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June 15, 2006
World Resources Institute and Citigroup Team Up to Report on Solutions to Climate Change
by Bill Baue
The report recommends a dozen companies poised to profit from a carbon-constrained future,
including Archer Daniels Midland, Caterpillar, Cypress Semiconductor, GE, Itron, Johnson Controls,
Monsanto, and Waste Management
SocialFunds.com --
Following up on its collaborative report with Merrill Lynch
(ticker: MER)
last year on how climate change will impact the auto sector, the World Resources Institute (WRI) has again paired with a Wall Street firm to
produce climate-related research. On Monday, Citigroup (C) and WRI released a report
entitled Investing in Solutions to Climate Change that identifies twelve companies set to
benefit from global warming by offering products and services in four areas of climate change
mitigation.
The report fits into a larger trend of mainstream financial firms producing
research on corporate social and environmental issues formerly addressed primarily by socially
responsible investing (SRI) analysts. However, the report's exclusive focus on climate issues
steers some of its findings outside the SRI umbrella, as some companies working proactively on
climate are also retroactive actors on other social and environmental issues elsewhere in their
businesses.
"I don't think this report is about SRI; it's about an environmental issue,
climate change, that is financially material issue to a number of sectors covered by Citi
analysts--both in terms of risk but also in terms of opportunities," said Fred Wellington, senior
financial analyst with WRI's capital
markets research team, who contributed to the report. "There is demand from the institutional
investor community for research that looks at how climate change can impact the bottom line of
companies."
"Citigroup is clearly a leader on a number of environmental issues," Mr.
Wellington told SocialFunds.com. "This report represents another area where they see competitive
advantage in integrating environmental issues into their business while meeting a demand from their
clients,"
The report identifies four areas companies are addressing climate change in
potentially profitable ways: improved energy conversion efficiencies; low-carbon energy conversion
technologies; carbon capture and storage; and displacing high-intensity with low-intensity carbon
sources. Citigroup analyst Peter Suozzo (who authored the report) then picks twelve companies with
strong performance in these areas where they are generating significant revenue, and explains each
company's "pick and shovel proposition" (or the tools it uses to mitigate climate change.)
Companies recommended including Archer Daniels Midland (ADM), Cypress Semiconductor (CY), Johnson
Controls (JCI),
Monsanto (MON),
Waste Management (WMI).
"For investors
looking for exposure to low-carbon technologies, large companies operating in growth areas can
offer stable upside potential, while small listed companies with proven technologies can offer more
'pure' exposure to trends toward carbon constraints," writes Mr. Suozzo.
For example,
Itron (ITRI)
makes radio-frequency-based automated meter reading (AMR) devices. In Itron's "pick and shovel"
section, Mr. Suozzo identifies how AMRs enable electric utilities to manage supply and demand more
efficiently and incentivize conservation by charging more for electricity at peak demand times. He
then provides numerous specific examples of how Itron uses its tools.
Mr. Suozzo is much
less expansive on explaining the environmental for investing in Caterpillar (CAT)--the "pick and shovel" section
is a mere two sentences long, explaining how Caterpillar produces low-emission diesel engines.
This is also an instance where a company's climate-related benefits may not outweigh its social
risks--in this instance, Caterpillar's refusal to address human rights concerns associated with the
use of its bulldozers by the Israel military to destroy Palestinian homesteads.
Indeed,
investors must weigh the degree to which the environmental benefits outlined in the report drive
business for the companies recommended. Mr. Suozzo admits as much in profile on General Electric
(GE).
"Because of the sheer size of GE's product portfolio, 'picks and shovels' climate technologies
are not significant enough to drive earnings and share price on their own," he writes.
"Nevertheless, GE is a significant beneficiary of regulatory and social trends, and no investor
interested in this area should overlook it."
After profiling the companies, the report
moves into what will likely constitute its "meat" for some readers--its overview of climate-rated
regulatory trends on the regional, national, and international sphere.
"The US, like
Australia, has passed no binding national legislation to reduce GHG emissions," writes Mr. Suozzo.
"Thus, the perception has arisen among investors that there is little activity related to climate
policy or regulation of GHGs in the US."
"While this may have been true some years ago,
there is sufficient activity at the current session of the US Congress, as well as at the state and
local level, to warrant investor attention," he adds. "A 'push-me-pull-you' dynamic is at work:
Society and some politicians are 'pushing' for regulation, while business is 'pulling' for
certainty and solutions."
The report outlines the various climate-related bills and
proposed legislation. These range from the "Strong Economy and Climate
Protection Act of 2006" introduced by Senator Feinstein (D-CA), which seeks to place market-based caps on GHG
emissions, to the "Keep America Competitive Global
Warming Policy Act of 2006" introduced by Representatives Udall (D-NM) and Petri (R-WI), which proposes a cap-and-trade framework.
While the report takes an ecumenical stance on the politics of climate change, it does seek to
inform investors of how climate-related regulations will impact business.
"Arguably, from
the standpoint of business, a comprehensive federal response to climate change is preferable to a
patchwork of state and local climate policies," write Mr. Suozzo. "However, precisely when the US
will reach this point is unclear."
©
SRI World Group, Inc. All Rights Reserved.
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