Carbon dioxide, that's where the money is

CO2 will create a bubble

Gas works

"If you can invent something that devours carbon dioxide, fast, you'll be a very popular man."

CO2 Reduction: That's where the money is, says investment guru
Companies with innovative technology to reduce carbon dioxide emissions will gain a competitive edge and surpass their rivals in the stock market, according to Masaru Arai, director and principal executive officer of Daiwa Asset Management Co., a member of Daiwa Securities.

Arai has taken part in creating global standards for corporate disclosure of environment-related efforts and possesses in-depth knowledge of the correlation between global warming and the equity market.

Excerpts from a recent interview with Nikkei.net follow:

Q: Leaders of the Group of Eight major countries agreed at the Heiligendamm summit earlier this month to try and halve global greenhouse gas emissions by 2050. How will that affect the stock market?

Masaru Arai

A: That is good news for the market. Efforts to combat global warming encourage technological development and stimulate the economy. They also expand demand for alternative energy sources such as solar and wind power as well as carbon fiber, which can cut fuel consumption by reducing the weight of aircraft and cars.

Rises in global temperatures work against the world economy. The Intergovernmental Panel on Climate Change (IPCC) forecasts global warming would result in a loss of up to 3% in the world's gross domestic product in 2030. Market observers are monitoring the extent to which preventive measures will be able to mitigate the adverse effects on the economy.

Q: How much do you think global warming will impact the Japanese economy as a whole?

A: I am not pessimistic. One estimate says it will cost up to 9.8 trillion yen a year to reduce CO2 emissions by 2050 to a level 70% lower than that in 1990. Although climate change itself exerts downward pressure on the economy, the expenses incurred by the problem create new demand. If the fight against global warming results in technological development aimed at cutting CO2 emissions, that would lead to providing technical assistance or exporting related facilities to developing countries.

In developed nations, the creation of advanced technology to reduce CO2 output will be the key to alleviating downward pressure on the economy. That will be another focus of attention of investors. The competitive gap will widen between companies that have advanced technology and those that do not. The race for survival will change the key players in the stock market as well.

Q: Do you think investors are taking climate change into account when making investment decisions?

A: Global money only recently started to move in that direction. One example is the United Nations Environment Programme's Principles for Responsible Investment, which calls for institutional investors to make investment decisions by taking environmental issues into account. More than 180 investors, including pension funds, have signed the principles, with the combined assets under the management of the signatories doubling from last year to 8 trillion dollars.

Securities companies in the U.S. and Europe have started to assess company value from the standpoint of global warming measures by hiring analysts with expertise in the area. I think investment money will shift to companies that can benefit from global warming initiatives from those which will be adversely impacted.

Q: Could you elaborate on that?

A: Firms that emit a large amount of CO2, notably those in the oil industry, will be affected adversely worldwide. Among automakers, technological advances in reducing exhaust gas, such as by further developing diesel engines, will play a key part in determining winners and losers. Firms that lag behind others in technology development could see their stock prices hover lower and even be seen as acquisition targets by rivals.

On the other hand, benefiting from the trend will be companies with the technology to develop alternative energy sources. In the U.S., investment by venture capital companies that specialize in putting money into such firms tripled in 2006. Although their targets are unlisted stocks, this is a clear sign that investment money is flowing into the sector.

Q: What will be the impact on global stocks?

A: To investors that take climate change into account when choosing which stocks to buy, the shares of conventional electric power companies will be less attractive.

But the trend is a positive factor for Japanese issues as a whole. Japanese companies have world-class solar power technology and great potential in wind power, energy saving and the development of new materials. Investors have started to realize that, as can be seen in the rising stock prices of manufacturers of filters that purify automotive exhaust gases, for instance. To attract more investment in Japanese stocks, it will be necessary for the government to set clearer policies on global warming issues and for companies to disclose greater information on their efforts to tackle this important problem.

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