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10-28-2006, 08:52 PM
The Sunday Times

October 29, 2006

Focus: The City goes green

Green issues were once the preserve of tree huggers. Now the City is embracing eco-friendly industries — and making money from them. Dominic O’Connell and Grant Ringshaw report past seven is an early start for a conference, even by the standards of the City. But early starts mean nothing when there is the smell of money in the air.

Ten days ago dozens of fund managers, hedge-fund traders and analysts crowded into a suite of meeting rooms at Claridge’s, the swish London hotel, just after 7am to hear a series of briefings from companies in a hot new investment area — green energy.

NI_MPU('middle');The speakers ranged from the sublime to the faintly ridiculous. Lord Moynihan, sports minister under Margaret Thatcher and chairman of the British Olympic Association, did a smooth 20 minutes on his wind-turbine company, Clipper Windpower, while Todd Jones of Agcert talked excitedly about a system of making money by capturing methane gas from the droppings of farm animals in the Third World.

A few years ago the men in suits wouldn’t have crossed the street to meet this lot, let alone disturbed their beauty sleep. They would have rated them at best as scientists with risky ventures and at worst as hippyish day-dreamers.

All that has changed. Fears over climate change and the search for alternatives to fossil fuels have made green-energy stocks all the rage.

Tomorrow the green mania will grow further when Sir Nicholas Stern delivers his long-awaited report on climate change. Stern, a former chief economist at the World Bank, has been asked by Gordon Brown to investigate the effect of global warming on the world economy. He is expected to issue a dire warning, saying that without urgent action to curb greenhouse-gas emissions, there will be a substantial recession. Sir David King, the government’s chief scientific adviser, recently said Stern’s work suggested “the kind of downturn that has not been seen since the great depression and the two world wars”.

Perversely, this will be music to the ears of City folk — and not just those who have had the foresight to buy shares in green- energy groups. London has become an entrepot for alternative energy, a place where companies from all over the world come to raise money for their promising — and risky — technologies. They are paying millions in fees to the accountants, lawyers, investment bankers and other advisers that make the Square Mile tick.

According to stock-exchange figures, 53 “new energy” companies worldwide, with a combined market value of £6.8 billion, are listed in London. They come from America, China, Germany, South Africa — and almost all are listed on the Alternative Investment Market (AIM), where the lighter float regulations have pulled in all types of foreign firms.

Shares in Proton Power Systems, a German group that makes fuel cells for buses, forklift trucks and industrial applications, start trading on AIM this week. Proton will raise about £5m from the float of 30% of the company’s shares.

Felix Heidelberg, chief executive, said his company chose London because of its wealth of expertise and because its rivals are already here. “The fund managers in London know what a fuel cell is. They know because there are a lot of companies here that are in the same type of business, including our competitors. They know much more about the prospects of technology companies,” said Heidelberg.

Some City observers are warning that the flood of companies coming to AIM could eventually prove to be its undoing. Alex Snow, chief executive of Evolution, a stockbroker that has played a leading role on AIM, said investor appetite for new AIM floats was waning. “There are limits to capacity,” he said.

GREEN MANIA in the City is not limited to the listing of new energy companies.

It has also caught the attention of financial traders.

Last week the American investment bank Morgan Stanley announced that it would invest $3 billion (£1.6 billion) in trading carbon-emissions contracts and other projects linked to curbing production of greenhouse gases. The bank hopes to make money by acting as an intermediary — buying carbon credits and then selling them on to governments and companies. It is not alone — nearly every large investment bank with a sizeable commodities-trading desk has piled in.

Scores of other investors are going green. Last month Climate Change Capital, a specialist investment bank, raised almost $1 billion to invest in clean-energy projects around the world and trading carbon credits. To put this in context, only the World Bank has raised more money to pump into the low-carbon economy.

The City traders are doing what they have always done best — exploiting markets to make money. Although it is difficult to conceive of a market in atmospheric gases, the greenhouse-gas trade is already well established.

