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Energy Efficiency Indexes Focus on Financial Potential of Energy Savings

Investment indexes including S&P, Merrill Lynch, WilderHill, KLD and NASDAQ Clean Edge focus on energy savings

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"The Merrill Lynch energy efficiency index (EEI) stands out because it really is the only index to focus exclusively on the demand side of the energy equation and identifies the segments of the market which are best placed with products which lower the consumption of energy and by so doing lower CO2 emissions," said Asari Efiong, SRI/ Renewable Energy Analyst for Merrill Lynch.

Merrill Lynch singled out the automotive industry, building materials, capital goods, and semiconductors sectors as sectors that will most likely gain from an increase in efficiency.

Merrill Lynch's index considers the rise in regulations on CO2 emissions and new fuel emission standards-from the local level to the national and global levels-and the companies that will benefits from these policies. Analysts at Merrill Lynch project that the global manufacturing industry could improve its energy efficiency by 18% to 26% over all and reduce the sector's CO2 emissions by 19% to 32%.

"Companies which are leaders in their industry in looking to improve efficiencies - what people tend to call 'best in class' companies - are cutting operational costs and are likely to be better managed overall, and a growing body of research indicates that they have a competitive advantage over their peers that should improve their profitability and bode well for investors," said Michael Kramer, AIF, Managing Partner and Director of Social Research for Natural Investment Services.

The Merrill Lynch Energy Efficiency Index (EEI) was recently launched with a universe of 40 global companies found in four sectors that should benefit from improved energy efficiency. With this new index, Merrill Lynch adds to its list of "green" indexes, as well as to a growing list of "clean" energy and climate change indexes offered by other index providers.

"The relatively low cost energy savings and carbon emission reduction potential that could come from improving energy efficiency in buildings, transportation, industrial processes, etc. is still relatively under-explored," Efiong said. "One of the reasons for this is the sheer breadth and complexity of the challenge as it involves billions of small emitters rather than the limited number of big companies currently subject to heavy regulation under the European emissions trading scheme (the ETS) for instance."

Merrill Lynch analysts conclude that automotive companies identified as market leaders in new technologies that help increased fuel efficiency will profit. The index also includes capital goods companies that are well positioned to reduce CO2 emissions and energy consumption.

The buildings sector was marked as the sector with the biggest potential for energy efficiency at the lowest costs. The companies selected for the index include manufacturers of building insulation. Merrill Lynch believes that the growth in this sector mirrors new legislation, especially from the European Union, that regulates energy efficient building.

The Merrill Lynch EEI also includes power semiconductor market leaders and other companies that help lower energy consumption, for example, with efficient lighting and smart metering. By examining the entire electricity supply chain from power generation to consumption, the index's creators were able to find companies well positioned to benefit from energy efficiency.

The Merrill Lynch EEI is possibly the first index to focus solely on energy efficiency, although there are a small, but growing number of indexes that follow "clean" and "renewable" energy.

Standard and Poor's has launched the Global Thematic Index Series, which includes the S&P Global Clean Energy Index. Other well-known indexes that follow clean energy include the WilderHill Clean Energy Global Innovation Index, the NASDAQ Clean Edge U.S. Index, the KLD Global Climate 100 Index and the Ardour Global Indices. The EEI joins Merrill Lynch's family of "clean" energy indexes: Merrill Lynch Renewable Energy, Merrill Lynch Uranium Index, and Merrill Lynch Emerging Markets Infrastructure Index.

"This index serves an important function in highlighting those companies which are leaders in their respective industries in adopting energy efficiency measures, but it does not mean that these companies are necessarily 'clean' or socially responsible in a broader sense," Kramer said. "In fact, none of the environmentally focused indices currently available conduct this broader social analysis, even though holding sector indices as a part of a socially responsible portfolio makes financial and ideological sense for many social investors."

"When widely recognized firms like Merrill Lynch consider energy efficiency in evaluating investments, it indicates that the conventional investment world is echoing the social investment community in acknowledging the correlation between environmental and financial performance," Kramer said. "What would make an index like this more appropriate for socially responsible investors would be the inclusion of social and governance criteria in the selection of companies, but certainly mainstream investors will appreciate this lighter shade of green."

Edited by Carolyn Allen, owner/editor of California Green Solutions
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