. "These companies alone won't 'fix' global warming, but the Index focuses investors' attention on where the possibilities lie."

The index includes a number of predictable choices - such as FPL Group, the largest producer of wind energy in the United States - as well as some surprises, such as Johnson & Johnson, which KLD says is the largest corporate user of renewable energy in America.  The index is equal-weighted to prevent large-cap companies like Johnson & Johnson from overwhelming the small-cap pure-plays. 

"Pension funds are concerned about the financial risks associated with climate change," said Tom Kuh, director of research at KLD. "As fiduciaries with a long time horizon, they are looking for new strategies to integrate these factors into their investments. The Global Climate 100 looks ahead to show investors where the opportunities to address global warming will come from."

Already this year, the California state retirement system for public employees (CalPERS) and teachers (CalSTERS) committed $1.5 billion to investments in innovative and responsible environmental companies.

Many of the companies in the index - such as British Petroleum and General Electric - have been among a vanguard of companies looking to leapfrog the regulatory process by cutting greenhouse gas emissions and create new environmental technologies before any global caps are put in place.  These companies figure that it will be easily and less expensive to lead the rush to reduce greenhouse gas emissions than to be dragged into it by regulation, and they might be right.  Already, markets are emerging in both the U.S. and Europe to trade carbon dioxide "credits" like a commodity, and companies with credits to sell stand to make a nice profit.

More Diversified Than The Competition

KLD calls the Global Climate 100 the "first global index focused on climate change," and to a certain extent that's true; the index is unique in including companies taking a wide array of approaches to solving the problem of climate change.  But the index shares much in common with the recently launched WilderHill Clean Energy Index, which forms the basis for an exchange-traded fund (ETF) from Powershares Capital Management.  That index focuses exclusively on companies working to develop renewable energies.

What further distinguishes the KLD index is that it is designed to serve the needs of institutional investors, and as such, offers broad sector diversification and a good sampling of blue-chip names.  General Electric, J&J, BP, UPS and Toyota all merit inclusion in the index, with a diversified sector representation as show below.  In theory, an investor could develop a fairly diversified portfolio featuring only companies in the Global Climate Index.

 

Sector Diversification.

Basic Materials

4%

Communications

1%

Consumer, Cyclical

12%

Consumer, Non-cyclical

1%

Energy

13%

Financial

4%

Industrial

30%

Technology

4%

Utilities

31%

 

One potentially controversial decision for the index is that it does not include companies involved in nuclear power, despite the fact that nuclear power does not produce greenhouse gases.  SRI has long excluded nuclear companies from all of its portfolios, arguing that the dangerous wastes created by the process outweigh the pollution-reducing benefits of the technology.  That remains a contentious point in some parts of the environmental lobby, but here, KLD is sticking to its roots.

 

 

 

 

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