Cap-and-Trade and Alternative Research



With the primaries reaching an end, the main presidential candidates, John McCain and Barack Obama, as well as voters can finally focus on the substance of policy proposals. One of such proposals stands out because of its potential impact on the investment research industry, especially on Economic, Social and Government (ESG) research: the cap-and-trade system, an administrative measure to control gas pollution by limiting the amount of emissions allowed for each company in the US.

Different versions of the cap-and-trade system have been proposed by the two main candidates in an attempt to significantly reduce carbon emissions in the US. According to the campaigns’ website, Senator John McCain proposes a system that sets a limited amount of greenhouse emissions for individual companies and allows them to buy and sell their rights to emit. Senator Barack Obama, on the other hand, supports a system where pollution rights will be auctioned in their totality. Each polluter would pay for every ton of emissions they release instead of yielding their rights away to the major polluters. The money collected from this auctioning would be destined for environmental improvement.

ESG research aims at integrating environmental, social, and governance issues with investment analysis and valuation. This integration of ESG issues with investment analysis has raised intense controversy as some see it as a deliberate way to politicize investments following liberal ideals covered by a veil of neutrality. Despite this, Integrity has witnessed the growth of ESG research in the past decade responding to increasing demand from investors –our database includes over 30 firms specializing on ESG research, including Trucost, Innovest, and KLD, among others.

Liberal maneuver or not, ESG has become a hot topic around the world. Given some scientific proof of the warming of the planet, social and political pressures increasingly call for an effective control of greenhouse gas emissions. International organizations such as the UN and the World Bank have launched initiatives to involve the corporate world into the green era. Needless to say, efforts such as Al Gore’s book and his Nobel Peace Prize have put the issue in the front pages and in the forefront of people’s consciousness. These trends are likely to impact consumers’ preferences, and consequently, corporate finances.

The alternative research industry, especially ESG research, will help investors to understand the risks, liability, and profitability of different companies. Both candidates’ proposals on cap-and-trade carry implications for companies at the financial level, of course, but also at a more structural level. If the cost of greenhouse gas emission is high enough, companies will have to adopt restructuring measures such as tech development and transparency in order to maintain their productivity and their profit with a lower level of emissions. ESG research will necessarily have to dig into the firms’ initial adaptation to the cap-and-trade system and follow up on their performance under the caps.

Senator McCain’s proposed trading system would oblige ESG research firms to keep an eye not only on the companies’ measures to control their emissions, but also on the economic returns and expenditures related to this issue. Senator Obama’s proposed auctioning system will require ESG research firms to pay close attention to the resources destined either to reducing emissions or to pay for the pollution caused.

ESG concerns are on the rise and the main presidential candidates have launched relevant proposals for controlling the earth’s warming. Integrity believes that ESG research, despite the controversy around it, will respond to the demands and to the concrete policies on cap-and-trade. The polar bear, a recently declared threatened species, will certainly cheer the increased use of ESG research.


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