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November 15, 2007

Launch of Five Climate Change Funds May Enrich Investors, But Won't Save the World
    by Bill Baue

Deutsche Bank, F&C, HSBC, Schroders, and Virgin Money launch climate funds, a trend that validates the role of finance in addressing--though not solving--global warming. -- If once is an accident, twice a coincidence, and thrice a pattern, then climate change investment funds represent a burgeoning trend, as recent months have seen the advent or announcement of at least five.

And not just from firms with a deep history of socially responsible investing (SRI) such as F&C, but also from more mainstream firms such as HSBC, Schroders, Virgin Money, and Deutsche Bank. Indeed, Deutsche Asset Management has jumped into climate investing with both feet, issuing a white paper on the topic and appointing Mark Fulton as climate change strategist last month.

Dual drivers fuel this trend. First, there has been a sea change in environmental concern. Intergovernmental Panel on Climate Change scientist Tim Flannery recently revealed that the IPCC Fourth Assessment Report (due out November 17) finds that we reached atmospheric concentrations of carbon dioxide equivalents of 455 parts per million in 2005, a decade sooner than forecasted.

According to the May 2007 IPCC Summary for Policymakers (specifically Table SPM.5), scientific scenarios predict that a level of 455ppm of CO2e will raise global temperatures beyond two degrees centigrade--widely considered a point of no return for triggering runaway global warming.

Second, ironically enough, there is profit to be made from climate change. The recent �Carbon Beta� study from Innovest Strategic Value Advisors shows that companies minimizing risks and seizing opportunities associated with climate change financially out-performed their same sector peers over the past three years--with the premium growing over time as carbon regulations tighten around the world.

The Deutsche paper suggests three tacks investors can take on climate change: accept the science and seize the opportunity; maintain skepticism or even ignore the issue; or practice climate investing whether you believe the science or not, seeing as companies and regulators are convinced enough to act now.

While climate change funds show some promise of delivering profits, they are not a panacea for the climate crisis, according to industry experts.

�The launch of these funds shows that investors are willing to play their part in mitigating and adapting to climate change, but they are only a first step,� said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk (INCR).

Joel Makower, executive editor of and co-founder of Clean Edge, agrees.

�These funds� purpose--to profit from companies that can capture the opportunities inherent in a carbon-constrained world, from energy efficiency to renewable energy to carbon trading, offsets, and sequestration--is all good,� Makower told �But investors should understand that their money isn't going to much affect the atmosphere's growing concentration of greenhouse gases--at least, not any time soon.�

The onus for reducing climate-changing pollution falls on government.

�To enable the investment community to reduce climate risks and capture opportunities, there is an urgent need for the US government to enact mandatory national policy that will stabilize and then reduce national greenhouse gas emissions economy-wide,� Lubber told Congress is currently considering several carbon cap-and-trade bills, and President George Bush is telegraphing that he may refrain from vetoing some. Today, Ceres sent a letter to Senate and House leaders signed by 29 institutional investors and fund managers with over $1.4 trillion in assets under management urging Congress to pass a national energy bill that includes strong measures for expanding clean energy, reducing oil dependence, and curbing global warming pollution.

The climate funds are screening in companies that are preparing for a tighter regulatory environment, which �stand to achieve a strong, competitive and sustainable advantage,� according to material accompanying the September launch of the Schroders Global Climate Change Fund.

F&C, which launched its Global Climate Opportunities Fund in September, brought governmental expertise on board by adding Vicki Bakhshi, a former climate change policy adviser to British Prime Minister Tony Blair and a former senior researcher on the Stern Review on the Economics of Climate Change.

Also in September, HSBC launched its Global Climate Change Benchmark Index, to join the KLD Global Climate Leaders Index and a slew of clean energy indexes. This month, HSBC launched its Climate Change Funds, which of course tracks the index.

Unsurprisingly, clean energy and energy efficiency and conservation play a key role in the new climate funds. However, just as these funds will likely have only a minor impact on diverting global warming, so too will they have only a limited impact of clean energy markets.

�There is a wall of money washing into clean energy--$100 billion this year, up from less than $30 billion three years ago--and the market value of the clean energy industry and existing clean energy generating and refining assets is in the order of $500 billion,� said Michael Liebreich, CEO of UK-based New Energy Finance, a clean energy research firm. �So from a pure liquidity perspective, a billion or two more flowing into the industry is not very significant--it isn't going to change the nature of the game.�

�What is significant is that it is part of a trend whereby different types of investors are being brought into the sector, which educates people and diversifies the investor base,� Liebreich told �This is very significant--three years ago we couldn't even get a meeting with most of the companies that are launching these funds, which all now suddenly want to be seen as pioneers.�

Richard Branson last year pledged $3 billion to pioneer new biofuels, so it should come as no surprise that in January 2008, the Money arm of his Virgin empire will launch a Climate Change Leaders Fund based on screens from UK-based environmental research firm Trucost.

The launch of the Global Climate Change Fund by DWS Scudder, the US retail investment arm of Deutsche Asset Management, represents just one element of the firm�s overarching climate change strategy, on which it has invested nearly �6 billion since 2006. Interestingly, Deutsche implicitly acknowledges that we may be too late to mitigate climate change, and so it discusses adaptation strategies such as water purification and disaster control.

It is particularly sobering to contemplate ways to profit from our collective failure to avoid climate change, though it is heartening to see investment firms finally tackling the issue.

�My sense--certainly over the time-frame before I shuffle off my mortal coil--is that we will see a lot of irreversible regional impacts, some pleasant, most unpleasant, and some downright tragic,� said Liebreich of New Energy Finance. �Whether that adds up to a tipping point is an issue for the scientists and philosophers to argue about.�

�What I do know is that it is worth redirecting some of our vast human ingenuity away from reality TV and monster truck racing and towards reducing the scale of the problem.�

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