New Climate Action May Impact Dividend Growth

Posted on October 11th, 2012 by

Out-of-control firestorms in Colorado and 100-degree heat index in the nation’s capital served as an apt backdrop for an important court ruling on climate risk.

The U.S. Court of Appeals for the District of Columbia found that the EPA’s interpretation of the Clean Air Act to regulate carbon dioxide regulations is “unambiguously correct.”  The three-judge panel unanimously agreed with the Environmental Protection Agency’s finding that carbon dioxide is a public danger.

According to David Doniger of the Natural Resources Defense Council,”These rulings clear the way for EPA to keep moving forward under the Clean Air Act to limit carbon pollution from motor vehicles, new power plants, and other big industrial sources.”

A handful of large companies had hoped that lobbying would deter these new regulations. For investors who have been paying attention, however, it is clear that the trend toward cleaning up emissions has been underway for some time.  Investors may now look at climate issues as quantifiable risks to their portfolios. It is clear that the foot-draggers have some ground to make up, and that could be a costly endeavor.

Take the case of electric utilities:  These companies have long been predictable investments for individuals, earning a regulated rate of return and generally growing their sizable dividends. This is increasingly in question.

Helped by local regulations, many utilities have heeded the call to clean up their act. They have begun to generate power by means other than burning coal.  Or they have installed expensive equipment to meet future emissions regulations.  While the markets had not yet rewarded all of them for these actions, expect sentiment to turn in their favor.  Their investments will turn out to be valuable, and those who have delayed taking action could see lower dividend growth rates going forward.

The good news for investors is that most companies have been disclosing carbon and other emissions for some time.  Organizations like Trucost PLC have been tracking carbon emissions for more than ten years.  The Carbon Disclosure Project polls more than 6000 companies on emissions and water use.  The information is there for investors to access, if they choose.

Despite all of this transparency, some large companies keep information to themselves.  Like the borrower who won’t share a personal financial statement with the banker, it’s hard to imagine that investors will just trust that these future costs will be modest.

Investors would be wise to follow the example of large institutions:  Refuse to invest in companies that won’t disclose the impact of their operations.

The opinions expressed in this article are solely those of the author, Scott Sadler, Boardwalk Capital Management.
For more information, discuss this topic with your advisor or visit Boardwalk Capital Management.

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