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Banks Seize Global Warming Investment Opportunities

Paul Adams

3 August 2007

Mounting public concern about the effects of climate change and the attempts of politicians to minimise the effects of global warming through the introduction of tougher legislation are providing interesting investment opportunities. Both Credit Suisse and Merrill Lynch have been quick to seize on the likelihood that companies that adopt cleaner production methods and those providing solutions to help firms reduce the use of energy, raw materials and emissions of the so-called "greenhouse gases" are likely to benefit from increased profitability. This week both banks have launched new indices for this increasingly important business sector. The Credit Suisse Global Warming index provides opportunities to invest in renewable energy and carbon controlling stocks which are selected by the bank's equity research and HOLT teams. The bank’s Global Equity Strategy and Equity Research teams have identified key investment opportunities created by environmental sustainability issues, particularly in companies involved in demand management (e.g. more efficient energy consumption), emissions limitation, renewable electricity and renewable fuels. Stefano Natella, managing director and head of Global Equity Research said: "This themed index is the next step in Credit Suisse's efforts to supplement our research with relevant thematic indexes on key global issues." Jessica Houtepen, managing director and head of Global Equity Derivatives Structuring, said: "By combining the expertise of our energy research, HOLT and structuring teams, Credit Suisse has created an index with strong historical performance, which provides a solid base for a range of structured products." The bank's Global Energy Research team first generated a global universe of global warming-related stocks, and then chose the top 120 stocks by market capitalisation from that group. HOLT factors were used to assess these companies' operational quality, cash flow valuation and market sentiment, selecting the top 40 companies to constitute the index. Calculated by Standard & Poor's, the index is rebalanced every February and August and is calculated as a synthetic price return and total return index in dollars, Euros and Swiss francs. And Credit Suisse are not alone in looking at this space. Merrill Lynch’s new Energy Efficiency Index has been launched to identify industry sectors which should benefit from the global drive to improve energy efficiency. The index is currently comprised of 40 companies globally that the bank believes should benefit from the growing momentum to reduce CO2 emissions and the cost of energy. "While there has been a clear shift of resources and investor attention into renewable energy, energy efficiency remains an area that is relatively under-explored," said Asari Efiong, Merrill Lynch Renewable Energy equity analyst. "We believe that energy efficiency represents a significant market opportunity for investors, as policy changes look set to force a structural shift in demand." Merrill Lynch has identified the automotive industry, capital goods, semi-conductors and building materials as most exposed to this theme. The bank’s Energy Efficiency Index is divided into four components: integrated plays with a focus on the capital goods sector; fuel efficiency in the automotive industry; building insulation; and energy-efficient solutions, including products, applications and industrial processes.