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Climate Action 2010-2011

Finance and Markets

Finance and Markets Figure 1: Global GHG abatement cost curve beyond business-as-usual (v2.1) – 2030. to comments made publically by GE’s CEO Jeff Immelt last June, Ecomagination is now one of the company’s most successful business initiatives, with revenues from its portfolio of energy efficient and environmentally beneficial products and services crossing the US$18 billion mark in 2009 alone. Central to GE’s success has been the strength of its commitment. Crucially, this goes beyond the sums invested and is reflected moreover in the fact that Ecomagination is a core, cross-company strategy. Without doubt this is the thread that ties together those companies making the best of the low-carbon opportunities at hand. At BMW for example, its ‘EfficientDynamics’ initiative has improved fuel efficiency across all its vehicles since its introduction in 2002. As a result of early and comprehensive action, BMW ranks top among major manufacturers in terms of the speed at which it has improved the average carbon efficiency of vehicles sold, according to research from the European Federation for Transport and Environment. This stands the company in good stead for cost-effectively meeting stringent carbon emission regulations now present across its key automobile markets. Analysis from Liberum Capital, for example, estimates that BMW will spend less than half the annual amount to meet the European Specific Emissions Targets from 2012 when compared to competitors such as Daimler. Doing more with less – a blue-chip focus on energy efficiency It is perhaps no surprise that in sizing up the lowcarbon economy, blue-chip companies have focused predominantly on lower-risk market opportunities related | 116 | to energy efficiency. Associated products and services typically offer customers relatively short pay-back periods where fuel savings outweigh capital investment costs, known as ‘negative abatement cost’ solutions. Indeed a report from HSBC’s Climate Change Centre of Excellence recently noted that whereas the dominant feature of the low-carbon economy to-date has been a focus on altering the energy mix, energy efficiency will be the single largest investment opportunity by 2020 as government policies increasingly look towards improvements in the energy efficiency of buildings, industry and transport. This, they estimate, is a market set to grow at a compounded annual growth rate of 12 per cent to 2020, by which time it would reach a market size of US$1.2 trillion. As ‘win-win’ investments that reduce both energy costs and climate impacts, growth opportunities within this sector don’t rely solely on the appetite to tackle climate change. Rather, such solutions offer a number of ‘wins’ to related but separate concerns such as energy price volatility and energy security. ‘Smart-grid’ infrastructures that optimise the delivery of electricity provide a further example of this. IT giants such as IBM, Cisco and Oracle now market solutions to support a mass roll-out of Smart infrastructures, as are electric transmission and distribution specialists such as Schneider Electric and ABB. Moving to the next phase of green growth In view of this, the challenge for policy makers must therefore be to ensure the safe passage of projects that initially have a positive abatement cost – where investment costs are outweighed by cost savings. www.climateactionprogramme.org

Finance and Markets McKinsey & Company highlight such projects on righthand side of their often-cited ‘abatement cost curve’ as seen above. Not only are these projects necessary in order to meet suitably ambitious carbon reduction targets but many projects on this end of the scale are motivated solely on the grounds of mitigating climate change. Installing commercial-scale Carbon Capture and Storage (CCS) equipment is one such example. It is therefore essential businesses have the appropriate signals to continue investing in low-carbon solutions from governments around the globe as the ‘win-win’ opportunities subside. With the seeds of a low-carbon economy coming to fruition, the emergence of global market leaders for low-carbon solutions is welcome news for investors. the Carbon Disclosure Project (CDP) – now a key source of information for investors on climate-related corporate risk and opportunity profiles. More recently, in July this year we joined organisations including Microsoft, Siemens and BT in signing an open letter from the Aldersgate Group to UK Government ministers arguing that “a clearer, stronger signal is needed now for the introduction of mandatory carbon reporting in the UK that is consistent with international standards”. Chief amongst the arguments for this measure is that mandatory carbon reporting would go a long way to providing investors with a fuller picture of companies’ material climate risks and opportunities. Given the emergence of low-carbon growth within major corporations, as well as the successes of voluntary reporting schemes such as the CDP, we remain optimistic that large companies will play an integral role in tackling climate change. [Additional research provided by Jonathan Wallace.] Large sections of the investment community lend their support in this regard. The Investor Statement on a Global Agreement on Climate Change, which Jupiter signed in 2008, concludes that clear, credible, long-term policy signals are critical for investors to integrate climate change considerations into their decision-making process, and to support investment flows into a low-carbon economy. Progress towards an historic and ambitious global agreement on climate change would undoubtedly send the right signal. However, a continuation of the strong progress we have seen at national and regional levels of government is equally crucial. Backing the best throughout With the seeds of a low-carbon economy coming to fruition, the emergence of global market leaders for low-carbon solutions is welcome news for investors such as ourselves who seek to identify and invest in long-term outperformers. At Jupiter, we believe that a valuable signal of this rests in how fully companies understand and act appropriately on both the risks and opportunities associated with the transition to a low-carbon economy. This requires an ‘engaged’ approach to investment decision making whereby the right questions are asked of a company’s strategic positioning around climate change and wider sustainability issues. This dialogue is naturally set within the practicalities of companies’ operations and – in the same fashion as the approach taken within corporate leaders such as GE and BMW – is an increasingly integral part of investment research and decision-making. To support us in our aim of generating strong returns for our investors, we are also taking a pro-active and vocal stance in advocating best-practice in corporate reporting around climate change. Jupiter is a founding signatory of Emma Howard Boyd is a Director of Jupiter Asset Management and Head of Sustainable Investment and Governance. She is also a Senior Associate of the University of Cambridge’s Programme for Sustainability Leadership, a Director of Triodos Renewables Plc, and an Executive Board Member for the Accounting for Sustainability Project. She was founding Chair of Eurosif, the European Sustainable and Responsible Investment Forum, from its launch until the end of 2002, and was also Chair of UKSIF, the sustainable investment and finance association until March 2006. Launched in 1985 as a specialist boutique, Jupiter has grown to be one of the UK’s most successful and respected investment management groups. We currently manage assets spread across a range of UK and offshore mutual funds, multi-manager products, hedge funds, institutional mandates and investment companies. Jupiter has gained a reputation for achieving outperformance across a broad variety of portfolios specialising in different markets, including UK equities, Europe, global financials and emerging Europe. Jupiter Asset Management 1 Grosvenor Place London SW1X 7JJ UK Tel: +44 (0)207 412 0703 Fax: +44 (0)20 7412 0705 Email: sri.dept@jupiter-group.co.uk Website: www.jupiteronline.co.uk www.climateactionprogramme.org | 117 |