It was created by the Kyoto protocol on climate change and by the European Union’s greenhouse-gas emissions-trading schemes. Under the Kyoto protocol, developed countries must slash their emissions. One option is to finance development of carbon-reduction schemes in poorer countries, allowing developed countries to earn “carbon credits”.

The EU’s mandatory scheme set limits on the amount of carbon that can be produced by intensive users of energy, such as power stations. Companies that produce more than their quota must buy credits to make up the shortfall or face stiff financial penalties.

The effect has been to create a booming carbon-trading industry. According to the World Bank, the global carbon market was worth about $21.5 billion in the first nine months of this year — almost double the $11 billion for the whole of 2005 — with much of the trade in Europe.

Some of the new energy firms are taking advantage. Agcert is one of a number of producers of the carbon credits that provide the raw material for the market traders. It makes the credits by stopping greenhouse-gas creation in emerging markets — in Agcert’s case, by setting up systems to capture the methane produced by intensively farmed cows and pigs.

Jones told the conference that his company’s methods were simple. “These farms are a sight you don’t really want to see. They have animals in buildings with concentrated feeding and all the manure and urine just piling up. We dig out big pits for the waste, line them, and put a cover over the top to catch the methane,” he said.

The gas is then burnt or used to generate power. Jones said that Agcert had 2,000 farms under contract in Brazil, Mexico, Chile and Argentina.

MEANWHILE, green issues have entered the mainstream business world. Last year, HSBC became the world’s first bank to go carbon neutral. For a company to declare itself carbon neutral, its output of carbon dioxide, which is usually generated through energy use, must be reduced and any greenhouse-gas emissions “offset”.

The process of offsetting usually means investing in clean energy or environmental projects. For many firms this has traditionally involved planting trees or investing in renewable-energy sources such as solar power or wind farms. HSBC, for example, has switched its energy supplier to a company producing power from renewable sources. The bank has also introduced a recycling scheme at its Canary Wharf headquarters in London.

In May, BSkyB announced that it, too, had gone carbon neutral by offsetting its carbon emissions. Other measures included switching its taxi account to a company that uses hybrid vehicles.

The battle to be green is at its most fierce in supermarket retailing, with each of the large chains vying to outdo its rivals and present itself as the most environmentally friendly. Tesco is investing £100m in environmental technologies in a bid to slash its energy consumption by 50% by 2010, compared with 2000 levels. Last year, it opened the first of its state-of-the-art energy-efficient stores in Norfolk, where the tills are powered by wind turbines and the in-store bakery is fired by solar power.
Since 2002, J Sainsbury has spent £15m on energy-efficient projects and plans a further £5m investment this year. Asda plans to have no waste going to landfill sites by 2010 and has invested £40m in recycling at its distribution centres.

Being green is good business. According to a report this year by the Institute of Grocery Distribution, more than half of British shoppers care about the green credentials of what they buy. The report argued that the market for “ethical consumerism” is now worth £25 billion a year.

MOYNIHAN, a veteran of the wind-power industry, believes the City has a key role to play if Britain is to stay at the forefront. “These companies are at a point in their life when they need access to funds reasonably quickly because they are looking at compound growth in their businesses of more than 20%. They could raise that money in America, but there they face the constraints of Securities and Exchange Commission rules and the Sarbanes-Oxley laws. It is much easier for them to come here than practically anywhere else.”

The City honeypot could also bring spin-off technology benefits to British industry. Proton, for example, hopes to win business from Transport for London, which plans to buy a fleet of zero-emission buses. To help win the contract, Heidelberg plans to forge a commercial alliance with a British bus builder, a link-up that could come in handy should fuel-cell vehicles take off around the world.
Gordon Brown is likely to push this point when he unveils the Stern report tomorrow, saying that while there is the potential for economic chaos in global warming, there is also the prospect of thousands of high-tech jobs if Britain can be at the forefront of the technology leaps that climate change will demand.,,2095-2426490,00.html

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