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Wall Street Adds Climate Change to Bottom Line
By Ron Scherer
The Christian Science Monitor
Tuesday 27 February 2007
The environmentally tinged takeover of
TXU Corp.
illustrates global warming's increased financial
relevance.
New York - Wall Street now views the color green as something other than
money.
In the latest sign that global climate change is becoming a major factor
for investors, potentially the largest private takeover in the nation's
history has environmentalists' fingerprints all over it.
A consortium of private investors announced Monday they would pay almost
$45 billion to acquire TXU Corp., which generates electricity in the
state of Texas. What makes the deal more than just another gigantic
financial transaction is that the buyers of the company consulted with
environmental groups and agreed to sharply scale back plans to build new
coal-fired power plants.
"This is a real breakthrough, an indication investors are paying
attention to the real financial risk associated with climate change,"
says Dan Bakal, director of electric power programs at Ceres, a
Boston-based environmental group that advises investors controlling $3.7
trillion in assets. "It means Wall Street is really beginning to pay
attention."
Wall Street analysts believe the deal could mean that future takeovers
will start to factor in the cost of corporate carbon emissions.
This could affect mergers and acquisitions in a broad range of
industries, including manufacturing companies, the auto industry, mining
companies, and other utilities.
"What it shows is the environment has a much greater presence than in
the past and the issue of global warming is under increased scrutiny,"
says Sam Stovall, chief investment strategist at Standard & Poor's in
New York. "These are additional factors that must be addressed in future
mergers."
In fact, there are some signs Wall Street is trying to get up to speed
as quickly as possible. For the past three years, the World Resources
Institute (WRI), an environmental think tank in Washington, D.C., has
been working with investment banks and securities firms such as Merrill
Lynch, Citigroup, and Goldman Sachs to teach them how to establish their
own carbon "footprint" and analyze other companies' emissions.
Analysts Eye Carbon "Footprint"
By calculating the footprint - the amount of greenhouse gases a company
pumps into the atmosphere - analysts can begin to forecast the potential
risks of climate-change lawsuits and future costs of any greenhouse-gas
regulations.
"It's been a slow start, but we have been pleased to see financial
institutions begin to grapple with those systems," says Jennifer Layke,
deputy director of climate and energy for WRI. "But this is the first
time we have seen a set of investors reach out to the environmental
community around the terms of a new investment deal."
Last year, the New York Stock Exchange began to educate CEOs about the
issue. It sponsored a lunch with former Vice President Al Gore, who gave
a slide-show version of his Oscar-winning documentary, "An Inconvenient
Truth."
Investors Call for Carbon Accounting
This year there will be a record number of shareholder resolutions
asking companies about their carbon footprint.
Normally, shareholder propositions don't receive much traction in the
corporate world.
But, the proposals have been receiving a significant amount of
institutional support from such large shareholders as Calpers, the
California public-employee pension fund. And there is increasing concern
that corporate boards may have a liability if they don't start to plan
for future limits on carbon emissions.
Pressure was already building on TXU to scale back its proposal to build
11 coal-fired power plants. Over the weekend, Ceres issued a report that
looked at the potential carbon taxes the utility would face, assuming
that Congress or the states begin to enact such charges.
"Our report made some reasonable assumptions, including that none of the
costs would be grandfathered in," says Mr. Bakal. "That means 100
percent of the carbon dioxide must face a carbon tax, which we estimate
could be as much as $780 million per year, perhaps for 15 years."
At the same time, the Ceres report called into question some of the
revenue and cost assumptions that TXU had made to justify the new plants.
"We think they had overestimated the amount of growth and underestimated
the amount of the coming carbon controls and the cost of complying with
the existing Clean Air Act," says David Gardiner, one of the authors of
the report and a sustainability consultant in Arlington, Va.
TXU Buyers Moved to Ease Opposition
Some of these issues resonated with the group of TXU buyers, which
includes the Texas Pacific Group, Goldman Sachs, and Kohlberg Kravis
Roberts & Co. Texas Pacific and KKR are private equity groups that amass
money from pension funds and wealthy individuals and buy companies.
Monday, in Dallas, the buyers' group said they would drop eight of the
11 new coal-fired power plants if their deal succeeds. They also said
they would roll back electricity rates by 10 percent. And, they
indicated they would work towards meeting any national emissions caps in
the future.
"It's a sign people are paying attention," says Rodney Taylor, managing
director of the environmental-services group at Aon, a large
Chicago-based insurance broker. "From a financial standpoint, it also
says something about the perception of where energy costs are going. KKR
is kind of a medium-term investor, so they must be looking at energy
costs going up sharply over the next three to five years."
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