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Mark Nicholls, editor
Environmentalists have much to despair about when it comes to the current lack of urgency surrounding the fight against climate change. Cowed by recession and chastened by over-reach in the run-up to the 2009 Copenhagen talks, policy-makers have de-emphasised global warming as a pressing issue and, in the US particularly, efforts to rein in greenhouse gas emissions appear to have gone into reverse.
This loss of focus undoubtedly affects investors – especially opportunistic ones looking for the next investment theme to make them money. While media interest and politicians’ soundbites do not make an investment case, they do generate interest and at least encourage investors to explore ‘sexy’ new areas such as alternative energy, low-carbon transport or carbon trading. Their absence matters.
So it is heartening to see two initiatives that provide evidence that institutional investors are increasingly concerned about climate change, and which will also serve to accelerate the integration of environmental analysis into the investment ‘mainstream’.
The first is the news that rating agency Standard & Poor’s (S&P) is to begin systematically integrating climate risk into all its corporate bond ratings. The outcome will be a carbon exposure figure expressed in dollars or euros of earnings – a purely financial metric designed with clear relevance to fixed income investors.
Of course, for most companies, that figure will not be material at present – and Michael Wilkins, the S&P managing director leading the initiative, acknowledges that the move will not lead to a slew of ‘rating actions’ over the next year or so. But S&P is getting ready for when “carbon policy is going to bite hard”.
Meanwhile, investment consultancy Mercer has released a landmark report – The Impact of Climate Change on Strategic Asset Allocation – intended to guide institutional investors as they seek to manage the risks and exploit the opportunities presented by the issue.
The numbers that the report contains are stark: climate change is likely to contribute 10% to portfolio risk, it could cost investors $8 trillion over the next 20 years and low-carbon technology investment opportunities could total $5 trillion by 2030.
Investment consultants such as Mercer are often seen as the ‘gatekeepers’ for investors managing trillions of dollars of assets who rely heavily on their advice; they have, in the past, been criticised for ignoring or downplaying socially responsible investment options. That the company is now advising investors how to shift their portfolios to take account of climate risk is likely to begin to move enormous sums of capital.
As forward-looking as both of these initiatives are, what is most encouraging is that neither emerged from a vacuum. Both are as much a result of client push as adviser pull – investors are beginning to mobilise, and crucial intermediaries such as S&P and Mercer are responding.
After a grim 2009 for carbon offsetters, the green shoots of recovery were beginning to sprout last year, according to the more optimistic winners of Environmental Finance’s annual voluntary carbon markets survey – announced this week. As the global economic picture brightens, more companies are beginning to reconsider carbon offsetting, they say – and companies are once more stepping in where governments are failing to act.
And the US ‘pre-compliance’ market – where voluntary reductions are bought and sold with a view to looming regulatory mandates – was saved from collapse at the end of last year. While the November mid-terms spelt the death, for two years at least, of federal cap and trade, voters in California saw off an attempt to put its carbon trading plans into deep freeze.
Recovery in both sections of the market is likely to be modest and slow moving – as might be expected given the stuttering economic recovery in most developed economies, and the general lower priority accorded to climate change and carbon markets since the Copenhagen bust-up at the end of 2009.
But figures collated by our sister publication, Carbon Finance, show the issuance of voluntary offsets accredited by the American Carbon Registry, the Voluntary Carbon Standard, the Gold Standard and the Climate Action Reserve was up 6% month-on-month in January, at 97 million tonnes of carbon dioxide equivalent.
However, what was most striking about the results of our survey was the almost complete disappearance of JP Morgan and its recent acquisitions from the voting. Last year, the US investment bank took the Best Trading Company slot. ClimateCare, its voluntary market wing acquired in 2008, won Best Offset Retailer. And EcoSecurities, the carbon project pioneer that JP Morgan look private in late 2009, was voted Best Project Developer.
How the mighty are fallen. This year, the bank and its partners barely moved the needle. EcoSecurities and ClimateCare garnered a handful of votes; JP Morgan itself won none.
