By Dietmar Hawranek and Alexander Jung
The players in the capital markets couldn't be more pleased. In the past, those who chose to invest in companies with environmentally sustainable business practices could feel good about themselves, but were unlikely to earn impressive returns. "Sustainability and performance were often contradictions," says Holger Boschke of Dresdner Bank. But, says Boschke, this too has changed. Nowadays these companies promise handsome profits.
Pension funds, in particular, which generally look for profitable long-term investments, are now restructuring their investment strategies. Knut Kjaer, who heads the Norwegian pension fund, which now manages €220 billion ($303.8 billion) in profits from his country's oil revenues, making it the world's second-largest pension fund, has removed ethically and environmentally suspect companies from his portfolio. In fact, this is the fund's stated policy. Henri de Castries, head of the Axa Group, one of the world's largest financial investment firms, knows that for many industries the risks of climate change are "just as important as interest rates and exchange rate risks."
The question is, how does one measure whether a company does in fact conduct its business in a sustainable manner? Merely analyzing the changes in its CO2 emissions would be too simple. When a company spins off an energy-intensive division -- the way German consumer goods group Henkel once did when it sold its chemical subsidiary Cognis or GE did when it recently spun off its plastics division -- it automatically improves its overall environmental impact, but the end effect on the environment amounts to zero.
Calls for Carbon Disclosure
The Carbon Disclosure Project (CDP), a group of 280 major investors who manage combined assets of more than $40 trillion, is attempting to provide more accurate answers to these questions. CDP has called upon the world's largest corporations to disclose their climate-related risks and explain their strategies to offset the problem. The organization uses the resulting figures to develop a Climate Leadership Index of 50 companies on the vanguard of climate protection. The index is intended to serve as a guideline for investors.
There are a number of surprises on the CDP's list. It includes Bayer and BASF, despite the fact that many still view the chemical industry as suspect when it comes to climate protection. Only recently, for example, BASF CEO Jürgen Hambrecht criticized Berlin's climate protection policies as " fear mongering." Nevertheless, Germany's chemical industry giants have already reduced their emissions by more than 30 percent since 1990 and plan to continue the trend in the coming years.
Sustainability ratings like the London-based CDP and the Zürich-based SAM (Sustainable Asset Management) have already become standard tools for evaluating companies. As a result, businesses are taking steps to project a positive image.
This has proven to be all too easy for some companies, which buy certificates from organizations like Climatepartner or Atmosfair, which use the money to invest in solar, hydroelectricity and wind energy projects. By purchasing the certificates, the companies hope to save precisely the amounts of greenhouse gases they were previously emitting, making them "climate neutral." The deals have since become the modern equivalent of the selling of indulgences.
"Incredible Nonsense"
"Carbon neutral" has since become a label that is liberally applied to rock concerts, television sets, computers, air travel and even banks like Credit Suisse and Barclays. Indeed, "carbon neutral" was named The New Oxford American Dictionary’s Word of the Year for 2006.
Critics say that this method is a temporary solution at best. Although she welcomes such initiatives, Regine Günther of the World Wildlife Fund (WWF) is highly skeptical of the reforestation programs offered by some agencies. "There's an incredible amount of nonsense out there," she says. It also remains to be seen whether these contributions will be sufficient to offset environmental damage being done elsewhere. For example, someone who purchases gold jewelry online from Christ Jewelers through Climatefriends pays a "climate contribution" equal to 4.5 percent of the sale. This is a modest toll, though, considering that, according to the Wuppertal Institute, more than half a ton of earth has to be moved to mine a single gram of gold -- not to mention the tremendous volume of water consumed in the process.
The efforts of the oil and gas industry also seem highly disingenuous. "We take concerns about the climate very seriously," insists Kurt Döhmel, the head of the German division of Shell. It is true that oil companies like Shell and BP have been investing in renewable energy for years. But these investments are paltry compared to the billions they pump into their polluting core business: the production and sale of oil and gas, which is burned and causes air pollution.
But that happens to be the way oil and gas companies make their money, and this is unlikely to change anytime soon. According to Döhmel, fossil fuels will still cover 80 percent of the world's energy needs in 2050.
Environmental standards will be even more problematic for the utility industry. According to the WWF, six of Europe's 10 most polluting coal power plants are in Germany, and RWE operates four of them. Nevertheless, power companies still plan to build close to 30 new coal-fired plants.
Part of their planning is based on the expectation that a technological solution will soon be developed to capture and sequester CO2. But it will take years for these technologies to come online, and it remains to be seen whether it will even be possible to retrofit all of the coal-fired plants currently on the drawing boards.
Failing to reduce emissions could prove extremely costly for RWE and other German utilities. In the next phase on the emissions trading process, which begins in 2008, governments will reduce quotas for emissions rights even further, likely increasing the cost of polluting from the current price of upwards of 20 euros per ton of CO2.
Energy experts like Georg Erdmann, a professor at Berlin's Technical University, predict that prices could eventually top €100 a ton, a level that would spell economic disaster for utilities like RWE.
The Painful Lessons of the Auto Industry
These scenarios offer a taste of the massive impact climate change will have on many businesses. Those who fail to react early on stand to be punished by the consumer, a painful lesson the German auto industry is already learning today.
For Toyota, the initial costs of developing its energy-saving hybrid drive ran into the billions. But now the Japanese carmaker, which once suffered from a reliable but somewhat boring image, is suddenly the world leader on both the environmental and technological front. Indeed, Toyota is far more deserving of a slogan coined by German competitor Audi: Vorsprung durch Technik (Progress through Technology).
Ultimately, the question is whether sustainability will in fact bring about lasting change within the economy. The advertising industry, at any rate, is skeptical about whether the green economy is a lasting phenomenon. "We've seen this sort of thing before," says Peter Haller, the head of Serviceplan, Germany's largest independent advertising agency.
A few years after Haller founded the company in 1970, skyrocketing oil prices lead to public debates over the limits of growth. But, as Haller recalls, the issue was soon displaced by concerns over terrorism and unemployment.
But the situation in the energy markets quickly normalized after the 1970s oil crisis. Today a similar stabilization seems unlikely, with oil prices remaining above the $40 a barrel for the third year in a row. Instead, continually rising energy costs are more likely to force companies to improve their energy efficiency, thereby enhancing climate protection efforts. The European Union, for its part, will continue to increase its pressure on industry by enacting tougher environmental laws.
This is why many executives believe that we are unlikely to see a repeat of the early 1970s. In fact, Bosch CEO Fehrenbach is convinced that "we will be dealing with this for decades to come."
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