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Should bond investors think green?

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Isabelle de Grave asks whether funds and investors should be alert to the risk natural resource scarcity poses to sovereign bonds.

The environment is not often a business concern for bond investors. Only following the euro debt crisis has the idea that bonds are risk free been seriously challenged. Now the movers and shakers of the financial sector seek to deepen their understanding of credit risk by looking through an environmental lens.

As we ratchet up a lengthy list of environmental challenges, and grow our databases of near apocalyptic statistics to measure the toll human life is taking on the planet, environmental angles on economics and business are bubbling up to the surface.

Our burgeoning population and subsequent needs means we will need to produce 50% more food and energy and 30% more fresh water by 2030. Just a brief look at these statistics explains why an undercurrent is building around the need to focus on sustainable economics.

A recent project, titled E-Risc A new angle on Sovereign Credit Risk, by the UNEP Finance Initiative, Global Footprint Network and partner financial institutions, looks to bring environmental criteria into the decisions of bond investors and countries issuing bonds.

Eco-economists point towards a growing need to consider systemic risks, in particular environmental factors with an impact on multiple financial markets.

The E-Risc study stems from the wider logic that natural resources, both renewable such as food and fibre, and non-renewable such as fossil fuels, ores and minerals are critical to each nation’s economy.

Countries are increasingly depending on levels of natural resources beyond what their own ecosystems can provide. As natural resources become less readily available, costs rise and global competition for the planet’s limited resources increases.

On the basis that natural resource scarcity is now a significant factor of economic performance, analysts have developed a methodology to measure environmental risk for both sovereign bond investors and countries issuing bonds.

We’ve tried to make the link explicit between environmental factors and what they mean directly in terms of economic and financial performance”, said Martin Halle, lead author of the report and policy analyst at Global Footprint Network.

Brazil, France Japan, Turkey and India were analysed according to the environmental risk framework.

The study is an informative first step in a move to integrate environmental factors into mainstream sovereign credit risk assessment.

The results are of a magnitude that is large enough to have an effect on the variables that are traditionally considered to be credit risks”, Halle said via a phone interview.

In keeping with the logic of conventional risk assessments, the environmental factors were found to be financially material for sovereign credit risk not just in the medium term but also in the short run.

Delving into the findings, the researchers report that in the short-term, over a period of five years, a 10% change in natural resource-related commodity prices could alter a country’s trade balance by up to 0.5% of gross domestic product.

In terms of natural resource degradation, a 10% cut in the productive capacity of natural resources can cause a reduction in a country’s trade balance of between 1% and over 4% of gross domestic product.

On trade related risks for the countries analysed, Halle said, “France having a more balanced natural resource trade profile is less at risk from price volatility than a large exporter like Brazil or importer like Japan.”

Out of the five countries, Brazil is the only country in the sample whose ecosystems still generate more natural resources than its own population demands, proving most resilient to environmental degradation.

Recognising the value of the research, Bloomberg have made the Global Footprint Network’s country-level natural resource risk data (National Footprint Accounts) available on its terminal to help users integrate natural resource risk into sovereign debt, economic growth and company valuation models. 

Ivo Mulder a programme officer at UNEP Finance Initiative, said via email, “The E-Risc project has been an important litmus test to see how serious investors, banks and rating agencies are taking this analysis.”

At Davos 2013 it garnered attention at a sideline event, and despite the initial reticence of major credit agencies and the majority of financial institutions to engage with project from the offset, it is gaining traction.

I’m optimistic that in a year or two credit rating agencies and a number of institutional investors will have at least incorporated the environment as an additional factor that can affect a country’s economy”, added Mulder.

With Standard and Poor taking an interest in the environmental-economic findings on the corporate side, the E-Risc team continues to look for credit rating agencies and institutional investors to fuel the drive towards a sovereign credit risk framework that joins the dots between economics and the environment.

Isabelle de Grave is assistant editor at Pioneers Post. This article originally appeared on Pioneers Post.

Further reading:

Economy or environment: why choose?

Saving the world or getting healthy returns is a false choice in finance

Climate change is ‘not a high priority for most politicians’

Are capitalism and conservation incompatible?

Britons want government to tackle climate change and grow economy

Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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