Has it taken its eye off the ball? Is it struggling to integrate its purchases? Or has it diverted its environmental markets attention to mandatory markets? (Although it didn’t figure in the winners of our broader Carbon Markets Survey, the results of which were announced in December.)
The answer probably lies in the cold calculation that JP Morgan’s bankers are making on the prospects of the carbon markets rapidly expanding. The EcoSecurities acquisition was driven by two different parts of the bank; the commodity trading division, which was enthusiastic about opportunities in the carbon markets and saw in EcoSecurities a global origination platform to supply carbon credits to US and European clients; and the private equity team, who priced its carbon portfolio out to the end of 2012 – and not beyond.
With the stalling of the international talks and a much-reduced US carbon markets, JP Morgan appears to have dramatically scaled back its ambitions. Certainly, EcoSecurities has closed a raft of offices and seen large numbers of staff depart – and what was once one of the most visible companies in the carbon markets now has a much reduced profile. What was once a bold move by a banking powerhouse into a promising new market is now all about cost cutting and value preservation.
Let’s hope that that changes soon. In the meantime, let’s salute those that have stepped in to fill its shoes: oil trader Vitol, project developer South Pole Carbon Asset Management, offset retailer The CarbonNeutral Company.
That the revolution in Egypt has got oil traders jittery is old news – but Jefferies’ solar analysts make a different point in a research note released yesterday.
As governments in the Middle East and North Africa (MENA) become a little more responsive to the popular mood, will they be forced to turn away from subsidising fossil fuel use and towards renewables?
They are certainly under a lot of pressure, as rising populations and electricity demand put strains on their electricity systems. Fossil fuel exporters are incurring ever higher opportunity costs in burning fuel they could be exporting.
“We believe oil- and gas-producing nations are likely to deploy renewables and sell oil rather than burn it at subsidised prices for local energy generation, and this may accelerate with rising energy demand and prices. Each 1GW of PV saves 23m barrels of oil over 20 years,” the note says.
And, of course, the solar resource is pretty attractive – the cost of solar per kWh in the Middle East is therefore half of that in the US, Jefferies says.
There is one fly in the ointment: political risk. “Substantial wind projects and select high-profile solar projects in Egypt are likely to push out given greater near-term geopolitical risk from financing banks,” the note says.
However, it adds that: “Longer term, we suspect European and Asian governments/banks may increasingly fund MENA renewable projects to lower domestic gas/oil consumption, and increase exports.”
Building a city from scratch is always going to be an ambitious project, let alone manufacturing an industrial hive for the clean energy sector in the desert.
Students are already living on campus at the Masdar Institute
Financed through Abu Dhabi’s oil wealth, Masdar City is the showpiece of the country’s forays into clean energy. Expected to cost $22 billion, the city is planned as a zero-carbon development incorporating sustainable design principles, and as a catalyst for the growth more generally of clean energy. Masdar’s chief operations officer Dale Rollins estimates that around $2 billion has been spent so far.
A review of Masdar’s plan for the city in 2010 has already resulted in a general scaling back.
Plans to elevate the whole city on a platform were scrapped to reduce costs, while the completion date for the project has been put back several years. The city was to have generated all its own electricity from solar; instead, Masdar will import some green energy from off-site farms (the UAE has set a target of 7% energy from renewables by 2020).
The government-owned company argues that adjusting its plan in response to economic and technical evolution is simply common sense.
Masdar's experimental concentrated solar power project
During a press tour arranged by Masdar during the World Future Energy Summit (WFES), we journalists were taken around the most advanced buildings. We gathered enthusiastically into the four-person vehicles of the Personal Rapid Transport system, to be ferried to the Masdar Institute, a university developed with Massachusetts Institute of Technology to carry out postgraduate research into clean energy.
(These sci-fi pods were to have been a key means of transportation in the city, but it seems that the plan is likely to be abandoned in favour of electric vehicles – Triple Pundit has posted a video of them in operation.)
