Focus: Finance and Governance - Outlook - Investment's role in climate change

It now looks as if 2005 was the year in which people switched from being conspicuous consumers to conservation converts.

Although higher interest rates have helped to limit consumption, natural disasters have strengthened the arguments of the conservationists. When people's moods change, it has an impact on investors.

It was also the year in which companies had to start thinking seriously about climate change. The Kyoto Protocol, accepted by governments of 55 per cent of the world's population, came into force in February. Just as importantly, a financial system for rewarding companies that limit their emissions, the EU emissions trading scheme, emerged.

Kyoto will only work if there is a level planet. The US, which produces 25 per cent of the world's carbon emissions, has not signed up to the protocol. Nor has China, whose emissions will exceed those produced by the US within ten years.

Politicians have to accept that preserving the planet will cost. Some industries are already battling with higher energy costs; others, such as aviation, are likely to face new taxes. If the costs of transport rise, supply chain costs will increase too, acting as a brake on globalisation.

Other industries are working to reduce their emissions, which is why politicians are again considering nuclear energy and why companies such as BP and BHP Billiton are investing in carbon sequestration, or capturing, schemes.

Investors will want to know the likely effects of higher carbon prices and will want more transparency from companies about their emissions and the policies they are using to control them. Ethical investors will want even more information and could start putting pressure on companies to limit emissions. In this case, more funds are likely to concentrate on climate change.

Charities will generally follow the path most investors take, but conservation and environmental charities could be encouraged to invest in companies that adopt a responsible approach to carbon emissions.

Although action is already being taken, carbon emissions in Europe have been rising recently. Consequently, we expect the penalties associated with excessive emissions to increase and more industries to be covered.

Many companies and funds are already open about their policies on carbon emissions, but we expect the push towards greater transparency to increase in intensity. Those investors and charities that spot these trends earliest are the ones most likely to spot future winners and losers from higher carbon prices.

KEY POINTS

- The Kyoto Protocol came into force last year, making companies think about climate change

- Ethical investors could put pressure on companies to limit their emissions

- The penalties for excessive emissions could rise and be applied to more industries.

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