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April 22, 2015

Carbon Divestment Becomes a Financial Imperative

Posted by Aruna C. Newton (View Profile | View All Posts) at 10:42 AM



Pricing Carbon: It's About Our Economy & Our Future [Source: https://www.youtube.com/watch?v=PQPDGfeRoS8]

Today, we celebrate Earth Day.

This day takes many of us out of our comfort zones, which is what it is designed to do. It forces us to think about the finite natural resources we have on what the astrophysicist Carl Sagan once referred to as "that little blue dot" floating around in space. It's the only home we have, so we might as well do everything we can to take care of it.

Sometimes that's easier said than done. For years, carbon divestment strategies were in the sole realm of universities and were based completely on moral issues. That moral high ground is nice, but something is happening around the world to transform it into a financial imperative. As that transformation takes place, more people, governments, and corporations are sitting up and taking notice.

There's a riveting new study that comes out of a joint research effort between Amundi, Europe's largest asset management firm, the Swedish pension fund AP4, and Columbia Business School. What researchers from those three entities have discovered is that investments in companies that are based on fossil fuels, for instance, are still very lucrative. So how to lessen an investment's exposure to fossil fuels but still receive the kinds of fat returns that they provide?

The World Bank recently reported that 40 countries and 22 cities, states, and provinces that account for nearly a quarter of the planet's greenhouse gas emissions are on their way to establishing carbon pricing mechanisms. The more that entities place what essentially amounts to a carbon tax on greenhouse gas emitters, the more ways there will be to hedge a successful investment against what are still very profitable carbon-based firms. What the researchers did was to approach the massive index provider MSCI to create what's called the MSCI Global Low Carbon Leaders fund.

What an investor gets is lower exposure to companies that emit greenhouse gasses. But the index is also set up in such a way that it anticipates the growing carbon surcharges that governments continue to levy on greenhouse gas emitters. As the taxes grow, many fossil fuel-based companies will be forced to look for newer methods of energy to create and to sell. And the taxes will also make it cost-prohibitive to follow up on what were until recently very lucrative endeavors.

Consider, for example, Canada's Alberta Tar Sands. There's a lot of oil locked up in those sands, but it takes a lot of effort to get to it and refine it. Add to that fact that the Organization for Economic Cooperation and Development estimates that carbon taxes will reach $60 per metric ton by 2030 and $80 per metric ton by 2040. With taxes as high as those, what fossil fuel company would want to spend a lot of funds and effort trying to extract oil from tar sands? Doing so wouldn't make financial sense.

True, the world is a long way away from settling on one set of carbon pricing principles. But it will happen someday. And when it does, those investment funds that have been set up to hedge against greenhouse gas emitters will be brilliantly positioned to reap the benefits. So this Earth Day, think about what can be done now to make things a reality in the decades to come.

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