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June 21, 2005
Merrill Lynch and World Resources Institute Analyze Climate Change Investment Opportunities
    by William Baue

The jointly-produced report, the first such collaboration between a mainstream US investment bank and a environmentalist nonprofit, breaks new ground by issuing stock recommendations.


A report connecting the dots between climate change and investment opportunities coming from the World Resources Institute (WRI), an environmental nongovernmental organization (NGO) with market expertise, is not surprising. What is surprising is such a report being jointly produced with mainstream investment bank Merrill Lynch. This is the case in a report entitled Energy Security & Climate Change: Investing in the Clean Car Revolution, which was released late last week.

"The report is novel in two main respects: first off, to our knowledge, this is the first time a US investment bank has partnered with an environmental NGO on research," said Fred Wellington, a senior financial analyst leading WRI's capital markets research team, who contributed to the report. Interestingly, Merrill Lynch proposed the collaboration to WRI, not vice-versa, as one might expect. "They are familiar with our work, and we've had an ongoing dialogue for about a year-and-a-half, but this report is not a result of us pressuring them to put it out."

"The second way it is interesting is that other investment banks, mostly out of their European offices, have put out very good research on climate change, but the Merrill Lynch report makes actionable stock recommendations on the back of a global analysis of climate change policies," Mr. Wellington told SocialFunds.com.

The first part of the report examines how energy security and climate change are driving governmental responses in the form of regulation, outlining the Kyoto Protocol as well as regulations in the European Union, US, Canada, Japan, China, and Australia.

"Clearly, there is a discernable trend towards regulating emissions of carbon dioxide and other tailpipe emissions from the burning of fossil fuels," state the report authors, led by John Casesa, Merrill Lynch global auto team coordinator. "As the causes of human-induced climate change become more generally accepted, policies to reduce GHG emissions will continue to proliferate."

Another factor driving the auto sector to address energy security and climate change is demand from consumers, who want more environmentally friendly cars but do not necessarily want to give up on performance and features. This poses a technological challenge to the sector.

"This is what we mean by the Clean Car Revolution: in a world of finite resources, higher consumer expectations are stimulating a technology race to meet them," the report states. "For investors, solutions to these challenges present a compelling investment opportunity."

The report provides analysis of the seven companies the Merrill Lynch global auto team believes are best positioned to capitalize on what it calls the clean car revolution, including BorgWarner (ticker: BWA), Hyundai (HYMTF.PK), Magna International (MGA), and Toyota (TM).

"Perhaps the company in our global universe most leveraged to the trends outlined in this report is Detroit-based BorgWarner Automotive," states the report, referring to the car components manufacturer. "[A]lmost all of BorgWarner's key products offer the benefit of higher fuel efficiency and/or lower emissions."

"We rate BorgWarner Neutral, as the stock's current valuation appears to reflect the company's attractive growth prospects," the report continues.

After outlining Hyundai's research and development efforts to proactively deal with environmental regulations, such as focusing on hybrid electric and fuel cell vehicles, diesel engines, and fuel efficiency enhancements, the analysts give Hyundai a neutral rating.

Buy ratings go to Magna, primarily on the strength of its metal hydroforming technology allowing for the production of lighter, stronger, more fuel-efficient vehicles, and Toyota, the global leader in hybrid technology according to the analysts.

The report exemplifies the very type of climate change research by mainstream financial institutions called for by the Investor Network on Climate Risk (INCR) in its ten-point "Call for Action" issued at the United Nations summit last month.

"I think this report is the first to come out since the recommendation was made," said Mr. Wellington, who co-authored a report on climate risk investment strategies sponsored by INCR, a consortium of two dozen US and European institutional investors with over $3 trillion in assets. "However, it is not at all a result of the INCR conference--we at WRI have been working on this with Merrill Lynch since well before the summit."

The report sets a high water mark for other mainstream investment firms to best in answering INCR's call.

 

 
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