June 2, 2008 / 7:58 AM / 11 years ago

US power firms risk value hit over climate -banker

BEIJING, June 2 (Reuters) - U.S. utility firms that produce above-average amounts of greenhouse gasses could face a fall in their stock-market value as the country moves to regulate emissions, a senior investment banker warned on Monday.

Jack Rivkin, chief investment officer of Lehman Brothers Holdings Inc’s LEH.N Neuberger Berman unit, said European company valuations began to reflect their environmental profile when an emissions-trading system put a price on carbon dioxide.

And as consensus grows in Washington about the need to tackle climate change, energy companies in the United States face a similar moment of reckoning.

“If the U.S. is moving towards a carbon regime, are we likely to see the same tilt you got in the European Union? Our bet is yes,” he told a seminar in the Chinese capital Beijing.

“The market place seems to be already taking into account the impact of climate change on valuations.”

The price-to-earnings ratio of European power firms with a low “carbon intensity” — the amount of carbon emitted for each unit of electricity generated — rose as high as 19 in 2008 from an average 14 in 2004.

But those with a high carbon intensity saw their ratio drop as low as 11 over the same period, as a ‘cap and trade’ system took effect, Rivkin said, citing his firm’s own recent research.

There has not yet been a similar shift in the U.S. market, he said, perhaps because investors were waiting to see how hard any prospective emissions control system would be on big polluters.

This month the U.S. Senate is to debate a bill that could cut total U.S. global warming emissions by 66 percent by 2050, but it is unlikely to become law this year despite many state-level schemes and growing domestic support for action.

He was optimistic, however, that industry values might shift in response to a growing amount of hard statistical evidence proving that firms could profit from producing cleaner energy.

“If you can convince the CEO that the value of his company will change in response to some variable, they will react.”

Mutual funds that made “climate change oriented” investments over the past five years got returns almost 20 percentage points higher than those tracking the Standard and Poor’s 500 index, Rivkin added.

He also pointed out that investors could win from indirect plays, such as agricultural machinery maker Deere & Co (DE.N), that are likely to see a rise in business as biofuels and climate change add to the pressure for higher yields from arable land.

Neuberger Berman’s own Climate Change mutual fund, launched on May 1 about a year after the company started its portfolio, has around 56 percent of its investment in stocks focused on cleaner energy, 23 percent in companies benefiting from energy efficiency, and 20 percent in those looking at adaptation.

The majority of its picks are U.S. firms, although more than a fifth of its investments are in Europe and some 5 percent are spread across the rest of the world.

But he warned that geographical differences in the impact of climate change — he cited the possibility of higher-than-average temperature increases in India — could raise the risk of investments in some countries. (Reporting by Emma Graham-Harrison; Editing by Ken Wills)

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