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Climate Policy or Profit Potential -Investors Have More to Like in Oil Companies

Posted on: Friday, 28 October 2005, 03:01 CDT

By Cole, Carol

U.S. integrated oil companies received a nod from the Climate Disclosure Project (CDP), which reports on the climate activities of the worlds largest companies for institutional investors. The third edition of the report (CDP3), unveiled at a multi-city launch in New York, Amsterdam and London this fall, lists BP, Chevron, Norsk Hydro, Royal Dutch/Shell and Suncor on a company honor roll.

Automotive companies on the Climate Leadership Index 2005 are BMW, DaimlerChrysler, Ford, Honda and Toyota.

CDP surveys companies about their climate change activities and reports to financial firms and institutional investment managers. Through CDP, investors collectively sign a single global request for disclosure information on greenhouse gas emissions.

Oil and gas companies typically take the blame for contributing to greenhouse gas emissions. It's the rare occasion when fossil fuel companies are placed on an honor roll of any sort relating to climate change.

This year, 155 firms managing $21 trillion in investments signed the disclosure request. That's four times the number in 2003, when the report was prepared for 35 investors managing $4.8 trillion in assets.

"This increased interest from the investment community, coupled with a record high 71% disclosure rate to the CDP information request ... points to a continued elevation of climate change as a critical shareholder value issue in the minds of investors and corporations alike," the CDP authors said.

This year, 71% of the FT500 companies completed the information request. More than 90% of respondents said climate change posed commercial risks or opportunities for their businesses, but only 51% have implemented emission reduction programs. Even fewer, 45%, have established emission reduction targets and 35% report having taken action in emission trading.

Only 54% of respondents provided emission data, and of them, only 13% reported a reduction in emissions while 17% reported an emissions increase. Some industrial sectors, including the oil and gas industry, are "conspiculously poor" when it comes to emissions disclosure, CDP3 noted.

Even if oil companies are "conspicuously poor" at disclosing emissions, are institutional investors still buying the shares?

"The short answer is yes," said Charles Carlson, CEO of Horizon Investment Services, a money management firm.

Just how much impact a company's climate change position, strong or weak, has on investors in unclear. What is clear is that investors are flocking to oil company stocks. Shares in the oil sector have been outpacing the Dow Jones Industrial Average.

"Investors are going to be concerned about corporate profits at this point," said Carlson. "There are penalties for not being environmentally friendly, and there are institutional investors who mainly focus on environmentally and socially responsible stocks. But at the end of the day, institutional and individual investors are going to ask, 'What are the profits going to be?'"

For the oil sector, the outlook is pretty good. According to Carlson's latest research, investors should stay with their oil stocks.

"Oil prices, spurred by supply concerns, have continued to move higher, carrying with them oil stocks," he said this fall as the major oil companies post all-time highs.

The current profit picture is only part of the investor question. Investors consider the sustainability of oil prices and oil company profits. Will stocks stay high, or perhaps, go even higher?

"The strength in the oil sector begs the question: How high is too high?" Carlson said. "To be sure, calling a top in oil prices - and, therefore, a top in oil stocks - has been a fool's errand of late. Just when it seems prices can't rise any more, another storm or supply-channel issue arises to lift prices even higher. Obviously, at some point oil prices will top out, and a sustained downward move in oil prices will cause selling in oil-related issues. Still, quality oil stocks have a lot going for them, including strong cash flows - which will lead to sharply higher dividends - and streamlined operating structures that will let them mint money even if oil prices drop back to the $50s."

So where does climate policy fit in the investment decision equation? Joachim Faber, member of the Board of Allianz AG, the global insurance giant, commented to CDP3: "As an investor, we are concerned to know whether the companies we are investing in are adequately taking account of climate related risks. However, the data is not often available, sometimes not comparable or of poor quality. As a part of the Carbon Disclosure Project, we hope to collect more reliable data, so eventually, a common emission measurement methodology can be developed."

CDP has emerged as the central clearinghouse for corporate climate activity disclosure. And the value of that service to the investment community is reflected in comments such as Faber's.

The weight investors themselves place on the information as they make their investment decisions can be over-shadowed by performance concerns.

"Institutional investors are like anybody else," Horizons Carlson continued. "They are judged on their performance in shorter and shorter time periods, so they tend to favor those companies that can deliver a payoff in ever shorter times. Oil companies are making money for their investors. They aren't too concerned about Kyoto at this point."

Climate change might be eclipsed by the investment climate, Carlson added. Not only are oil sector profits so attractive, but they are a shelter in what is currently a tough investment environment. "The group has been very strong in a choppy market," he pointed out. "Especially in these types of environments, people migrate to stocks that can turn in a strong performance."

"Oil prices, spurred by supply concerns, have continued to move higher, carrying with them oil stocks," - Charles Carlson, CEO of Horizon Investment Services

Carol Cole, Senior Editor, Octane Week

Copyright Hart Energy Publishing, LP Oct 2005

Source: World Refining

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