Why investing in climate change just became more profitable
It's rare that investors get to benefit from a European Commission ruling, but a recent decision is about to make investing in one climate change-related sector much more attractive.
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Regardless of what you think about global warming, the important point (from an investors' point of view), is that it is now firmly on the political agenda. Politicians believe in it, popular opinion is behind it - and that makes it an investment opportunity.
The good news is that the European Commission has just made investing in one particular climate change-related sector much more attractive.
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And as its not often that investors get to benefit from rulings from Brussels, we might as well take advantage of it
The European Commission has slashed the number of carbon permits that will be given to industries across the EU, in order to cut carbon dioxide emissions further between 2008 and 2012. Of the 10 governments who submitted national allocation plans, only the UK's was deemed acceptable, while plans from several other countries are under review or still to come - France, for example, withdrew its plan at the last minute, apparently "fearing a humiliating outcome", says The Times.
For the uninitiated, the basic idea behind the permits is that industries in each country are allowed to emit a certain amount of carbon dioxide (one of the key greenhouse gases). The permits are then traded through the emissions trading system (ETS), and companies that pollute less can then sell their permits to companies that pollute more.
The idea is to create a shortage of permits, so that they rise in price and it becomes more profitable to companies to avoid pollution-causing activities. The trouble is, in the first year of the emissions trading system (ETS), carbon permits were over-allocated, and their price plunged. The European Commission is trying to avoid the same problem recurring.
It will be interesting to see how the Commission's stance holds under pressure. Germany is complaining that the cut in its allowance from 482m tonnes to 453m tonnes is "totally unacceptable", while Latvia, which had its allocation halved, said the new target is "far too tight for us to fit into".
But in any case, the early omens are promising for companies in the sector. Particularly as charities are now getting in on the act. One group, Pure, intends to raise funds to buy carbon credits and then take them off the market, shrinking the supply further and driving up the cost of polluting. The charity will approach, among others, companies that want to offset their carbon footprint'. In the past, this has been done via the rather questionable method of planting trees (how many trees do you need? How long does it take? Wont we run out of ground to plant trees in eventually?) - whereas it seems that Pure will provide a much more constructive and quantifiable way of going about this, a PR opportunity that any self-respecting firm is likely to jump on.
MoneyWeek editor Merryn Somerset Webb wrote a cover story on the opportunities in carbon trading, just over a month ago. Anyone following her tips at the time would have done rather well out of the European ruling - but they're still well worth a look now. To read the piece, click here: How to profit from carbon trading.
There's also more on the future of energy in this week's issue of MoneyWeek, out tomorrow. Cris Sholto Heaton takes a look at the nuclear power sector and uncovers one tiny stock that could be set to revolutionise nuclear technology - and see its share price soar in the process.
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On another note, we see that credit ratings agency Standard & Poor's has just warned that there is a dotcom-style bubble appearing in the infrastructure sector, with too much borrowing and overoptimistic valuations. It's just one of many bubbles we could point to, from housing to credit derivatives.
In fact, there are very few obvious bargains to be had out there in the investment universe at all, at the moment - so an opportunity to hear the opinions of investment stars like Anthony Bolton and Jeremy Grantham firsthand is not to be missed. The Independent Investor Winter Round Table is being held on Tuesday December 5th at The Savile Club in Mayfair, between 9:30am and 4pm. For more details, please click here: www.businessboffins.com/investor06
Turning to the stock markets
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In London, the FTSE 100 was boosted by Wall Street gains and strength among pharmas to close 58 points higher, at 6,084. Software company Sage led the blue-chips higher, climbing over 7% on good full year results. For a full market report, see: London market close
Elsewhere in Europe, stocks also tracked Wall Street gains. The Paris CAC-40 closed 75 points higher, at 5,381. In Frankfurt, the DAX-30 closed 82 points higher, at 6,363.
Across the Atlantic, stocks rallied on positive economic data. The Commerce Department reported that third-quarter growth was higher than predicted, whilst inflation came in lower than expected. The Dow Jones closed 92 points higher, at 12,227, with Intel and Verizon putting in strong performances. The S&P 500 ended the day 12 points higher, at 1,398, whilst the Nasdaq was 17 points higher, at 2,430.
In Asia, the Nikkei was also boosted by the strong US GDP data. The index gained 198 points to end the day at 16,274.
The price of crude oil climbed sharply higher yesterday, almost hitting a two-month high, but had fallen slightly to $62.34 this morning. In London, Brent spot had fallen nearly 2% to $61.73 today.
Spot gold had risen to $636.90 this morning, whilst silver was trading at $13.58 an ounce.
And in London this morning, home improvement retailer Kingfisher announced a 10% rise in third-quarter profit on the back of job cuts and closure of unprofitable stores in its B&Q chain. However, a programme to revamp stores will lead to a 'short-term impact on profitability', according to Finance Director Duncan Tatton-Brown. Kingfisher shares were down by as much as 2.2% this morning.
And our two recommended articles for today...
Will global economic growth slow in 2007?
- As we near the end of 2006, investors are facing the prospect of slowdowns in both China and the US. Given that these two nations have been driving global growth for the last five years, the consequences for the rest of the global economy would be serious. US GDP growth may have come in higher than feared in the last quarter, but what's the long-term outlook? To find out why Morgan Stanley economist Stephen Roach thinks we should be worrying about a two-engine slowdown, read: Will global economic growth slow in 2007?
Why investing in commodities is not as risky as you think
- Commodities are riskier than stocks. The lower dollar is inflating prices. New technology will render them less valuable. There are many myths about investing in commodities, but legendary investor Jim Rogers believes investors shouldn't be put off. For a straightforward guide to investing in commodities that separates the fact from the fiction, click here: Why commodities are not as risky as you think
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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