1 July 2010 – Here’s a small but powerful pointer to keep in mind if you have any doubt about the way risk management is going in the capital markets: 12 per cent of all institutional and private investment dividends in the UK come from a single company – BP.
Or they used to, until BP stopped paying dividends in the wake of the Gulf of Mexico oil spill disaster. Since then its cost of capital has soared, and some observers say this global giant may soon face bankruptcy over the environmental catastrophe.
Even more alarming is that most of the developed world’s institutional investors are still wedded to fossil fuels, a source of income and energy that – in climate and cost terms – is looking increasingly risky.
Here’s another possible pointer for our new Prime Minister: Norway is using its sovereign wealth extracted from stiff fossil-fuel taxes to wean the country off carbon dependency.
Sharing this startling, and somewhat scary, investment scenario recently with a corporate crowd at the Sydney offices of lawyers Baker & McKenzie was James Cameron, vice-chairman of UK-based Climate Change Capital.
Cameron, guest speaker for Gareth Johnson’s corporate networking group, the Australian and New Zealand Sustainability Circle, sounded relaxed as he painted a nightmare scenario of investment risk. But then that was the point: Cameron’s company is designed to help the world transition to a low-carbon economy – and to make money in the process.
Among its US$1.5 billion portfolio is a raft of investments in renewable energy, retrofitting buildings (for which it has sought Australian advice) and capturing coalmine methane in China. Along with this exposure has come firsthand understanding of how the institutional investment mind ticks. Not to mention the government drivers and attitudes to climate change issues in the many countries it has an interest in.
In Cameron’s view, the future is an exciting and rewarding place.
“My direct personal experience is that the opportunity is very, very exciting, and I expect to be able to persuade not only governments and sources of public money but private capital as well – the font of our economic system – that they can start to make investments away from fossil fuels,” he said.
“Imagine what it would be like to be chancellor of the exchequer or finance minister when the investment [in energy] has actually gone over the high capital-cost hump and into low or negligible operating costs. Wouldn’t that be a brilliant economy to take responsibility for?”
Cameron’s talk, with the theme of sustainability and entrepreneurial risk taking, made no bones about the difficulties that lie ahead for investors.
But instead of defensive action, Cameron urged a different view – that of exciting opportunity taking, the “I can’t wait for the future” attitude.
“A narrative has to emerge that is attractive to the investment community,” he said.
He said that governments can play “all sorts of roles” but that the most powerful input is to let go of assets that will be expensive to run in the future.
It was important to concentrate, not so much on the “slightly daunting list of challenges to us all” in terms of dealing with a vastly changing world, but instead on the “absolute necessity” that dealing with climate change can be married with “a whole series of investments that are attractive in themselves”.
Among the opportunities are finding ways to manage energy security, modernise the grid and facilitate the technology that will “thrive in a modern, intelligent distributed power grid”.
“I can see a list of things to do where public policy can be very helpful, where technology, innovation and capital can be deployed at a scale that offers an extremely attractive scenario.”
But this is where some help is needed, he said: an intervention to shift the emphasis of investment away from the status quo to investments in change.
Something along those lines is already happening quite independent of government, coming directly from the most powerful capital enterprises on the planet.
Take Walmart for instance. This massive US retail chain is not only starting to interrogate its supply chain to assess sustainability, it’s also starting to suggest ways suppliers might comply with this direction.
When you realise the suppliers are mainly in China, you start to get the drift of that potential impact.
“Take their huge presence in China,” said Cameron, “They’re not just saying, ‘If you want to supply to us you have to disclose your emissions. But here are some suggestions as to how you might comply with our requirements’. That’s market power. Governments are not requiring people to do that.”
To make waves in the capital markets arena though, big institutional investors need exactly what they are used to: safe secure investments that look like bonds. Green bonds actually.
Cameron’s fund has already attracted big institutional investors “and they would like to make some more investments.”
This is a “major major challenge,” he said, “There is no option other than to offer institutional investors something that looks something like the investment yield they are used to.”
And so far there are no large-scale renewables that can offer those sorts of returns.
“Which is why,” he said, “I like bonds that are for use on the infrastructure that we need to avoid climate change – climate bonds, green bonds, anything frankly, that will resonate with that font of capital.”
Not that the current scenario is of much comfort. Especially with BP.
“Even if you knew nothing about climate change and didn’t care about climate change, wouldn’t you be just a little alarmed that 12 per cent of dividends paid to UK individual and institutions come from BP, one company?”
As Cameron might urge, it’s time for a rethink.
From the Climate Change Capital website
Two business groups comprise:
• Asset Management: CCC develops and manages funds that invest in companies, projects and technologies that provide products or services facilitating climate change mitigation or adaptation. CCC’s investment portfolios focus on the asset classes: Carbon Finance; Private Equity; Property and Energy Infrastructure.
• Advisory: CCC provides financial, strategic and policy advice to energy-intensive industries, financial institutions, clean technology companies and governments
CCC raises and deploys capital for numerous low-carbon activities including:
• Financing renewable energy projects and retrofitting commercial property in the UK;
• Capturing coalmine methane in China;
• Investing in clean-technology businesses in Europe; and
• Investing in waste-to-energy projects in China and Hungary.