Aug. 14, 2006 issue - It seems like a hippie entrepreneur's dream come true: an ecostore with cash registers powered by rooftop wind turbines, skylights instead of light bulbs and photovoltaic solar cells on the roof to help power the bakery's oven. It's so environmentally friendly that even the toilet water is collected from raindrops outside. Only this is not some pipe dream of a fringe activist. The vision comes from Tesco, the world's third largest retailer. Tesco is pumping 100 million into environmental technologies to reduce the amount of energy they use by 50 percent, compared with 2000 levels, by 2010. In addition to building 80 new ecostores across Britain over the next year—the greenest of which will be constructed of recycled materials and will burn food waste for electricity—they're also making smallchanges that could have big effects. They're paying customers not to use plastic bags, which they expect will cut consumption by 25 percent in two years.
Tesco is not the only commercial firm that has taken an interest in saving the planet, and making a killing besides. Renewable Energy Corp., a Norwegian solar-energy company, had the world's largest-ever renewable energy IPO in May. It was 15 times... more [truncated due to possible copyright]
Aug. 14, 2006 issue - It seems like a hippie entrepreneur's dream come true: an ecostore with cash registers powered by rooftop wind turbines, skylights instead of light bulbs and photovoltaic solar cells on the roof to help power the bakery's oven. It's so environmentally friendly that even the toilet water is collected from raindrops outside. Only this is not some pipe dream of a fringe activist. The vision comes from Tesco, the world's third largest retailer. Tesco is pumping £100 million into environmental technologies to reduce the amount of energy they use by 50 percent, compared with 2000 levels, by 2010. In addition to building 80 new ecostores across Britain over the next year—the greenest of which will be constructed of recycled materials and will burn food waste for electricity—they're also making smallchanges that could have big effects. They're paying customers not to use plastic bags, which they expect will cut consumption by 25 percent in two years.
Tesco is not the only commercial firm that has taken an interest in saving the planet, and making a killing besides. Renewable Energy Corp., a Norwegian solar-energy company, had the world's largest-ever renewable energy IPO in May. It was 15 times oversubscribed and raised more than $1 billion, valuing REC at nearly $7 billion. You wouldn't mistake REC's CEO Erik Thorsen for a New Age Joni Mitchell. "I don't have anything against helping the environment," says Thorsen. "But the main driver for us is profit."
Something weird is happening in the once marginal world of environmentalism. The green cause is no longer the preserve of woolly-minded liberals and fringe activists. Its tenets are being actively pursued by business leaders, stockholders and investment managers. In the popular mind-set, natural disasters such as New Orleans's Hurricane Katrina, floods in Eastern Europe and swirling desert sands in Beijing are now linked to a change in climate that threatens our way of life and our grandchildrens' future. Europe's second record-breaking heat wave in three years—with the hottest July in U.K. history and more than 40 dead in France and Spain—has only cemented this relationship. Environmental concerns have grown so widespread that no politician can ignore them.
Conservative politicians once skeptical of the green movement have been reacting to the pressure. Last week, California's Republican Gov. Arnold Schwarzenegger met with British Labour Prime Minister Tony Blair to promote the idea of a transatlantic carbon-emissions market. He also wants to reduce his state's greenhouse-gas emissions to 80 percent below 1990 levels by 2050. David Cameron, the new leader of Britain's Conservative Party whose revamped slogan is "Vote Blue, Go Green," has visited the Arctic to see firsthand the effects of global warming. He cycles to work, and is redesigning his Edwardian house in London to include a wind turbine and solar panels, which will cut energy use by 30 percent. In Germany, the Greens and the conservatives recently agreed to join forces to run the city government of Frankfurt, the first such coalition in the country's history. President Jacques Chirac of France is promoting a new "solidarity" levy to be paid by all air travelers. John Gummer, Britain's secretary for the Environment under the last Conservative government, likens the green issue to defense policy before the fall of the Berlin wall: "People expect parties to have a clear environmental policy, [otherwise] people won't even consider voting for them."
The most startling turnaround, however, is among business leaders. Corporations are giving themselves green makeovers to improve efficiency, save money and look more attractive to investors and the public. According to a recent report from the Climate Group, an international environmental charity, 43 multinationals—including Bayer, BT and DuPont—saved a combined $11.6 billion last year by improving energy efficiency, reducing waste output and harnessing solar power. General Electric's Ecoimagination campaign to cut carbon emissions, partly by selling low-emissions products ranging from power plants to fluorescent light bulbs, raked in $10.1 billion last year, up from $6.2 billion in 2004. Their slogan: "Green is green," as in the color of American dollar bills.
Fund managers and corporate developers, too, are beginning to take into account the environmental viability of the companies they invest in. Venture capitalists are investing in green businesses because they believe it's a growth opportunity. "Five years ago, the environment was seen as a preoccupation of the ethically minded. No one really took you that seriously," says Tom Whitehouse, CEO of Carbon International, an environmental consultancy. "Today, the environment is totally mainstream. We're operating in a different paradigm."
Like politicians, executives see which way the wind is blowing. To meet the Kyoto targets, governments have set limits on industrial greenhouse-gas emissions that affect the balance sheet. The European Emission Trading Scheme, launched across Europe's 25 member states last year, allocates "carbon credits" to companies, which they can either use or trade for cash on the open market, like any other commodity. So far, credits for 880 million tons of carbon, worth more than €17 billion, have changed hands. Even in the United States, where carbon cuts are voluntary, many companies are signing on anyway, either in anticipation of future controls or to keep increasingly ecoconscious customers at the tills. In Japan, Sony announced last month that it will lower carbon emissions by 7 percent from 2000 levels by 2010. Britain-based HSBC became the world's first bank to go carbon neutral late last year, and is now turning its 11,000 buildings in 76 countries worldwide into models of energy efficiency. "Our customers have told us that they decide where they shop based on whether the business is a good neighbor," says David North, Tesco's community and government director. "Being responsible on the environment is a growing driver of customer choice."
