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Investing For The Future

March 5th, 2007

It is quite clear that climate change has become an increasingly hot topic (forgive the pun) over recent years. Not a day goes by without an article appearing in the National press or on TV that in some way refers to the ongoing struggle against the ever increasing problem of greenhouse emissions.

We now live in world of growing pressure from voters, consumers and governments for businesses and individuals to reduce the amount of greenhouse gas emissions that they pump out into the atmosphere each day. Hollywood stars drive around in their hybrid cars, entrepreneurs offer to donate profits from their businesses to help climate change and potential prime ministers cycle to work. Whilst their motives are doubted by some there’s no denying that changes are afoot.

As a result of this increasing pressure from the business world’s most important stakeholder, the consumer, we find ourselves in a changing market place, albeit perhaps not at the pace desired by some or indeed perhaps ultimately required by all.

It’s not just the environment that is an issue for business, people are becoming more careful in what they eat and drink. Coca Cola has seen decreasing sales of ‘Coke’ for a number of years whilst the demand for healthier alternatives such as fruit smoothies has rocketed. Sales of organic food are increasing each year and therefore not surprisingly even the major supermarkets have jumped on the bandwagon in their pursuit of the profits to be made in this lucrative new (ish) market.

So what does it mean for the investor? Well it probably means that you should take into account now exactly the same considerations when you are considering making an investment as you always did.

• Are you well diversified?

• Can you afford to lose the money invested?

• Are you in it for the long-term?

• Have you done your research into what business and/or markets are likely to succeed in tomorrow’s world?

The last point however is perhaps where new ideas need to be taken as historical methods of evaluation are not necessarily going to work on their own in the future. Ensuring a company’s management have the appropriate skills and experience to succeed is still going to be a valid, and indeed, necessary piece of research for the savvy investor but what’s the use of having that if the business will not able to readily adapt to the changing business environment. There are an increasing number of regulations being implemented in Europe and elsewhere that aim to control the damaging Green House Gas emissions that business emits. As a result those failing to comply will inevitably face financial penalties. So perhaps the all-knowing investor needs to look at the “carbon footprint” of its potential acquisition in addition to the strength of its Balance Sheet.

A recent study by an environmental research firm called Trucost includes the UK’s first carbon footprint ranking of a selection of 44 unit and investment trusts. This provides the investor with a comparison of funds evaluated on an environmental basis, not just on their financial performance. It has attempted to calculate the greenhouse emissions of the companies included within the unit/investment trusts and express the footprint in terms of CO2 emissions per £ invested.

The list is far from exhaustive but the firm intends to carry out rankings every six months and increase its coverage. What it has done so far however is to highlight the huge variance between the best and worst performing funds – the impact of moving £10,000 of investment from the worst fund to the best is a whopping 14 tonnes of CO2 per annum (the average UK household emits 6 tonnes pa). Additionally its findings suggest that ignoring environmental issues does not lead to financial gain with funds invested heavily in firms having high carbon footprints performing no better than those invested in low emission enterprises.

So for those looking to do their bit and are already recycling everything within site and purchasing biodegradable nappies then perhaps the next natural step is to consider the environmental impact of their investments. Those only in it for the money probably don’t care what the current carbon footprint of their stockholdings are but can they afford to carry on with that rationale? If the world is changing, from a business point as well as an environmental one, then are today’s stars and cash cows going to turn into tomorrow’s dogs because of their carbon pawprints?

N.W

Related Links

www.trucost.com

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