Does the Word ‘sustainable’ Help US to Make Good Investments?

David Casale is a chartered engineer and director at London’s leading energy and environment merchant bank, Turquoise International. Here, David discusses why confusion in the cleantech industry is preventing the further drive of innovation and investment.

With recent figures from The International Energy Agency suggesting that the renewables industry is enjoying a continuous 5% year-on-year incremental growth, it seems that sustainability is not only gaining increasing global momentum, but also becoming widely known as a great business investment opportunity. Combine this with a predicted 14% increase in the number of renewable sector jobs before the end of 2014, and we see what an important part environmental ventures are playing as a long-term driver for economic growth.

China and America are leading the way globally; doing the ‘heavy lifting’ and committing to large-scale projects and innovative renewable technologies. This is not only generating significant return, but also driving wider capital investment as part of long-term fiscal planning.

David Casale

However, other countries are seemingly falling behind. What’s more, private investments worldwide are still lower than expected, while the lack of widely-available loans for large-scale projects and uncertainty over long-term government support has resulted in a slowdown in some areas of the global renewables industry.

It seems, therefore, that despite excellent expansion figures, there is still considerable confusion in the industry; resulting in an imbalance of geographic investment and contributing towards us missing wider environmental targets – in some cases, by a long margin. Take the UK for example, where carbon budgets are set and incentives are highly prominent. As a society, we can’t afford the huge levy payments and, as a result, have a cap governing all expenditure (Levy Control Mechanism).

If, however, we were to approach the challenge from the other side – setting a budget and then allocating it to the most effective climate-friendly alternatives, the overall outcome may be somewhat different.

As the impacts of climate change become more apparent, society will become increasingly reliant on investment into reducing carbon emissions. Positively, engineers and developers continue to bring forward projects and ideas; however, something must change to bring investor confidence back and continue the global march of renewable development.

Time for an environmental reality check

Innovative businesses have led environmental technological advances for centuries, attracting investors to a return that reflects the risks taken. The principle is straightforward; provide new products and services that are better and cheaper but don’t harm customers, staff or the environment.

For a while, the sector boomed, before government involvement and global regulations began to disjoint the idea’s simplicity. In particular, the prioritisation of measuring carbon emissions and linking investment to their inaccurate representation.

While the dictionary definition of ‘carbon footprint’ is clear, the interpretation has been corrupted by commercial and political positioning, losing sight of the big picture. For example, the activity of purchasing a television would have no carbon footprint in the UK, according to some definitions, but if we manufactured one in the UK, its footprint would be revealed; taking into account extraction and transport of new materials, the manufacturing process, energy, waste and delivery.

‘Carbon footprinting’ maintains a misguided view of climate change as an accounting issue, slightly irrelevant, something to be dealt with later, when, in fact, it could be the biggest intergenerational pass-off of all time.

We need to educate society about the process by which it can interact with this challenge in a way which is respectful of the other issues that surround us but not dismissive of the potentially damaging long-term effects of carbon mismanagement. A carbon footprint, or focussing on ‘sustainability’, unfortunately does not help with that.

We need to get back to first principles, deal with the science and close the gap between scientific agreement and the public consensus. If society was able to achieve that, we could engineer a robust, project-based approach to a least-cost solution.

But how do we achieve this end goal? Simply put, we need to prioritise effective investment and support cleantech development. Investment confidence is key to this, so regaining belief while making investments count is key.

Securing investment – going beyond carbon footprinting

Investors around the world continue to increase their exposure to companies that rate higher on environmental factors. At the same time, there is a common perception that many sustainable businesses have solutions to problems that either do not exist or which no-one will pay to solve. So what can businesses needing capital do to improve their chances of securing investment?

There is no one-size-fits-all approach. Clean energy and environment is not a uniform sector, more a series of overlapping industry segments of which only some are of interest to any individual investor.

Company owners should be mindful of the level of reward they are looking for. The risk they are prepared to assume in return will have a significant impact on strategy, fundraising and exit timing.

Many companies do not have the luxury of choosing investors, but experience suggests small syndicates with diversity of approach, experience and connections work better than sole investors or large groups. Each will have an industry view and early understanding of their agenda will predict their behaviour once they are a part of the business.

Engaging skilled advisors is also important, choosing experts who have the experience to tackle specialist considerations; like conducting due diligence analysis and posing the correct questions to avoid future issues.

By following this advice, kick-starting wider investment and project funding is possible, which, in turn, will drive forward innovation and development; rather than simply ticking measurement boxes and disrupting stable growth.

The future

The climate change agenda requires society to decide what future it wants. From there, businesses and investors can go about efficiently delivering it. Clean technology innovation needs to reflect this, going back to basics and answering – who will buy it and what will they get in return?

The carrot and stick isn’t working on a global level. We need the commercial aspects to stack up if we are going to have a fighting chance of changing the minds of the many and not just the few. Going beyond carbon footprint measuring and dropping sustainability from the rhetoric is a start; but, on the whole, we need to regain confidence in the science, take consumers with us and further drive investment to achieve wider sector growth.