Around 150 students are already living at the facility, all as Masdar employees, we were told. As well as working on renewables and clean energy MScs, the students dedicate around 50% of their time to the Institute’s own research agenda.
They live in apartments built using ancient and modern techniques for cooling desert dwellings.
Hooked up to a smart grid, the student accommodation can show Martyn Potter, director of operations and facilities for the academy, energy and water usage. And, he explained, the Institute plans to carry out some social experiments on how to change students’ and faculty’s behaviour.
A pilot-scale solar chiller is up and running, and the electricity used by the Institute and on the construction site is supplied by a 10MW solar farm, which is testing the performance of different types of panel in the desert conditions.
Many questions remain – particularly, when can construction work be completed, partnerships with other companies and governments formed, and a thriving clean-tech industrial base growing up around the institute?
The International Renewable Energy Agency is among those with plans to set up camp in Masdar City further down the road. But, off the record, clean energy firms I spoke to at the WFES were cautious about the prospect of moving their offices into the city. Because only a fraction of the ambitious plans have so far come to fruition, it is understandably difficult for companies to commit.
Plenty of building left to do before Masdar becomes a thriving urban centre
One executive told me that his company did want to set up office in Masdar City, but the firm’s procurement department put the kibosh on the idea because of the costs involved, instead opting for a base in Abu Dhabi.
If Masdar City is to become a clean-tech hub of the type envisaged, it will need to attract such companies, including other investors – particularly if the research done is to be incubated and made commercial.
The Institute already works informally with Masdar’s clean-tech venture capital arm, and the firm is looking at future funds which could invest at the angel stage, harnessing more directly the research done at the company’s own academy.
It has put in place best-practice policies on issues such as intellectual property, which is meant to allow for spin offs and licensing of renewable energy innovations coming out of the programme, said Steve Griffiths, director of institute initiatives.
However, Griffiths told me that the culture and regulatory framework in the UAE and in the region may need to shift if more investors are to come in – the institute may look at filing patents in Europe and the US in the absence of such a change.
Work done so far is exciting, but when you consider the scale of the plans, it has barely begun – with completion expected only by 2025. Eyes will be on Masdar to see whether the level of ambition set can be reached.
…Or the bond markets, for that matter. This week has been a traumatic one for carbon traders, and it has provided more evidence, if any were needed, that Europe’s policy-makers and regulators do not fully appreciate what they have created in building a multi-billion euro environmental market.
On Wednesday morning, news emerged of the latest in a string of thefts of EU allowances, this time from the Czech registry. At least 475,000 allowances, worth a cool €6.7 million ($9 million), were stolen from the account of emissions trading firm Blackstone Global Ventures.
The response? Spot markets across Europe were closed (although futures markets continue to operate) and, by the end of the day, the European Commission had ordered closed all the emissions registries run by the 27 member states, to prevent these allowances being moved (further) around the market. These registries are likely to remain shut until 26 January, while the Commission assesses the security measures each member government has put in place.
These thefts have been going on since early last year, if not before. Yesterday, the Commission admitted that up to 2 million EUAs may have been stolen over the last year or so. That’s €30 million worth. While registries in larger member states have implemented sensible security protocols, many registries in eastern Europe are accessible with a username and password, and have proved vulnerable to phishing attacks and even computer viruses.
The Commission has prodded member states to improve security, but they fall under national jurisdiction, and some governments have simply not bothered to carry out basic security improvements. These are not simply environmental permits; these are real assets worth, across Europe, many billions of euros. And they are easily transferable and difficult to intercept: even once stolen EUAs have been tracked, warrants are needed to stop their transfer, and buyers who have unwittingly received stolen EUAs have no incentive to be caught holding them.
As if that wasn’t enough, carbon traders were sent into turmoil again this morning. The Commission issued a press release stating that the member states’ climate change committee had voted to ban carbon credits from certain Clean Development Mechanism projects – that destroy HFCs and some nitrous oxide projects – from 1 January 2013, not 1 May as the market had been assuming.
