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Investors warned over cost of greenhouse gas

Financial Times: Investors warned over cost of greenhouse gas

By Fiona Harvey

Published: June 13 2005

The UK’s biggest emitters of greenhouse gases are revealed this week, with a warning to shareholders that they should take the potential cost of climate change into account when investing.

Shell, the oil producer, is responsible for 23 per cent of emissions of the FTSE 100, while BP, its rival, and Scottish Power, the electricity and gas supplier, are joint second with 17 per cent of the total each.

Corus, the Anglo-Dutch steel producer, accounts for 6 per cent, and BHP Billiton, the mining group, 4 per cent.

The UK’s biggest 100 companies contributed 1.6 per cent of the world’s greenhouse gas emissions, according to the Carbon 100 report from Henderson Global Investors, to be published this week. The UK was responsible for 2.2 per cent but FTSE 100 companies have a disproportionately large effect because of the global nature of many of their operations.

Many of these companies also have a wider effect because of the nature of their business: the products sold by the UK’s five biggest oil and mining companies accounted for more than 10 per cent of the world’s total greenhouse gas emissions.

The report, which uses studies from Trucost, an environmental research company, warned investors to take note as governments were increasingly regulating carbon dioxide emissions. “A carbon-constrained world could pose significant challenges for investors in a number of UK companies.”

Limits on emissions could affect demand for many products, as well as imposing costs on their producers.

Last week, leaders of 24 of the world’s biggest companies asked Tony Blair to call on the G8 countries to institute a global system to limit companies’ greenhouse gas emissions and allow them to trade emissions permits with one another. The European Union has operated such a system since January 1, covering sectors that are particularly energy-intensive, such as electricity generation, steel and cement making.

There are moves in the US to set up emissions trading systems in some states that could link to the EU scheme. President George W. Bush has vetoed such a system on a national level.

The government has used several means to encourage companies to reduce emissions, including the climate change levy and programmes to improve energy efficiency. Many companies had reduced their emissions, said Nick Robins, head of socially responsible investment funds at Henderson.

However, companies had to go further: “British industry has been good at reducing emissions within the factory gates. Now the challenge is to help consumers . . . by considering things like product design and use.”

The FTSE 100 companies were responsible for emitting carbon dioxide equivalent to nearly three quarters of the UK’s total emissions, the Carbon 100 report found. However, some of these emissions were produced outside the UK, while some of the UK’s emissions were produced by companies outside the index. About half of the UK’s emissions are reckoned to come from business.

Climate change, caused by emissions of gases that trap heat on earth, also imposes costs on companies and may threaten investors more than they realise, the report said. For instance, the severe flooding in Europe in 2002 generated losses of $16bn (£9bn), and the heatwave of 2003 $13.5bn. Though it is not certain either was the result of climate change, global warming is expected to cause more extreme events.

The survey revealed the potential costs to investors in large companies. Taking the government’s estimates of the damage caused by a tonne of carbon dioxide, the report calculated that 12 per cent of the earnings before interest, tax, depreciation and amortisation of FTSE 100 companies could be at risk. Of these companies, 26 had a risk to more than 10 per cent of their earnings.

However, finding out how much carbon dioxide a company produces can be difficult. Fewer than half of the FTSE 100 companies disclose their carbon emissions. Even when they do, comparisons may be tricky as companies often use different metrics.

Investors around the world have called for greater disclosure from companies. At a conference for institutional investors in New York last month, a group of investors with more than $3,000bn in assets called on the US Securities and Exchange Commission to make disclosure a part of listed companies’ filing requirements.

Paul O’Neill, former US treasury secretary, told the meeting: “Transparency is really important. I would like to see a full declaration.”

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