Daily Telegraph: Drive to go green becomes big business

EXTRACT: Lucy Haskins, Lehman’s oil analyst, thinks “oil companies will be part of the solution”. She quotes Royal Dutch Shell chief executive Jeroen van der Veer: “If the world thinks CO2 is a huge problem, then it is a great opportunity for Shell.”

Whether trying to satisfy lawmakers or gain a competitive edge, all sectors are affected by the climate debate, reports Tom Stevenson

Drive a new Mini Cooper off the forecourt and you can relax in the knowledge that your chic runabout emits 18pc less CO2 than its predecessor, the 2001 relaunch of Sir Alex Issigonis’s iconic car.
 
At 139 grams of greenhouse gas per kilometre driven, the emissions from BMW’s Mini sneak in under the 140 g/km limit the European Automobile Manufacturers Association has committed to achieve by 2008.

European car makers aren’t celebrating, however. Despite achieving more impressive CO2 reductions than their peers in Asia and North America, they are under attack from EU lawmakers.

European cars are responsible for no more than 1.5pc of global CO2 emissions, but they are visible to the public and the media and an easy target for bureaucrats looking to score green points. The car makers are almost certain to miss their voluntary 2008 target, which means that they will be hit by punishing new mandatory goals.

Christopher Will, autos analyst at Lehman Brothers, believes that the European car industry will be the first major business casualty of increased climate change concerns. “This is more the result of populist EU politics than scientific fact,” he says. “The European electorate is more green than counterparts elsewhere, but depressingly this appears not to be accompanied by any great hunger for the facts.”

Gary Chase, in Lehman’s New York office, sees similar problems ahead for the airline industry. “Aviation has moved into the sights of greenhouse gas regulators, despite contributing relatively little to global warming,” he says.

As the charts show, transport is no bigger a polluter than industry or agriculture and is responsible for less carbon than both power generation and changing land use, such as deforestation. Emissions from the developed world are also dwarfed by those in developing countries when measured against economic output.

For the airlines, becoming the focus of public anxiety about global warming is a serious business problem, because aircraft emissions are notably hard to reduce. “There’s no silver bullet,” Chase says.

The car and airline industries are running fast to keep ahead of the incoming green tide, but they are not the only business sectors to have woken up to the challenges posed by the environmental crusade. According to a study of the business impact of climate change, published today by Lehman Brothers, global warming is a key strategic issue for companies.

John Llewellyn, senior economic policy adviser to the US bank and author of the report, says global warming ‘will influence business in ways that are similar to those being wrought by demographic change, and by globalisation, both of which are changing patterns of demand, structures of production, geographic location, and other key parameters that influence firms’ behaviour”.

As importantly, he believes climate change will be the trigger for sharp and unexpected price shocks as new evidence emerges or government policies change.

For individual firms, Llewellyn believes, the impact of policy changes as a result of global warming can hardly be overstated. “The pace of a firm’s adaptation to climate change and related policy will influence whether any given firm survives and prospers, or dies,” he concludes.

Llewellyn admits that the global warming debate raises unanswered questions. The impact of positive feedback effects, where rising temperatures themselves trigger further warming, is also unclear. Estimates of the economic costs of limiting climate-damaging emissions are wide-ranging.

But Llewellyn is convinced that the intellectual argument has largely been won. With another landmark study on global warming, by the Intergovernmental Panel on Climate Change, due to be published tomorrow the momentum looks unstoppable, he believes.

Some of the likely winners and losers are unexpected. Lucy Haskins, Lehman’s oil analyst, thinks “oil companies will be part of the solution”. She quotes Royal Dutch Shell chief executive Jeroen van der Veer: “If the world thinks CO2 is a huge problem, then it is a great opportunity for Shell.”

Big Oil understood the significance of global warming early on. Shell is focusing on gas-to-liquid technology to produce clean diesel. BP plans to invest £4.1bn in low carbon power and alternative energy businesses over 10 years.

Lehman expects telecom equipment manufacturers to enjoy a surge in demand for new networks and replacement equipment if sea levels rise materially. The report estimates that 10pc of the world’s population lives in coastal zones.

But these same factors could prove catastrophic for the world’s chemical industries. Many of the major chemical sites have been built at – and are still planned for – coastal and riverside ports that are vulnerable to flooding.

Lehman estimates that of the global ethylene capacity of 173m tonnes, 45pc is at high risk of flooding. Protecting these plants or relocating inland would have significant capital and transport costs.

For the chemicals industry, therefore, the challenge is largely physical, just as for the car makers it is mainly regulatory. For companies with regular customer contact, such as retailers, reputational and competitive exposure are top of the agenda.

The greening of the supermarkets illustrates PR-savvy environmentalism, driven by real concerns but conscious of the benefits of being seen to care.

According to Llewellyn: “Some parts of business are moving ahead of governments and regulators in reducing their carbon emissions. This is partly out of a desire to jump before being pushed. But what seems to be mainly spurring companies into action is a wish to gain a competitive and reputational edge.”

It is not hard to see why Lehman Brothers should take an interest in the business impact of global warming. Arthur Moretti, a fund manager specialising in Socially Responsible Investment, says: “Regulatory changes in response to public sentiment regarding climate change can create a significant liability for a business or, at a minimum, increase the cost of doing business.”

Investors want to know which companies best understand the challenges and opportunities: “companies which are aware of the impact their business practices have on the overall environment may create a significant competitive advantage”.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/02/01/ccgreen01.xml

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