It caused some head scratching at Environmental Finance, as we thought the vote wasn’t due until this afternoon. It turns out that, somehow, a prepared release had been accidentally dispatched; in fact, the council voted instead for the May deadline, and the right release was issued.
Mistakes happen. But this is not the first time that market-moving announcements have been botched, or released unevenly. There are traders across Europe and beyond putting millions of euros at risk on a daily basis in the carbon markets, yet they are seemingly often treated as an afterthought by regulators in Brussels and in member states.
These traders have long argued that the carbon markets need to be subject to similar levels of regulation and oversight as established financial markets, and be treated with the same respect. They are not.
And there is more than the profit and loss accounts of traders at stake. The EU Emissions Trading Scheme is the EU’s flagship tool to tackle one of its most important policy objectives. The foul-ups we have seen this week make it look like a joke, a market run by amateurs. If the EU wants to lead by example, and encourage the adoption of carbon markets elsewhere around the world, this isn’t the way to do it.
A procession of the powerful took to the stage to open the World Future Energy Summit (WFES) yesterday in Abu Dhabi. Royalty and presidents, prime ministers and ministers, not to mention a headlining spot for UN Secretary-General Ban Ki-Moon.
Ban Ki-Moon: "Our challenge is transformation"
The annual summit is an opportunity for making connections between politicians and policy-makers with clean energy business leaders and investors – 3,150 delegates turned up on the first day, which WFES said was a 16% increase on last year, mingling and doing deals among the stands in Abu Dhabi’s gigantic exhibition hall, as well as attending a parallel programme of business- and technology-oriented side events.
What was said on the main stage, meanwhile, was largely what one might expect: there were no headline-grabbing announcements, with the emphasis instead on re-stating a commitment to clean energy, and on Abu Dhabi’s and the UAE’s emergence as a clean-tech and clean energy hub.
“Our challenge is transformation,” said Ki-Moon. “We need a global clean energy revolution.”
Adnen Amin, interim director general of the International Renewable Energy Agency, which is also based in Abu Dhabi, meanwhile spoke of the need for “an ambitious and transformative path to sustainability”.
In the plenary, the most interesting discussion in terms of fulfilling this hoped for revolution was among a battery of energy ministers, including from some key countries for the renewable energy business – notably China’s deputy energy minister Wu Yin and India’s minister of new and renewable energy Farooq Abdullah.
China is of course increasingly taking on the role of the leading light on clean energy, with its 12th five-year plan, due out in March, one of the most anticipated policy events of 2011.
Wu’s breakdown of the principal energy challenges the country faces will be no surprise to those following China’s energy story: security of supply, growing demand for energy, matching demand in the south and east with resources in the north and west. Consumption is on an upward path as well – but, as he reminded the audience, the country’s per capita energy consumption is still far behind the world average.
And to meet demand, the country is already consuming 3 billion tonnes of coal a year, which meets 70% of its primary energy needs, he said, via a translator (unfortunately your correspondent is not fluent), “so our greenhouse emissions are a big challenge for us”.
Sixty years after India’s independence, meanwhile, Abdullah noted that 40% of the population still lacks access to electricity. “That’s a major challenge.”
Senegal is facing a similar type of challenge, according to renewable energy minister Louis Seck, also speaking via a translator, with the need to leapfrog fossil fuels as remote areas are electrified. “We have huge potential of renewable energy, unfortunately this potential is not used in a proper way,” he said. Yet the country has set a target of 15% renewable energy by 2020 – and is the second nation after India to set up a dedicated ministry for renewables.
The question of how to pay for the transition to clean energy and low-carbon technologies, while grappling with the need many countries are facing to meet basic energy needs, was of course on the list of challenges as well.
Countries such as Senegal and India are setting renewable energy subsidies, but the question of keeping costs low is crucial.
