Policy: Environment & Energy

Energy investments face a changing climate

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Climate Change,EPA,PennAve,United Nations,Energy and Environment,Coal,Zack Colman,Oil,Natural Gas,Solar Energy,Financial Markets

The opening bell has sounded for investors concerned about climate change.

Businesses have started creating renewable energy financing mechanisms as ways to address climate change, a trend that's underscored by a United Nations Intergovernmental Panel on Climate Change report that said the increasing risks to investors and financial institutions dependent on fossil fuels will present "opportunities" by pushing capital toward renewable energy and energy efficiency, as well as companies that deal with flood control and response.

Barclays and MSCI started a joint "Green Bond Index" on Tuesday, which will direct investments to environmentally sustainable projects. Jim Glascott, global head of debt capital markets with Barclays, said his company wanted to get in on a green bond market that is expect to grow from between $30 and $40 billion this year to $100 billion next year, according to the nonprofit Climate Bond Initiative.

"The creation of a Green Bond Index will be an extremely useful tool for issuers and institutional investors and an important step in the evolution, transparency, and standardization of the Green Bond market,” Glascott said.

Then there's the "yieldco," an emerging financing mechanism that bundles the long-term contracts that solar, wind and hydroelectric power providers strike with electric utilities. The power-purchase agreements between solar provider and utility — typically a 30-year contract for providing a dedicated stream of electricity — functions as a sort of dividend for investors, much like a bond.

Subsidiaries of companies such as Abengoa and NRG Energy have increasingly used the structure. Abengoa Yield PLC, the spinoff of the Spanish firm's U.S. subsidiary, netted a $29 per share initial public offering in June, amounting to a $2.32 billion valuation.

Plenty of it has to do with cost. Projections are that oil prices will rise, that cheap U.S. natural gas won't remain so inexpensive and that climate policies will raise the cost of using coal. At the same time, the cost of producing power from wind and solar have plummeted in recent years.

"[I]n stark contrast to the observed long-term trend in the oil industry, the renewable-energy industry has achieved tremendous cost reductions in recent years, and we think this trend is likely to continue over the next two decades," Mark Lewis, senior analyst of sustainability research at Kepler Cheuvreux, said in a June memo.

But it's also illustrative of the market's growing wariness about some carbon-intensive investments as nations are becoming increasingly keen to act on climate change. Reinsurance agencies are backing away from disaster-prone coastal areas threatened by rising sea levels. Investors and lenders also are factoring in a "shadow price" on carbon, which reflects financial risk for holding onto carbon-saturated investments.

"The fossil fuel sector fails to explain how they can square an increased demand scenario with tackling climate change. Investors have called their bluff and they have admitted they are betting on a world with high oil prices and major climate change impacts," James Leaton, research director with London-based Carbon Tracker Initiative, said in a recent email.

The United States is a prime example, where President Obama's Environmental Protection Agency is proposing to cut carbon emissions from power plants 30 percent below 2005 levels by 2030.

Credit rating agencies hit coal companies and electric utilities dependent on the black stuff shortly after the June 2 proposal. Separately, a burgeoning divestment campaign that's pushed some university endowments and big city funds off hydrocarbons and coal also has started making headway, though supporters have not been able to convince municipal pension funds that control billions of dollars to drop investments.

Obama is positioning his administration's policies as a potential model for other nations heading into climate talks next year in Paris, where countries are looking to strike commitments to curb emissions enough by the end of the decade to avoid a 2 degree Celsius global temperature rise by 2100.

"Public perception is shifting, increasing the potential for political action," Elias Hinckley, a partner in the environment, energy and natural resources group at Sullivan & Worcester LLP, said of the U.S. in a recent email.

Some groups are working to push the markets away from fossil fuels and toward more climate-friendly alternatives.

Stuart Braman, a former managing director at Standard & Poor's, started Fossil Free Indexes, a project that went online last week that tracks the performance of the S&P 500 without a group of large oil, coal and gas companies.

Business sustainability group Ceres, which pressed the Securities and Exchange Commission to issue a guidance in 2010 that companies must disclose climate-posed risks, last week rolled out a new tool enabling easier searches for the 3,000 companies that have detailed such information.

Ceres President Mindy Lubber said that companies still detail far too little in those SEC filings, but that the group and its coalition of investors and companies are "making progress."

"We need to understand the real material financial risks," she told the Washington Examiner in a recent interview.

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