Investment analysts are starting to see the environmental awareness of managers as a barometer of the likely long-term success of their companies. Green policies, they say, tend to indicate hands-on management, high consumer confidence and good corporate governance. HSBC won't do deals with companies on projects, like oil pipelines through Russia, that don't measure up to their environmental, social and governance standards—a bar HSBC has been raising progressively higher since first publishing its Environmental Risk Standards in 2002. The world's two largest insurance companies, Swiss Re and Munich Re, are now taking companies' policies on climate change into consideration when determining risk. In Japan, about 800 companies annually publish reports explaining how they plan to cut carbon emissions and make their products and factories greener. "We believe that operating in a sustainable fashion is a proxy for good management practices overall," says Chris Walker, head of sustainable business development at Swiss Re. "They're the type of companies we're more comfortable doing business with."
Multinationals are investing tens of billions of dollars in proving that they're that type. Last month, General Electric and British Petroleum signed a $10 billion deal to develop hydrogen power plants that will capture carbon and bury it underground so it doesn't contribute to global warming. Goldman Sachs has invested more than $1 billion in renewable energy sources, including biofuels, like ethanol, and wind in the last 12 months. PowerLight and GE are currently building the world's largest solar plant in Portugal to the tune of $75 million. Shuichiro Tanaka, the general manager of Japan's Daiwa Securities Co. investment trust department, says, "In the past, companies regarded dealing with environmental issues as a cost. Today they see it as a business opportunity."
Markets are also beginning to recognize that companies that don't do right by Mother Nature may have more volatile stock prices. Goldman Sachs's ESG (Environmental, Social and Governance) Index now ranks the world's largest companies based on how environmentally friendly their operations are because, says Sarah Forrest, head of ESG Research at Goldman, "environmental issues do influence stock prices." Signatories to the United Nation's new Principles for Responsible Investing include hundreds of major investors worth $4 trillion in assets—10 percent of global capital.
All of these developments are being scrutinized carefully by venture capitalists, some of them the same ones who bankrolled the dot-com boom of the 1990s and now see alternative forms of energy as the Next Big Thing. Vinod Khosla, the Silicon Valley venture capitalist who got in big and early with Google and Amazon, is now betting $50 million of his dot-com cash on next-generation ethanol. While Khosla is impressed by the fuel on environmental grounds, he says he's driven mainly by investment logic. "Ethanol's a great investment because it's [going to be] cheaper than gasoline," he says. "End of story."
Venture-capital investment in renewable-energy companies was up 36 percent last year to a record $739 million. The WilderHill Clean Energy Index, which charts 40 alternative-energy firms, has risen 48 percent since its 2004 debut. The world's largest wind-turbine company, India's Suzlon Energy, was 28 times oversubscribed when it launched for $340 million at the end of last year. Chinese solar company Suntech Power raised $400 million in December; its share price has since shot up 50 percent. The largest venture-capital-backed IPO in Europe last year was of German renewable-energy company Q-Cells, which raised $400 million in October.
Despite these prominent deals, the share of venture capital going to alternative energy is still tiny—less than 1 percent of the $22 billion invested last year in the United States, where the lion's share of the world's venture capital is doled out. One reason is that venture capitalists tend to be biased in favor of companies that build on existing technologies rather than ones that need to construct infrastructure from scratch. Even the gods must play by these rules: to indulge his ethanol enthusiasm, Khosla had to use his own cash rather than that of his old firm.
The venture capitalists themselves place the blame on ongoing uncertainty about how governments will treat alternative fuels. Every major country regulates energy transmission and use, in effect elevating some technologies and penalizing others. The United States, for example, subsidizes ethanol producers but refuses to adopt caps on greenhouse gases or to establish a regulated framework for trading carbon credits, both steps that venture capitalists say would take a lot of the fear factor out of investing in clean energy.
Passing environmental legislation also requires getting past a powerful anti-regulation lobby, which argues that Kyoto-like targets put companies in the developed world at a disadvantage to unregulated ones in the developing world. "We don't think it's sensible to become the greenest country on earth when we might go bust doing it," says Mark Swift, a spokesperson for Britain's Manufacturer's Organization.
Still, more than three decades after Joni Mitchell sang "They paved paradise and put up a parking lot," environmentalists and big business now seem largely to be working in tandem. Earlier this year, the leaders of 14 of Britain's top companies, including the Shell Group and Vodafone, even wrote to Blair urging him to set clear greenhouse emissions reduction targets for as far into the future as 2025, well past the 2012 Kyoto deadline. Although profits are the main driver, many execs privately welcome the sea change that has allowed them to do the right thing by the environment. The joint head of HSBC's environmental action plan, Francis Sullivan, stresses "financial fundamentals" when explaining why his company is planting trees to offset its carbon output and building banks that use rainwater and solar power instead of oil and coal. But he's also concerned about there being enough green spaces for his two daughters, who bug him to turn off the lights when he leaves a room so he doesn't waste energy. Making money is great. And if you can save the world at the same time, so much the better.
With John Sparks in New York, Karla Adam in London and Akiko Kashiwagi in Tokyo