Verdantix says financial crisis triggers climate change shake-out
The fledgling climate change business sector faces a shake-out as recession hits developed economies, according to independent research firm Verdantix. But the sector as a whole will grow in 2009 and will power back to life in 2010 when many of today’s regulatory uncertainties will be resolved.
“The 2008 financial crisis is centred on property, banking, debt insurance and consumers. The climate change sector is not directly affected but will suffer from the economic ripple effects” said Verdantix Director, David Metcalfe. “CFOs will cut back on discretionary spending, corporate climate change strategy will slip down the priority list and investors will baulk at high risk ventures. No sector can escape the downturn – even fast growing sectors like climate change.”
The Verdantix report, Financial Crisis Triggers Climate Change Shake-Out, identifies five groups of decision-makers who will decide the fate of the climate change sector during 2009. The key conclusions are that:
- CFOs will block discretionary spending on climate change. Finance will follow the usual routine for recessions: budget cuts, centralized decisions, redundancies and higher hurdle rates for investment. This will hit capex on energy efficiency equipment and items like onsite wind turbines as well as climate neutrality, voluntary offsets and sponsorship of not-for-profits.
- CEOs will stall on climate change strategy development. Faced with lower growth and regulatory uncertainty, CEOs will postpone in-depth “future of the firm” strategy work. Instead they will opt for a salami approach to climate change consulting – buying advice slice by slice. Firms with low carbon programs underway, like Tesco, will use the recession to get even further ahead of competitors.
- Investors will avoid high risk propositions. Institutional and high net worth investors have had their fingers charred to the bone – not just burnt. In 2009 they will shy away from pre-revenue clean tech businesses, pre-break even carbon credit developers and pre-revenue “green consumer” propositions. Only when predictability returns to global capital markets will investors regain their risk appetite.
- Policy-makers will water down costly regulations. Cap-and-trade regimes use compliance costs as the stick to alter business decisions. European and US policy-makers will come under intense pressure from lobbyists and other politicians to delay the short-term imposition of “carbon costs” on industry. With unemployment on the horizon politicians will strike comprises with industrialists on the tightness and timing of emissions caps.
- Compliance buyers will wait for price falls. History shows that recession is the one sure way to reduce energy demand (and greenhouse gas emissions). As industrial output falls in sectors like cement, savvy compliance buyers in Europe’s largest utilities will delay allowance purchases and push down the price of EUAs – hitting the revenues of carbon credit developers.
“Despite the financial turmoil and recession the climate change sector will continue to grow in 2009 – but at a lower rate” said Metcalfe. “The sector will draw support from its pre-existing exponential growth rate, multiple compliance drivers, alignment with cost saving programs and availability of equity finance for new ventures.”
Looking forward to 2010, the analysis suggests that the climate change sector will rebound strongly. “We are optimistic about the prospects for the post-recession climate change sector” commented Verdantix research leader Rodolphe d’Arjuzon. “Our optimism is based on the combination of reduced policy uncertainty, proven benefits from global sector leaders’ climate change programs, a clear financial impact from carbon reduction legislation and cash rich investors seeking a sustainable investment theme. This market is not going away.”
The report, Verdantix: Financial Crisis Triggers Climate Change Shake-Out, is available to download at www.verdantix.com.