Shift in investments needed to reduce exposure to carbon impacts of Asian companies

11th December, 2007

Asian listed companies are more carbon intensive than their peers in other regions of the world. Investors in Asian Equity funds are therefore more exposed to carbon risks. There are opportunities to reduce the carbon intensity of Asian equity funds by some 30 per cent without suffering loss in performance.

These are the main conclusions of a report launched on 11 December in Bali – Carbon Counts Asia 2007: Carbon Footprints of Asian Investment Funds. The study, commissioned by the International Finance Corporation and conducted by environmental research organisation Trucost, provides the first comprehensive review of greenhouse gas emissions by Asian companies by analysing the carbon intensity of the MSCI Asia ex-Japan index and 90 individual investment funds in Asia.

The study found that the MSCI Asia ex-Japan index is more carbon intensive than the MSCI All World Developed, S&P 500 and MSCI Europe indices. Investors in carbon-intensive companies in the utilities, basic resources and industrial goods & services sectors could be most at risk from the introduction of a price for carbon and shifts in demand to low-carbon, more resource efficient suppliers.

The research established the carbon footprint of 90 individual investment funds, which together have more than US$ 127 billion under management. Over half of these funds have an even larger footprint than the MSCI Asia ex-Japan index. While this is partly due to sector allocation bets, the main driver is the fact that investors in the funds select companies which are more carbon-intensive than sector averages.

Fund managers can adjust their holdings to reduce exposure to potential liabilities from carbon-intensive companies without sacrificing returns. A carbon-optimised tracker portfolio created for this study matched the financial performance of the MSCI Asia ex-Japan while reducing the carbon intensity by 31%.

Simon Thomas, Chief Executive of Trucost, said: “This the first time that a review of the carbon intensity of Asian listed companies has been undertaken and the research provides invaluable insights for investors. As government policies increasingly constrain greenhouse gas emissions and introduce a price for carbon, investors are increasingly looking to take emissions into account in their investment strategies while maintaining the financial performance of their portfolios.”

Rachel Kyte, IFC Director of Environment and Social Development, said: “IFC believes that the private sector has a powerful role to play in climate change mitigation, at a minimum because the financial implications of climate change can increasingly be quantified as risk and because that risk can be turned into business opportunity. By creating the data which highlights this risk, we are enabling investors and companies to adapt their behaviour. In a carbon constrained world, this is smart sustainable investing and sustainable business.”

Key findings include:

• The carbon footprint of the MSCI Asia ex-Japan index is 620.99 tonnes of greenhouse gas emissions per US$ million invested.
• The 90 funds analysed had at least 90% their holdings by value located in China, Hong Kong, India, Indonesia, Malaysia, Pakistan, South Korea, Singapore, Taiwan, The Philippines or Thailand. The funds are responsible for annual emissions of over 40.6 million tonnes of greenhouse gases, measured as their carbon dioxide-equivalent (CO2-e).
• The carbon footprint of the consolidated group of 90 funds was 823.34 tonnes of greenhouse gases emitted per US$ million. Fifty-four out of 90 funds of Asian companies analysed have a greater carbon footprint than the MSCI Asia ex-Japan index.
• More than 8,950 tonnes of greenhouse gases are emitted per US$ million in the fund with the biggest carbon footprint. The smallest carbon footprint of a fund which invests in all major sectors was over 90 times smaller, at 29 tonnes of CO2-e /$US million.
• Trucost has optimised the MSCI Asia ex-Japan index. The Trucost Carbon Optimised Tracker Portfolio matches the financial performance of MSCI Asia ex-Japan while increasing carbon-efficiency by an average of 31%. Investment strategies can similarly be adjusted to reduce carbon impacts without returns deviating from those of the chosen benchmark.

About the International Finance Corporation

IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments. IFC’s vision is that poor people have the opportunity to escape poverty and improve their lives. In FY07, IFC committed $8.2 billion and mobilized an additional $3.9 billion through loan participations and structured finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries. For more information, visit About www.ifc.org

About Trucost

Trucost Plc is an environmental research business which helps companies and investors understand the environmental impacts of business activities in financial terms. Trucost offers expert advice and research to major corporations, both public and private, institutional investors and to Government departments and associated agencies. Trucost wrote the environmental reporting guidelines for UK business with the UK government, released in January 2006.

Trucost has built up a database of the environmental impacts and disclosures of over 4,000 major companies worldwide. Trucost’s database of climate change disclosures is the world’s largest. Trucost has developed unparalleled experience and expertise in the area of environmental performance, analysis and reporting, working with leading multinational companies in a range of business sectors including Avis, Bloomsbury, BSKYB, Christian Salvesen, Prudential, LogicaCMG and Legal & General.

Institutional investors use Trucost’s research to support due diligence and active engagement, incorporating environmental performance measurement into their investment decisions. Clients include Hermes Pensions Management Ltd, Henderson Global Investors, Fortis Investments, GLG Partners, Fond de Réserve pour les Retraites (FRR), Merrill Lynch Investment Managers and VicSuper. Institutional investors also use the information to assess the environmental footprint of their portfolios, and therefore improve understanding of their environmental risks.

For more information please contact:

International Finance Corporation
Lucie Giraud
1 202 294 0504
lgiraud@ifc.org

Trucost
Theo Moore
Brunswick Group
44 207 396 7401
moore@brunwsickgroup.com