So imagine if you will that you’re a small energy company. You’re thinking about building a wind farm, say, off the coast of Yorkshire. Problem is, you’re struggling to find investors to finance the project. Every time you talk to venture capital companies, private equity firms or other financiers, you get the same response. They’re worried about the risk – specifically, the risk of politicians lacking (how to put it?) lead in their pencil.
What, the investors ask you, happens if policy failure means that fossil prices stay low, so your wind farm can’t compete? Or, for that matter, if prices for emissions permits stay at rock bottom because government caves in to lobbying on permit allocation? What happens if the government simply misses all of its climate targets?
So maybe the investors agree to finance your project, but at punishing rates of interest. Or maybe they decide not to finance it at all. Either way, your energy firm and the government are stuck together in a vicious circle of self-fulfilling prophecy. The government can’t deliver its climatepolicy targets unless people like you build things like wind farms. But you can’t access capital at reasonable rates unless the investors are convinced that there’s a real future for what you want to build – and they figure that the government’s record of fudges kind of speaks for itself.
This is the kind of dilemma that David and talked about in our report on institutional architecture for climate change, where we argued that a key requirements for moving forward on climate policy was clearer signals from the future – whereby everyone believes that the low carbon economy is actually going to happen, and consequently acts in ways that deliver exactly that outcome.
Well, Michael Mainelli – a good friend of ours whom we worked with on the London Accord, which brought together a raft of investment banks in a collaborative research project on climate change – has come up with a delicious proposal that would in effect amount to just such a signal from the future. You’ll like this.
I think we’re going through a commercial revolution in reverse.
In the 12th – 14th century, finance gradually worked its way free of ecclesiastical limits, and burst out into an orgy of innovation which has lasted until the present day, when the age of leverage appears to be coming to an end.
However, all is not completely bleak for the City. The two types of finance that seem set to grow are (1) Islamic finance, and (2) renewables / carbon finance. These young markets have very rosy outlooks, and they’re on the whole centred in London.
It struck me today that these two markets are actually very similar. They’re both ‘green’, OK, that’s not a big similarity. But they both also involve finance that is sanctioned by moral boards.
So, for example, an Islamic bank like the European Islamic Investment Bank sanctions its activities by having a Shariah board that gives the ethical thumbs up to any deal it does.
An environmental finance fund like the European Carbon Fund also has its board of (mainly bearded) experts who also give the ethical thumbs up to any deals it does.
Finance is slowly working its way back into the ecclesiastical strictures – either of Islam or of the new religion of Gaia – out of which it burst all those centuries ago. It’s going back into the womb.
Dark times in western markets. The financial press at the moment reads like a particularly gloomy prophesy from the Middle Ages. This from Euroweek:
Undreamt of volatility in dollar swap spreads…Debt professionals watched in disbelief as dollar swap spreads shot out to their widest level in years. ‘Now the world is definitely coming to an end, right? It’s been nuts, just nuts’, said a stunned swaps dealer on Thursday in New York.
The surge in levels was so savage that some onlookers suggested it presaged the failure of a major US financial institution…Citigroup has taken a terrible beating through subprime, and its failure, or that of a big bank like it, is whispered as a possibility in the corridors of Wall Street.
The market was also upset by the news from Ambac, the troubled monoline bond insurer. It’s not getting a bailout from the banks after all, but intends to raise $1.5 bn of new capital in the stock market. If Ambac is downgraded, over $1 trillion of securities it has insured face a rating downgrade as well, which could spark a vast bond firesale and consequent losses for banks holding that paper.
Mortgage bonds are screwed too, as are hedge funds who own lots of mortgage bonds, including the Carlyle Group’s hedge fund, Carlyle Capital, which owned several billion dollars’ worth of mortgage bonds, and which now appears to be heading for default. And who is the biggest investor in Carlyle Capital? Citigroup.
Meanwhile, in other markets, things are looking fantastic. The IPO of China Railways managed to attract $68 billion in Chinese retail orders. $68 billion! The Middle East is also completely flush with cash. Russia is embarking on a $1 trillion infrastructure renovation programme.
And these investors are now buying up Wall Street bit by bit – Credit Suisse has sold a big stake in itself to Qatar’s sovereign wealth fund, while Citigroup is being propped up by other big Middle East investors at the moment.
This may not be enough to save it though. Even they think it might go down without US government support. This from Dow Jones last week:
Mideast sovereign wealth funds may fail to save troubled U.S. banking giant Citigroup unless more cash is pumped into the lender, the head of a $13 billion Dubai-owned investment firm said Tuesday.
Sameer Al Ansari, Chief Executive of Dubai International Capital told delegates at a private equity conference that it will take more than the combined efforts of the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi investor Prince Alwaleed bin Talal to save the bank.
“It’s going to take more than that to rescue Citi,” Ansari said. He added that more write downs are expected and that Gulf investors would be required to bolster Citi.
We’re seeing a major shift in the balance of power. Just 15 years ago, western financial institutions like the IMF, the US Treasury and Citigroup called the shots in emerging markets, and emerging market countries had to go to them on their best behaviour, like Oliver Twist saying ‘please sir, could I have some more!’.
Now, as one banker from the beleagured UBS told me today, ‘these developing countries don’t need us anymore’. No, I replied. They don’t need you…they own you.