Investors who scoff at movie stars arriving at awards shows in hybrid SUVs might easily dismiss global
warming as the topic du jour. After all, many Americans have responded to both
celebrity pretension and sky-is-falling environmental rhetoric with a collective
yawn. A survey in January by the Pew Research Center for the People & the
Press asked Americans to rank priorities for the president and Congress—global
warming placed 20th of 23 issues. Yet beyond the public’s indifference,
fundamental economic and political change is underway. Fifteen states,
representing 38 percent of the U.S. gross state product, will have regulations
in place by 2012 to limit greenhouse gas emissions, according to a report by
Citigroup. The leading presidential candidates from both parties have made
statements about climate change, suggesting that more federal regulation of
carbon emissions and gas mileage are likely to be part of our collective future.
As Edward Kerschner, chief investment strategist at Citi Global Wealth
Management, says, "Whether or not you believe in climate change, regulation is
here, and it is going to create winners and losers."
To gain better insight into how this ill-defined future might
impact the economy, the markets and individual investors, Worth spoke to five experts—three backed by the resources of global investment
banks, one who has been investing in environmental plays since 1990 and one who
brings a distinctly tech-oriented view to his analysis of the
markets.
Edward Kerschner: Regulation is here and it is going to
create winners and losers. Just because you don’t believe in climate change
doesn’t mean you don’t want to invest in companies being affected by the
perception of it. Robert Weissenstein: A whole
business and economic framework is developing around this issue. The question
used to be: What will we do when we run out of oil? That’s not green so much as
it is a question of how we will keep our economy going. Where will we go when
that finite resource ends? Well, we will identify replacement energies that
work. A lot of those—ethanol, solar, wind—used to sound like crazy sources of
energy, but we now know that they are viable alternatives to oil and gas. The
next step is building the infrastructure to deliver these alternatives in a
cost-efficient, practical way. I don’t know how green a train is, but you need
to transport ethanol, so maybe trains are good investments.
 | DAVID DARST chief investment strategist, Morgan Stanley’s Global Wealth Management Group in New York. |
David Darst: I think that it
depends on what you’re talking about. Solar has a Holy Grail aspect to it, and
it is considered more long term. There has been this feeling that if we could
figure out a way to collect it and transmit it, that’s the key. Biofuels, such
as ethanol, on the other hand, could be cyclical. Weather can play a big role in
the economics of biofuel, and then you have government policy coming into play
with farm-belt politics and trade agreements with places like Brazil. Then you
have the question of sugar ethanol versus corn ethanol. Also, a lot of people
say the economics of biofuel don’t make sense. There is some disagreement.
Kerschner: Regulation by the
government drives these developments. For example, the volume of carbon futures
traded on the European Climate Exchange [in Amsterdam] more than doubled between
March 2006 and March 2007. Why? Because in Europe, new regulations take effect
in 2008 limiting carbon emissions. In terms of governmental regulation, Europe
is ahead of the United States, and most countries have set targets for renewable
energy. However, there are a number of things the U.S. government can do, like
creating research-and-development subsidies and tax subsidies. It can also fund
research and regulate the number of miles per gallon required in
automobiles.
Jeffrey Leonard: I’m not a
big believer in subsidies, but you need a critical mass of infrastructure. You
need subsidies to make some of these things work. We haven’t been consistent
with government support. In 1979, 2 percent of government spending was on
R&D in environmental innovations. Today it’s two-tenths of 1 percent.
I’m also concerned with the way we throw money into pork barrel
and white elephant projects today. These are 50-year challenges. I’d like to see
long-term government commitment, but instead, six months ago you had politicians
standing in cornfields and people throwing money at ethanol. Now there’s a
backlash against it.
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