August 08, 2007
Merrill Lynch Offers New Energy Efficiency Index
by Anne Moore Odell
Merrill Lynch expands its line of "green" indexes with a new product that tracks the growing
movement to reduce energy costs and CO2 emissions.
Merrill Lynch's (ticker: MER) new index identifies companies
where less is more, at least in terms of energy consumption and CO2 emissions. The Merrill Lynch
Energy Efficiency Index (EEI) was recently launched with a universe of 40 global companies found in
four sectors that should benefit from improved energy efficiency. With this new index, Merrill
Lynch adds to its list of "green" indexes, as well as to a growing list of "clean" energy and
climate change indexes offered by other index providers.
"The energy efficiency
index stands out because it really is the only index to focus exclusively on the demand side of the
energy equation and identifies the segments of the market which are best placed with products which
lower the consumption of energy and by so doing lower CO2 emissions," said Asari Efiong, SRI/
Renewable Energy Analyst for Merrill Lynch.
Merrill Lynch singled out the automotive
industry, building materials, capital goods, and semiconductors sectors as sectors that will most
likely gain from an increase in efficiency.
"Companies which are leaders in their
industry in looking to improve efficiencies - what people tend to call 'best in class' companies -
are cutting operational costs and are likely to be better managed overall, and a growing body of
research indicates that they have a competitive advantage over their peers that should improve
their profitability and bode well for investors," commented Michael Kramer, AIF, Managing Partner
and Director of Social Research for Natural Investment Services.
index considers the rise in regulations on CO2 emissions and new fuel emission standards-from the
local level to the national and global levels-and the companies that will benefits from these
policies. Analysts at Merrill Lynch project that the global manufacturing industry could improve
its energy efficiency by 18% to 26% over all and reduce the sector's CO2 emissions by 19% to 32%.
"The relatively low cost energy savings and carbon emission reduction potential that could
come from improving energy efficiency in buildings, transportation, industrial processes, etc. is
still relatively under-explored," said Efiong. "One of the reasons for this is the sheer breadth
and complexity of the challenge as it involves billions of small emitters rather than the limited
number of big companies currently subject to heavy regulation under the European emissions trading
scheme (the ETS) for instance," Efiong added.
Merrill Lynch analysts conclude that
automotive companies identified as market leaders in new technologies that help increased fuel
efficiency will profit. The index also includes capital goods companies that are well positioned to
reduce CO2 emissions and energy consumption.
The buildings sector was marked as the sector
with the biggest potential for energy efficiency at the lowest costs. The companies selected for
the index include manufacturers of building insulation. Merrill Lynch believes that the growth in
this sector mirrors new legislation, especially from the European Union, that regulates energy
The Merrill Lynch EEI also includes power semiconductor market leaders
and other companies that help lower energy consumption, for example, with efficient lighting and
smart metering. By examining the entire electricity supply chain from power generation to
consumption, the index's creators were able to find companies well positioned to benefit from
The Merrill Lynch EEI is possibly the first index to focus solely on
energy efficiency, although there are a small, but growing number of indexes that follow "clean"
and "renewable" energy.
Earlier this year, index giant Standard and Poor's launched its
Global Thematic Index Series, which includes the S&P Global Clean Energy Index. Other well-known
indexes that follow clean energy include the WilderHill Clean Energy Global Innovation Index, the
NASDAQ Clean Edge U.S. Index, the KLD Global Climate 100 Index and the Ardour Global Indices. The
EEI joins Merrill Lynch's family of "clean" energy indexes: Merrill Lynch Renewable Energy, Merrill
Lynch Uranium Index, and Merrill Lynch Emerging Markets Infrastructure Index.
serves an important function in highlighting those companies which are leaders in their respective
industries in adopting energy efficiency measures, but it does not mean that these companies are
necessarily 'clean' or socially responsible in a broader sense," said Kramer. "In fact, none of
the environmentally focused indices currently available conduct this broader social analysis, even
though holding sector indices as a part of a socially responsible portfolio makes financial and
ideological sense for many social investors," he continued.
"When widely recognized firms
like Merrill Lynch consider energy efficiency in evaluating investments, it indicates that the
conventional investment world is echoing the social investment community in acknowledging the
correlation between environmental and financial performance. What would make an index like this
more appropriate for socially responsible investors would be the inclusion of social and governance
criteria in the selection of companies, but certainly mainstream investors will appreciate this
lighter shade of green," Kramer concluded.