Amina Benkhadra, minister of energy, mines water and environment in the Moroccan government, for example, said that the country’s ambitious plan to build 2GW of solar and 2GW of wind capacity will be partially financed by exporting some of the electricity to Europe, to tap the region’s feed-in tariffs.
Surely it is telling that the country is planning to export some of this electricity – although she did not put a figure on the amount – despite facing rocketing energy demand. Morocco is expecting its domestic energy demand to double by 2020 and triple by 2030, Benkhadra said.
India’s renewable energy minister, meanwhile, took the opportunity to pitch to the UAE to invest in the ministry’s proposed Green Bank: “At least we will not collapse like the American banks,” he joked. “We can give you better returns!”
Barely has the last New Year’s resolution been broken, and Bloomberg New Energy Finance (BNEF) is out with its numbers for clean energy investment in 2010. And it’s been a record year, with $243 billion in new money for physical assets, into listed equities, via venture capital and through R&D – that’s up 30% on 2009.
Clean energy investment on the rise
What is most striking about the BNEF numbers is that, at $243 billion, how much better they are than the group was forecasting. Earlier last year, CEO Michael Liebreich speculated that the 2010 figure could come in at $175 billion-200 billion – up from $162 billion in 2009, but barely above the 2008 record of $173 billion.
However, Liebreich warns that much of this stellar result was “in fairly direct response to government intervention, whether in the form of cheap debt in China, sweet off-take deals for European offshore wind, feed-in tariffs for solar or a regulatory push for smart grids. The industry needs to continue to drive down its costs and reduce its reliance on this sort of support.”
And certainly investors in clean energy stocks haven’t reaped much benefit from growing levels of investment: clean energy indexes plummeted last year. The WilderHill New Energy Global Innovation Index (NEX), tracking 100 listed global clean energy companies, dropped 14.6%, while the US S&P 500 rose 12.8%.
Analysts at Bank of America Merrill Lynch, in a 5 January note, blamed “the low nat gas price and lack of US energy policy action/concern for coming European actions. Moreover, cleantech seems to lack long-only interest to offset hedge fund shorts.” Its alternative energy index fell 17% last year.
Their outlook for 2011 isn’t much better: “Although we do think time is on clean-tech’s side and it is tempting to be contrarian, substantial stock outperformance in 2011 appears unlikely.”
They cite concerns over US policy support, given the lurch to the right in last November’s elections, continuing low natural gas prices, which make it harder for renewables projects to sign power purchase agreements with utilities, and price declines in solar offsetting potential growth in sales.
But investors can make money in clean-tech – at least if they put it with Impax Asset Management. In a pretty impressive set of 2009-10 figures released this week, the London based environmental technology specialist reported assets under management up close to doubling – to £2.25 billion ($3.55 billion) by the end of December, compared with £1.26 billion at the end of its last financial year, in September 2009.
And, more impressively, the firm’s long-only listed equity strategies managed by Impax have, on average, returned 69.3% over the five years to end 2010, compared to 23.6% for the MSCI World. Their secret? At least part of the trick is a diversified approach, taking in pollution control and water stocks as well as benighted renewables firms. And they’ve been at it for donkey’s years – the firm was set up in 1994.
Welcome to Environmental Finance’s new blog. We are launching this service to provide the readers of the magazine, and of www.environmental-finance.com, with a slightly less formal platform to highlight, analyse and discuss developments in environmental investment, markets and corporate risk management.
My team and I will be blogging regularly to supplement our ongoing coverage, particularly from conferences and external events, and we aim to provide pithy – and, when appropriate, light-hearted – posts to deepen and broaden the content we produce on the website.
We would of course welcome contributions – whether a simple ‘heads up’ on a story or event we should be taking a look at, or pitches for guest blog submissions. And, indeed, we always welcome feedback, whether good or bad. E-mail me at mark@environmental-finance.com.
Next week, our senior staff writer Jess McCabe will be blogging from the World Future Energy Summit in Abu Dhabi, on what has become one of the event calendar’s leading clean energy conclaves.
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