UBS EXPERT: Why talk about climate change? Should businesses listen?

INTERVIEW

 

Changes taking place in the physical climate will have major ramifications for the world’s business climate, says a leading expert, but adds that it is not all too gloomy for corporations.

“Climate change will create investment opportunities and risks,” said Kurt Reiman, Executive Director and Head of Thematic Research at UBS.

In an interview with the Financial Mirror, Reiman explained that the investment advice that UBS provides to individual investors increasingly reflects factors that extend beyond the realm of financial markets and economics.

“Our goal is to provide advice that is relevant to investors, and climate change is certainly relevant,” he said.

Reiman said that energy use is predicted to grow tremendously in the next 40-45 years, which will lead to a parallel increase in greenhouse gas emissions.

“Emission reduction policies create risks for our investments through heightened regulation, loss of revenues and reputation. But on the plus side, we believe there are opportunities through energy efficiency and the heightened use of renewable energy resources.”

Increases in population and economic growth have led to the highest-ever atmospheric greenhouse gas concentrations in the past 650,000 years, principally because of energy use, agricultural practices, and deforestation. But energy use is the biggest contributor.

By citing an example, Reiman said that Cyprus consumes 4100 watts of energy per person, which is very close to the norm in Western Europe and is well below consumption in North America.

“But the world’s approach to energy is changing and many of the fixes are easy,” he said, adding that the average incandescent light bulb wastes roughly 95% of the energy it consumes in the form of heat.

“If policies are not enacted to control the emission of greenhouse gases, energy use from fossil fuels will increase,” Reiman said.

The UBS research focus entitled, “Climate change: Beyond whether,” was published earlier this year and projects that greenhouse gas emissions will continue to rise, but that policies will begin to slow the rate of growth.

The report, edited by Reiman, points out that there are active policies in many countries, such as subsidies for renewable fuels and photovoltaics. This confirms that investment opportunities related to climate change do, in fact, exist but are still quite regional in nature and dependent on government policies.

Reiman came to Cyprus as the guest of the Cyprus Chamber of Commerce and Industry (KEVE) and the Association of Business and Professional Women (BPW). While in Cyprus, he also spoke to an audience of the Rotary Clubs of Nicosia-Aspelia and Nicosia-Ledra.

“Voluntary commitments to improve energy efficiency and reduce greenhouse gas emissions can also make good business sense,” he said, as is the case of Vassiliko Cement Works.

“Such sound business practices create very powerful incentives, which are further reinforced by the perceived socially responsible component of climate change.”

“This subject is also hugely personal,” Reiman added. The question nowadays is whether climate change is going to accelerate and how it will manifest itself in local areas.

“There are certainly physical effects resulting from climate change, and in Cyprus, one would also need to consider the effect of a rising sea level on coastal properties and the impact of greater evaporation and less precipitation on agriculture.

Reiman noted that government mandates of particular emerging technologies might not produce optimal rates of return or allocation of capital. Yet government policies are necessary to reduce greenhouse gas emissions and limit the physical effects of climate change.

As with most environmental issues, free markets do not regulate pollution because no one has the incentive to do things differently.

“If I reduce my emissions, how do I know others will do so as well?,” Reiman describes as the most frequently asked question. This is why policies to regulate greenhouse gas emissions and create a level playing field are so important.

“An emissions trading system essentially says to large industrial emitters of greenhouse gases: ‘This is the amount of emissions you’re allowed, now you figure out how to get there’.”

In 2008 the European Union Emissions Trading Scheme (ETS) will come into effect in Cyprus. This will regulate many industries, and corporations will have to pay if they exceed their allotment of emission.

Governments can also establish standards and emission taxes to regulate various industry sectors and consumer products, and can also allocate subsidies to renewable energy use and energy-efficient products. In the end, the ability of these policies to reduce emissions will depend on how comprehensive these regulations are and how they are monitored and deployed.