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Article: It ain’t easy being green. (Or is it?)

Another example where my world intersects Azimuth.

It ain’t easy being green. (Or is it?)

Sep 30th, 2010

At first blush it seems highly counter-intuitive, particularly after a major global financial crisis brought on by the greasy wheels of securitization and mountains of risky debt: “Green” development initiatives bundled into a portfolio and listed on the stock market.

Yet it is what a new report by research firm Finadium recommends could be at least one solution to unplugging the funding gap that exists between renewable energy projects and the one thing keeping them from taking the world to a greener and better place: cash.

Indeed, the new report, entitled “Identifying Investment Opportunities in Renewable Energy Finance,” (click here for a summary of the report) provides a variety of potential options for investors and financial intermediaries looking to earn a return on funding green initiatives, or to address “structural gaps in the investment ecosystem.”

The report looks at several ways to get cash to environmental projects, including borrowing a page from the mortgage model to provide long-term financing, reducing the 45% equity stake hurdle companies are required to jump over before they can even begin construction, setting up a REIT-like structure that can spread the cost and liability of the project or projects, creating a “GMAC” for solar, and partnering with a bigger company keen on getting green tax credits. The chart below from the report notes the increase in various types of global renewable energy transactions from 2004 to 2009.

But how does the money get to the people trying to clean up the world and make it a better place? An academic research report published earlier this year notes how finding “green” investments and managers is easier said than done. The paper, by Janelle Knox-Hayes with Oxford University’s Centre for the Environment and covered by AllAboutAlpha.com back in March, focuses on carbon emissions markets emerging as governance mechanisms to reduce greenhouse gas emissions and mitigate climate change.

While noting the broader market is growing by leaps and bounds, Knox-Hayes still concludes that despite clear interest from investors in carbon trading and new ways of investing in green-type initiatives that ways to invest money and help the environment were still at a nascent stage – even with estimates showing the growth potential as huge. The chart below from Finadium’s report confirms that US investments in renewable energy are on a tear.

Well, Knox-Knowles: meet Joshua Levitt, author of the Finadium report, who provides a litany of different ways that funding for renewable energy projects can be not only raised but profited from.

Levitt and his group studied nearly 15,000 companies currently operating globally “in the Green,” including substantive conversations with several hundred green entrepreneurs.

Their findings? That there is certainly money to made investing in smaller green energy companies. The report identifies and classifies the financing needs of 324 companies and details potential investment strategies and opportunities for private equity firms, corporations, hedge funds, family offices, venture capitalists and investment banks who are willing to take a project finance approach to the sector. Say Levitt…

While venture capital investors with the best new renewable energy technologies will likely profit, smart investors who can tailor traditional solutions for this sector can potentially see greater success…Winners will be financiers who can provide capital to a broad section of proven renewable energy technologies. These groups will take advantage of consumer appetite and a favorable government regulatory regime for the sector, while limiting risk to the point where investing in renewable project finance raises no more concern than financing a parking lot or a toll road.

As we noted after reading Knox-Knowles’ report back in March, gaining some altruism in alternative investments is certainly in vogue these days. Even better would be a way to make money off funding “green” initiatives that actually makes sense and doesn’t bring down the financial system – or isn’t predicated by onerous rules, regulations, complications and a general lack of liquidity, which unfortunately is still the carbon-trading world.

Comments

  • 1.

    Even better would be a way to make money off funding “green” initiatives that actually makes sense and doesn’t bring down the financial system...

    IMHO economic topics like "how do we incorporate ecologic costs into our economic system" are appropriate for Azimuth, i.e. we could include economics as one topic that Azimuth is about. On the other hand discussions about these issues tend to border on politics...

    Comment Source:<blockquote> <p> Even better would be a way to make money off funding “green” initiatives that actually makes sense and doesn’t bring down the financial system... </p> </blockquote> IMHO economic topics like "how do we incorporate ecologic costs into our economic system" are appropriate for Azimuth, i.e. we could include economics as one topic that Azimuth is about. On the other hand discussions about these issues tend to border on politics...
  • 2.
    edited October 2010

    It's quite possible that we should talk about economics on Azimuth! But we should do it in a coldly dispassionate "scientific" way, to avoid rousing people's passions. I put "scientific" in quotes because there's a lot of argument about to what extent economics is a science. I really just mean that instead of fighting we should be trying to understand — so we need to stay open to changing our minds. This is part of the scientific ideal that can apply even to economics.

    Comment Source:It's quite possible that we should talk about economics on Azimuth! But we should do it in a coldly dispassionate "scientific" way, to avoid rousing people's passions. I put "scientific" in quotes because there's a lot of argument about to what extent economics is a science. I really just mean that instead of <i>fighting</i> we should be <i>trying to understand</i> &mdash; so we need to stay open to changing our minds. This is part of the scientific ideal that can apply even to economics.
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