Laurel Teo, Business Times 12 Dec 07;
This could put investors of Asian equity funds at risk
A NEW study shows that Asian companies emit more carbon for the same amount of economic activity than businesses in other parts of the world.
This puts investors of Asian equity funds at greater risk should new environmental rules set a global price on carbon, and consumer demand starts shifting towards more energy efficient products and services.
Titled Carbon Counts Asia 2007: Carbon Footprints of Asian Investment Funds, the report was conducted by environmental research body Trucost and commissioned by the IFC - a World Bank group member that finances private- sector projects in developing countries.
Rachel Kyte, IFC director of environment and social development, noted that the financial implications of climate change could increasingly be quantified as risk.
'By creating the data that highlights this risk, we are enabling investors and companies to adapt their behaviour. In a carbon-constrained world, this is smart sustainable investing and sustainable business,' she said.
Launched yesterday in Bali on the sidelines of the United Nations climate change talks, the report compared the MSCI (Morgan Stanley Capital International) Asia ex-Japan equity index to the MSCI All World Developed, S&P 500, and MSCI Europe indices.
It also studied and established the carbon footprints of 90 individual investment funds, which together manage more than US$127 billion. A carbon footprint gauges the effect of a person or an organisation on the environment in terms of the amount of greenhouse gases produced, in this instance measured in units of carbon dioxide-equivalents per US$1 million invested.
The report found that the MSCI Asia ex-Japan index emits 620.99 tonnes of greenhouse gas for every US$1 million invested. This is 1.7 times the size of the footprint of the MSCI Europe index, 1.4 times that of the S&P 500 index, and 1.6 times that of the MSCI All World Developed index.
The larger carbon footprint of the MSCI Asia ex-Japan index stems from the relatively higher carbon intensity of companies in the index. These listed Asian companies emit more carbon per US$1 million of revenue than their peers in the same sectors in the other three indices.
Most of the 'greatest contributors' in this index belong to the utilities and basic resources sectors.
Meanwhile, the 90 individual investment funds studied cover 649 companies. Each fund has a market capitalisation of over US$400 million, with at least 90 per cent of the holdings by value in China, Hong Kong, India, Indonesia, Malaysia, Pakistan, South Korea, Singapore, Taiwan, the Philippines or Thailand.
More than half of these funds (54 out of 90) have an even larger footprint than the MSCI Asia ex-Japan index. While this is partly due to the type of sectors in which the funds allocate their investments, the study found that the main driver was that investors in the funds select companies that are more carbon intensive than sector averages.
Yet earlier studies by Trucost show no correlation between the carbon footprint of funds and financial performance.
The report says it is possible for fund managers to choose greener investments and still maintain the same level of earnings. In fact, it created a portfolio that matched the financial performance of the MSCI Asia ex-Japan index while reducing the carbon intensity by 31 per cent.
Noting that emissions are already being taxed in more and more parts of the industrialised world, the study predicted that there would be greater pressure on the corporate world to 'carbon optimise'.
'As companies are increasingly required to bear the costs of carbon, those with less efficient carbon use are likely to see profit margins narrowed, resulting in lower company valuations. Resource-efficient companies will be well positioned to benefit financially and strategically relative to their peers,' said the report.
