Green investing: The other side of the summit

Depending on who you talk to, COP15 – the UN climate change summit convened in Copenhagen last December – was either a defining peak in the greening landscape, or a molehill whose main achievement was to expose the sharp discord among those various delegates charged with securing a global sustainability blueprint for the future.

Probably it was a mixture of both. But it does seem, four months later, to have polarized opinions with a vengeance – and generated considerable confusion.

Green bulls and bears?

Moreover, a couple of subsequent scandals have only made matters worse, undermining the hitherto impeccable scientific credentials which largely bulwarked the decades-old UN-backed process. In this context, Copenhagen was simply the latest episode.

Still, some notable observers remain bullish, among them Dr Richard Sandor, chairman & founder of the Chicago Climate Exchange – an early mover in US carbon trading – who spoke in late January at the Asia Financial Forum (AFF) staged in Hong Kong by the territory’s Trade Development Council (TDC).

“I think the Copenhagen Accord is really terrific, it’s really building momentum,” he claimed. “For the first time we are witnessing not only the Europeans being involved, but also the US, China, India & Brazil among others. (In fact) all of the world’s major countries gathering to discuss the emissions issue.”

That’s one way of putting it. But others, like Singapore-based green space investor Ron Mahabir, a co-founder of Asia Cleantech Capital, take a more muted view.

“(Copenhagen) was an obvious disappointment, but that was mostly expected (by seasoned players) given the significant political stakes between richer and poorer countries, not to mention the specific interests of the 194 nations in attendance.”

“While an accord was eventually struck endorsing the continuation of the Kyoto Protocol, it is not legally binding. And this uncertainty in the CDM [Clean Development Mechanism] has chilled prospects for new carbon-related investments, and has understandably led to a fair amount of confusion and inaction,” he told AVCJ.

Overall, though, the COP15 accord was a good step in the right direction, Mahabir argues:

“Global leaders agreed that temperatures must not rise more than two degrees centigrade, and wealthier nations agreed to help poorer ones by establishing a $30 billion annual fund which will rise to $100 billion by 2020. Also, while China’s position complicated matters, the presence of the US was welcome after the lack of action under the previous administration.”

The China card

Copenhagen certainly made it crystal clear that henceforth whatever happens will be heavily influenced by policy decisions taken by China, and to a lesser extent the other major signatories. In other words, in the climate change arena, the multi-polar world is a certifiable fact, and deciding the key issues has already moved beyond the ambit of the G8.

In China’s specific case, that has much to do with its emerging leadership in areas like solar and wind, plus electric vehicles, along with its aggressive government leadership in funding and regulatory policy, as it does with the PRC’s economic heft and fast-growing carbon footprint. In fact, this willingness to provide funding and recently tweaked Chinese regulations are enabling China to leapfrog ahead of the Americans in sustainable green industries, according to some US observers.

And now China has just announced that it will endorse the controversial COP15 Accord hatched by US President Barack Obama just prior to the Copenhagen summit’s conclusion: so perhaps Sandor’s and Mahabir’s views will prove right in the end:

“We have to recognize that this is the first time China has come to an international agreement with a reduction in carbon intensity,” Dr Sandor explained. “I view it as a bridge.”

The way forward

Ultimately, Sandor and many others see carbon trading evolving between sovereign nations around the world, resulting in a ‘plural-lateral’ trading regime linked by “…some sort of financial instrumental like a certified emission reduction.”

That said, however, perception gaps clearly remain, as evidenced in comments made by Zhang Yue, chairman & CEO of Broad Air Conditioning.

“COP15 made me confused,” he said. “This meeting focused mostly on renewable energy and carbon sequestration solutions; yet, while outsiders worry over the unsure source of funding, insiders question the technological maturity. In a phrase, people are taking a gloomy view of emission reduction. Apparently, we already have existing, low-cost and even negative cost technology which can actualize the large-scale emission reduction cited by the IPCC, a 50% reduction based on 1990s levels. The key issue is recognizing the different levels.”

Another question mark still far from resolved is how quickly – and effectively – the US will move in getting its own domestic emissions regime in place.

The business angle

So where does this leave prospects and investment appetites in the clean energy and clean technology space?

According to Asia Cleantech’s Ron Mahabir, much as they were before COP15, in this region at least:

“For the clean energy industry, the good news is that Copenhagen was mostly a non-event,” he told AVCJ. “Governments are continuing to increase their focus on energy security, diversity and productivity. Job creation and environmental concerns remain other key drivers. Supportive legislation in nearly all countries in the region has only increased, and for the first time ever last year, spending surpassed that of North America ($37.3 billion, up 25% from 2008 vs. North American spending of some $32 billion).”

As regards the specifics within this, Mahabir notes that most of the spending in recent years has been centered on China’s wind sector. And while consequent overcapacity in the upstream side of the business will continue to affect the wind and solar sub-sectors, new policies across countries as diverse as China, India, Taiwan, South Korea, Japan, Thailand and elsewhere, will serve as a counterweight.

“Furthermore, the rapid drop in equipment prices due to the GFC plus this overcapacity is helping to spur the development of new projects in Asia,” Mahabir contends. “For example, with the 40% or so fall in solar module prices, we are now developing large-scale solar projects which only two years ago would not have been feasible.”

China’s cleantech positioning

So, despite ongoing uncertainties in the world’s economic environment, Mahabir sees the green/clean sector as being well-positioned in China, and expects it to outperform in the future.

“In terms of production, China has firmly established itself as the center of manufacturing for nearly all technologies. The greater Beijing area alone is home to an estimated 10,000 cleantech-related start-ups. So China is no longer limited to low cost manufacturing.”

The PRC is also in the lead in the thrust into electric vehicles. The state is pushing for 500,000 plug-in hybrids and pure electric cars by the end of 2011, he says.

“With China having the most to gain from this trend, we expect it to dominate in both production and adoption.”

CCX’s Dr Richard Sandor concurred:

“I do believe that Asia is making progress. It’s not only the markets there. It’s also the technological innovation, the development of wind power along with other alternative sources of energy, such as biomass.”

But Mohammad Nahavandian, President of the Iran Chamber of Commerce, Industries & Mines, added a cogent cautionary note:

“The supply has to be adequate and affordable – and it has to be reasonable too. And this has to be maintained over decades to come. So, with all the talk about clean energy and renewable energy, we can see that all the forecasts show that the era of coal and oil has passed. Therefore in order to have a sustainable supply in future, we have to have proper levels of investment in time; an estimated $26 trillion between 2007 and 2030. But how are we doing? Actually, a decrease has been observed. So, instead of going up with GDP and population growth, when such investment goes down, this can easily lead to another crisis.”

Dr. Sandor took an even longer perspective, however:

 “The hypothesis I would like to offer you is that the next wave of commoditization will be the commoditization of air and water; and I put it to you that these will be the biggest commodities in the world. So, value propositions will be anything that deals with the capacity, scarcity and quality of these two things.”

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