LONDON: Bond markets are poised to punish polluting companies in the aftermath of the Macondo oil spill and Fukushima nuclear crisis, said the head of Deutsche Asset Management, which manages 540 billion euros ($776 billion) in assets.
“The process of re-pricing carbon and environmental risk has begun, because these two events were catastrophic,” Kevin Parker, global head of DeAM, told Reuters in an interview.
By contrast, shorter-term equity and commodity markets have continued to chase high-carbon opportunities, including voracious emerging market demand for coal.
That contrast underlines the mixed signals driving a green economy. Environmental campaigners have long argued that markets do not adequately price the negative impact of industrial activity on nature, climate and human health.
But investors in longer-term debt including bonds will increasingly avoid unsustainable companies, said Parker, seeing an inexorable trend that will push up their borrowing costs.
“What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it,” he said.
Consultants, including Mercer in February, have advised investors to account for climate risk when making investment decisions.
Interest charged on BP’s newly issued bond debt actually fell in 2010 compared with before the Gulf spill, but against the backdrop of an improving economy, BP data show.
DeAM is in a sales drive to advise its clients about how to avoid environmental risk and invest responsibly.
Parker said it was possible to re-build a bond portfolio around low-carbon companies without cost in terms of credit quality, an attractive option in risk-averse bond markets.
“By switching to a low-carbon, sustainable bond portfolio you’re a risk avoider,” he said.
He acknowledged that in stock markets, by contrast, the renewable energy sector was dangerous without careful stock
picking, while surging coal demand was driving interest in high-carbon equities.
“Renewables on the equity side have been just a treacherous market to play. A lot of that has to do with the newness of the technologies, changing regulatory landscape, dashed expectations and hopes, herd mentality and bubble creation.”
“In coal, you’ve got this voracious appetite from China, then all coal companies go up in tandem. You would not go short coal and buy renewables, because the overwhelming demand for coal right now is huge.”
Parker added that he saw commodities as a growing asset class, given a growing world population and increasing consumerism in emerging economies.
“Pension funds have put their allocation up to about 3 percent now in commodities from 1 percent a few years ago. It’s viewed as an inflation hedge. There’s lots of underlying demographic data to support the increasing demand for commodities.”
DeAM manages funds with about $4.5 billion in commodities. “We think more pension funds will allocate to commodities. We’re bullish on the asset class.”