A convenient truth: ABN AMRO develops eco-index

Global warming may be an inconvenient truth, but take heart, a new index product from ABN AMRO could help investors turn climate change into a windfall.
Investors will soon be able to profit from climate change thanks to a new index created by ABN AMRO. The Dutch bank, whose Amsterdam headquarters will end up underwater if scientistsÆ predictions are right, has developed an index comprising companies whose businesses are connected to global warming or the environment.

Like climate change itself, the growth of such companies û such as makers of solar panels and fuel cells û seems a sure thing. Climate-change deniers, who were well-represented in the mainstream until just a few months ago, are now mostly consigned to a lunatic fringe as boffins around the world continue to uncover evidence of our damaging effect on the planet.

Reversing that damage is the key to our continued existence, of course, but will also represent a bonanza for investors who correctly pick the companies most likely to make it happen.

Indeed, the market for eco-themed investments is already established. ABN AMRO created a series of indices last year that focused on individual industries û carbon emissions, renewable energy, water, solar energy, bio-ethanol, bio-fuel commodity and natural gas.

Miles Ashton, Asia head of sales for the bank's private investor products team in Hong Kong, says that investors have bought more than Ç1 billion of the bankÆs eco-market products so far. "That's just in the retail sector," he adds. "When you add the volumes from corporate and institutional investors itÆs clear weÆre talking about a very sizeable market."

These existing indices are fine for investors with a strong view on which sectors are going to outperform the others, but those who are less certain may want to hedge their bets with a product that can adapt to developments in the market, taking greater exposure to technologies or industries that develop faster and cutting exposure to those that do not.

"Most of the eco-market products so far have focused on a particular sector," says Ashton. "With the climate change index weÆre looking to give investors broader exposure, combined with an index that can evolve. ItÆs the next step."

ABNÆs approach breaks down the climate change and environment sector into three segments: renewable energy, water and waste management, and catalytic conversion. Within these segments, each sub-sector is weighted according to its overall size and growth potential. The index then invests in the biggest and most actively traded companies within each sub-sector. Standard & PoorÆs calculates and maintains the index.

Wind power 10%
Hydro power 10.5%
Solar energy 8%
Bio-ethanol 8%
Other alternative fuels 8%
Geothermal power 0.5%
Water 25%
Waste management 20%
Platinum and palladium mining 10%
The first product available to investors will be a straight-forward index tracker, with more complex structured products coming on stream later in the year.

Using historical data, an index tracker would have performed well. If the climate change index, the S&P 500 and Eurostoxx 50 are all reset to a value of 100 at the start of 2001 and their respective performance plotted through to today, the result is compelling. Both the S&P and Eurostoxx end up at less than 150, while the climate change index is nudging 250.

As the evidence of climate change mounts, governmentÆs are finding it harder to resist the pressure to act, which should help accelerate growth in the sector.

The latest report from the UNÆs panel of climate experts, due out in April, will deliver another hammer blow to the sceptics. The Intergovernmental Panel on Climate Change, representing the most authoritative scientific opinion on the subject, reports that global warming is not only happening, but may now be irreversible.

In a separate study published in February, the IPCC also reported that humans are "very likely" to be the cause of this warming.

In other words, the case for climate change is about as irrefutable as any scientific theory can be. Making money from it may be easier than fixing it, which could prove to be the silver lining of a very large cloud.
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