Ecobella Blog

A study by McKinsey in October of 2008 assessed the impact of carbon mitigation on benchmark companies in the aluminum, automotive, beer, construction, consumer electronics, and oil and gas industries.

They modeled their sensitivity to regulatory moves, technological shocks, and shifts in consumer demand and analyzed the potential impact on the cash flows and 2008 net present value. The events in these companies and sectors were examined in the context of their carbon intensity, geographic footprint, and ability to pass through costs and to redeploy capital.

In some industries, shifts in demand would have a broadly negative impact on company cash flows and therefore valuations. Oil and gas consumption, for example, would experience falling demand over the long term as the economy shifts toward cleaner sources of energy (including solar, wind, and carbon capture and storage), and as oil-consuming sectors (such as automotive and power generation) increase their emphasis on energy efficiency. They concluded that valuations would fall by around 5 to 15 percent depending upon the scenario.

By contrast, other industries could enjoy considerable gains. Companies in the building-materials sector—particularly those that do business in places where building efficiency is not yet a major issue—will probably benefit from rising demand for improved energy efficiency and insulation products, which will increase their cash flows. As compared with the business-as-usual scenario, the valuation of a representative building-materials company in the developed world increases by 35 to 80 percent depending upon the scenario. If more stringent regulatory measures do not materialize, valuations could fall by 10 to 20 percent as a result of possible short-term cost pressures.

Efforts to offset climate change will structurally transform certain sectors—including automotive and aluminum—which will experience more volatile returns and increased rates of entry and exit as new technologies or regulatory restrictions emerge and the competitive landscape changes.

As common sense would command, on given industries there will be winners and losers, depending upon the ability of the different companies to approach the challenge. Companies that address the challenges in a creative and innovative way would develop strengths that could help on their margins and thus their cash flows and valuations.

Some sectors will experience minimal long-term stress from carbon-abatement efforts: they will be able to pass along any short-term cost pressures to customers and will not face substitution by other products or significant shifts in demand. In such cases, profit margins would revert to average levels over the medium to long term. The consumer electronics industry, for example, will probably have the technology to deal with regulation in a way that will not harm the bottom line.

As nations and companies start acting more aggressively to reduce carbon emissions, major shifts in the valuations of sectors and companies will start to become clearer and more predictable. Over the next 18 to 24 months, a number of regulatory and policy events, such as the December 2009 Copenhagen conference to replace the Kyoto treaty, will probably reduce the uncertainty and spark a rethinking of how carbon reduction efforts will affect valuations across a wide range of industries.

Several steps can help companies and their executives as they start to position themselves to thrive in a low-carbon economy:

• Review the company’s exposure to regulatory measures (such as carbon pricing, new standards, taxes, and subsidies), new technology, and changes in consumer behavior
• Develop a consistent strategy, informed by analysis and to engage with policy makers to help shape/understand the policies and regulations
• Generating more sophisticated forecasts and deeper insights into climate change–related developments.
• Decisions about new corporate investments should be geared toward carbon- and energy-efficient technologies that will remain competitive over investment life cycles
• Network around knowledge centers (venture capital firms, universities, scientists) that can help companies understand and manage the impact of climate change and develop technology
• Companies will need to focus on how and when to signal the value of their climate change bets so that investors can assess them. Each company will have to explain its overall level of preparedness for the future, the way climate change–related events could affect its specific cash flows, and what differentiates it from its competitors in these respects.

So far very few public companies have succeeded in explaining the more deeply hidden effects of climate change on their cash flows and competitive strategies.

An easy first step that Corporations can take is to engage with companies that have already started their efforts to mitigate Climate Change in their chain of supply.

Permalink:www.mckinseyquarterly.com/How_climate_change_could_affect_corporate_valuations

2nd October, 2008

The airlines, led by Boeing, have commissioned two initial studies investigating algae and jatropha-sourced biofuels.

Aeroplane manufacturer Boeing is heading a biofuels initiative, supported by several airlines, which aims to accelerate the development and commercialisation of sustainable aviation fuels.

The basic target is to use biofuels and to replace fossil fuels in 2013.

The group has commissioned two initial studies investigating algae and jatropha-sourced biofuels’ lifecycle carbon dioxide emissions and socio-economic impact.

Airline members of the newly-formed Sustainable Aviation Fuel Users Group comprise Air France, Air New Zealand, All Nippon Airways, Cargolux, Continental Airlines, Gulf Air, Japan Airlines, KLM, SAS and Virgin Atlantic Airways, which claim to collectively account for 15-20% of commercial jet fuel use.

They have teamed up with Boeing and Honeywell’s refining technology developer UOP to research renewable fuel sources with the aim of cutting emissions, reducing the industry’s fossil fuel dependence and its exposure to oil price volatility.

‘The airlines in this group have all previously had their own initiatives and, for the first time, we have joined together as a common force,’ Gulf Air chief strategy officer Tero Taskila comments.

‘It will give us more force behind the cause, which will make it faster and we can address the issues globally.’

‘It is very important that, whatever alternative solution we have in the future, it can be produced locally,’ he adds. ‘It doesn’t make sense to have a refinery in Brussels supplying the rest of the world because taking the fuel around the world will create a carbon footprint.’

Following initial discussions in January, Taskila says members of the group met in Seattle in August with a follow-up meeting scheduled for October.

During this session the members will work to align their existing projects and come up with a detailed plan of how to progress.

Boeing is funding the research, which will be performed by the Natural Resources Defense Council and Yale University.

Permalink: http://www.biofuels-news.com/news/boeing_initiative.html