Copenhagen deal to help boost climate fund flows

By Natsuko Waki - Analysis

LONDON (Reuters) - Agreement in Copenhagen next month on a new pact to fight climate change will encourage long-term investors to move into firms better placed to cope with a likely and eventual rise in the cost of carbon emissions.

A strong political deal including targets for emission cuts at the Dec 7-18 summit might be just enough to accelerate moves by investors such as pension funds or sovereign wealth funds to adjust portfolios to better reflect long-term risks from climate change, asset managers reckon.

It is also likely to boost growth rates of firms which are either energy self-sufficient or engage in alternative energy such as wind or solar, while pressuring emission-intensive industries such as utilities, aluminum or car makers.

And a more concrete deal -- such as a legally binding target to cut emissions -- would likely to prompt funds to start to change their asset allocation now to protect portfolios from the impact on companies hit by a rising cost of emissions.

"It's effectively a global treaty to control pollutants. You are intervening in the economy to control and internalize the cost of carbon," said Bruce Jenkyn-Jones, managing director of listed equities at Impax Asset Management.

"The idea that... people will pay for carbon right across the economy will have an impact on products and services. Big energy producers, utilities and industrials will be affected."

Impax manages a total of 50 million pounds in global equities for the UK Environmental Agency's Active Pension Fund.

The strength of a Copenhagen deal is still very uncertain. At a preparatory UN meeting in Barcelona last week, developed countries played down expectations of agreement on a legally binding text, saying that would take an additional 6-12 months.

But developing countries are suspicious of backtracking on commitments from rich nations which have promised to lead in the fight against climate change. They insisted on a legally binding deal in December.

"Politicians have done a good job of lowering expectations. That's exactly why there's real opportunity here. Decisions made in Copenhagen will dramatically influence growth rates of companies you are investing in," said Simon Webber, fund manager at Schroders.

He reckons immediately affected industries from a concrete deal included power generation, utilities and transport, citing that some utilities -- such as Germany's RWE -- could face higher carbon costs that are equal to almost a third of operating profits in the next few years.

He added the $26 billion deal in November by Warren Buffett to buy railway firm Burlington Northern Santa Fe highlighted the long-term viability of rails.

"(An aggressive deal) will mean nuclear power and solar growth rates will take off in these industries. There will be a major shift from combustion engine cars to electric vehicles. There's no other way of meeting tough initial targets," he said.

Malcolm Gray, portfolio manager at Investec Asset Management, says energy self-sufficient industries such as sugar can better cope with emission reductions and will attract flows. Some utilities in the traditional thermal space and aluminum producers that are not diversified will be exposed.

As the cost of goods will be adjusted to take into account the increased cost of production as a result of high carbon prices, consumers with less disposable income and some high-volume low-margin retail business might also be losers.