Politicians make the policy. But it’s often left to business to implement it. For this reason RioPlus Business is featuring submissions from the private sector across the globe in the lead up to Rio+20.
The aim is to demonstrate how Sustainable Development is becoming a reality in every continent, country and city. Today, Ed Nusbaum, CEO of Grant Thornton International and Nathan Goode, head of environment, energy and sustainability at Grant Thornton UK explain what’s holding back investment in the green economy.
By Ed Nusbaum and Nathan Goode
The challenge of developing a low carbon global economy has been with us for decades. However, we have entered a new phase on the route to decarbonisation following the financial crisis in 2008, further complicating the agenda for Rio+20.
A complex relationship has developed between the economic and the environmental agendas, which confusingly, seem sometimes to be in alignment and sometimes, diametrically opposed to one another. The low carbon agenda is a world of stimulus, subsidy and policy intervention, which are necessary enablers on the road to commercialisation. This means that while the cleantech sector globally appears to be booming, there are potentially some big challenges ahead.
For a time many governments were content to provide substantial support which low carbon industries absorbed. However, even in the ‘good times’, the state was only ever going to provide a small part of the finance needed to meet the targets set. Now intensive financial pressures are forcing the policy-makers to think much harder about the value that this kind of investment delivers and to make some difficult choices.
At the same time, securing private capital for long term investment in the low carbon sector is becoming more difficult.
Part of the reason lies outside the sector in the global financial volatility that currently reigns, but part of it lies in the sector, in the gap between expectation and reality as the return on capital in the low carbon sector has so far failed to materialise. This is potentially translating into a shortage of capital from government and global financial markets, just at the time when the renewables sector needs to scale up.
Value for money
One answer is for the state to become the banker, bridging the investment gap and looking for a return on its investment rather than simply giving taxpayers’ money away – a role currently played by bodies such as the European Investment Bank, the Inter-American Development Bank, the Nordic Investment Bank and planned for the UK’s new Green Investment Bank.
In macro terms, governments and private sector investors are right to require value for money from the low carbon sector – we all need renewables to be commercially viable to compete with carbon emitting forms of generation. The last thing we want is a series of technologies that are subsidy junkies. But we are seeing short term turbulence as governments make sometimes brutal adjustments to green stimuli and investors sit on their hands.
Part of the problem lies in the difficulty the market has in accurately valuing the intellectual and other non-financial capitals that are embedded in companies within new industry sectors, such as low carbon.
Until companies and investors break out of the current short term mind-set, high growth companies will find it difficult to attract and retain the commitment of investors throughout the company’s commercial development cycle and towards ultimate profitability.
Information plays a crucial role in enabling efficient capital allocation – and the information flow is particularly important for companies that depend on a high turnover of investors during the different phases of technological and commercial development. Innovative developments in the provision of company information are gaining momentum and high growth sectors could benefit from adopting Integrated Reporting, a method that reflects the full range of factors that link the business strategy to long term value with the aim of building the confidence of investors over the short, medium and long term.
Measurement and assurance
The International Integrated Reporting Council (IIRC) will be publishing a framework within the next two years and its early work demonstrates the extent to which measurement and assurance will be critical factors in gaining acceptance of Integrated Reporting globally.
These aspects of the corporate reporting dynamic are where accountants and advisors can offer most expertise, by ensuring the different contributors of value are properly measured and communicated to stakeholders. Moreover, the provision of a high level of assurance will be a crucial ingredient in increasing investors’ ability to make high quality investment decisions.
Another key ingredient is the cost to the user – both businesses and individuals. Again, the picture is complex. Neither the challenges nor the opportunities for consumers are being articulated effectively and honestly at the moment. Are renewables going to lead to long term high power prices or are they in fact part of the solution? What are the true costs of some of the alternatives such as nuclear power and the hidden subsidies of the fossil fuels they are designed to replace? Can consumers be persuaded to invest for the future by reducing consumption or adopting new forms of generation?
Perhaps the biggest risk is that debates about the future of energy become polarised and adversarial – nuclear versus renewables; cost of energy versus the green agenda; government intervention versus market forces, etc – when the answers are complex and evolving and the solutions collaborative and multi-faceted.
There is a part for everyone to play in smoothing the road ahead – a need for governments to introduce stability, simplicity and transparency into policy frameworks; industry to pursue a relentless focus on commercialisation; consumers to stop taking cheap energy for granted; NGOs to constructively engage with global capital; and finally for investors to step in to the water to help shape the solutions that will free up the flow of finance. We do not expect Rio+20 to solve all these issues but moving this debate forward requires them to be placed high on the agenda.
Grant Thornton is one of the world’s leading organisations of independent assurance, tax and advisory firms. It employs over 31,000 people, across 100 countries.