Sustainable business
Tuesday, 7 August 2007
Last Updated: Monday, 13 August 2007
In this section:
By Beth Quinlivan
In these days of heightened awareness of all things environmental, green investing has a lot of appeal for a lot of people. Who doesn’t want to support companies that are in the business of reducing carbon emissions or reversing environmental damage, especially if you think you can make a dollar out of it?
The problem is that although there is a high level of interest in clean and green, for investors it has not been a particularly easy area to get a grip on – or do well out of.
The companies are diverse, the businesses and technologies complex. Profits are not easily generated and unless there are fundamental changes to the way energy is priced in Australia, some of the companies will never be competitive.
Even following the listed companies is not straightforward. Unlike other emerging sectors like, say, biotechnology – where there is an ASX industry group that lists all the biotech companies – the environmental or renewable energy companies are spread across several ASX industry groups.
There have been a few investment successes, but there have also been disasters.
Is that likely to change, as concern over the environment grows? With a carbon emissions trading scheme looking more certain, will the local green investment scene be able to secure a more solid foundation?
On the experience of recent years, for people who want to have some money in sustainable or renewable companies, the challenge is to find opportunities that will help – not harm – their savings.
Green and growing
Green investment options have grown in recent years as the number of companies has increased. In a recent survey, broker ABN-Amro Morgans detailed more than 40 environmental or renewable energy companies listed on the ASX. And that didn’t include those such as Linc Energy or White Energy, which are developing new “clean” technologies to be used in the coal industry.
As well as the companies, there are a few managed funds, including Australian Ethical Investments and CVC Sustainable Investments, that have a fair concentration of clean and green assets. A number of the socially responsible investment funds also have small exposures to renewable or sustainable companies.
The renewable companies cover a wide range, including wind, solar, geothermal, biodiesel, ethanol and tidal energies. A number of green companies are also focusing on the new high tech and environmentally sustainable waste disposal or management area.
Many of the companies are small, although there are exceptions, such as Babcock & Brown Wind Partners and GRD. Many are still in development stage of building plants or developing technologies, some have limited earnings history.
Investment performance, as a consequence, has been mixed. After a burst of initial enthusiasm, the biodiesel and ethanol companies, for example, have had a nightmare year, with some trading at less than half the price of six months ago.
Competition
The fact of life for the local renewable energy companies – and their investors – is that the energy they generate almost always costs more than fossil fuel alternatives. Local coal-fired power is among the cheapest in the world, and until coal energy prices take some account of the pollution caused and water used, the renewable companies have a tough battle to be competitive.
In a recent paper, the Australia Institute compared the cost of various types of renewable energy to fossil fuel-generated energy. The cost of wind energy was approximately double that generated by coal and gas, while solar and tidal were more expensive again. Of all the renewable energies, the closest in price to coal and gas was geothermal energy, which was nonetheless about 30% more expensive.
Biodiesel and ethanol companies have similar problems. The cost of production of biodiesel makes it uncompetitive. Ethanol is more price competitive, but the local industry has recently been affected recently by other issues, including high prices for feedstock as a result of the drought.
What would change the dynamics of the renewable energy sector is a carbon tax or emissions trading scheme. Although the consensus is that Australia will eventually join an international emissions trading system, it is still likely to be a couple of years off.
One of the few brokers to follow the renewable energy sector is ABN-Amro Morgans. In its latest newsletter, the broker looked at the financial implications for Australia of joining an international trading scheme at the price levels nominated in the report by British economist Sir Nicholas Stern. Stern estimates the long-term social cost of carbon is $US85 per tonne of CO 2. If that price were used as the basis of the trading scheme, the broker calculates the cost of permits for using carbon would be around $377 a tonne.
Senior analyst Roger Leaning is confident that an emissions trading scheme will be implemented, although probably not until after 2010.
“The obvious beneficiaries of any such initiatives will be renewable energy generators, their costs will be more competitive with those of traditional methods,” he says.
But he is still extremely cautious about the prospects of many of the small companies – even with a carbon trading scheme on the horizon.
“I’m an advocate of businesses that can break even without any sort of subsidy. That makes anything on top upside,” Leaning says.
Buying green
“There is very strong demand,” says Richard Whan, portfolio manager for specialist financial advisory business Ethical Investment Services. “The reasons are often beyond financial, and we see part of our role as reining clients in, stopping them having too much of their portfolio in companies that sound good but are speculative, which don’t have any track record.
“A carbon scheme is still a few years away, so you have to ask whether some of the companies will survive until then,” he says.
Leaning believes that geothermal, followed by bioenergy, have the most potential of the different renewable energy categories in the Australian market. Geothermal describes energy obtained from hot areas under the earth’s surface. Bioenergy is energy made available by the combustion of renewable biological sources.
“Technically, Australia is at the leading of development of geothermal energy. It is viable source of energy and could be competitive without green credits, both on a national basis or as a small or remote area source of power,” he says.
ABN-Amro Morgans says the sector pick in geothermal is Geodynamics, although it currently has a Hold rating on the stock. It also likes Energy Developments, GRD, and Viridis Clean Energy. In any stock picks, Origin Energy is probably also worth considering. Its enormous cash flow, some of which is being reinvested in renewable energies, means it is well placed for future growth.
Company picks
Geodynamics
Market capitalisation: $189 million
Last sale: $1.09
Year high/low: $1.39/0.65
Share price 12 months: –6%
Geodynamics was floated in 2002, and has since been working through its milestones on the way to developing the country’s first hot fractured rock geothermal power plant in South Australia’s Cooper Basin.
GRD
Market capitalisation: $455 million
Last sale: $2.33
Year high/low: $2.64/$1.80
Share price 12 months: +10%
GRD is an engineering company that started life consulting to the mining sector but more recently moved into management of waste in landfills. Its Global Renewables division operates in Australia and Britain, and technology allows it to capture more than 70% of household waste. It generates renewable energy in the form of biogas, and reduces greenhouse gas emissions by more than one tonne for every tonne of waste that doesn’t end up in the landfill.
Viridis
Market capitalisation: $193 million
Last sale: $1.07
Year high/low: $1.11/$0.84
Share price 12 months: +14%
Viridis Clean Energy Group is an energy infrastructure fund that invests in environmentally proven fuels and technologies in developed countries. It has wind energy investments in Germany and Britain, and exposure to US and British landfill gas energy.
Energy Developments
Market capitalisation: $650 million
Last sale: $4.46
Year high/low: $5.45/$3.52
Share price 12 months: +6%
Energy Developments is an international renewable energy provider with operations in Australia, the US, Europe and Asia. It has three core business areas: remote area power generation, landfill gas power generation, and coal mine waste methane power generation.
Origin Energy
Market capitalisation: $7.6 billion
Last sale: $8.71
Year high/low: $9.80/$6.23
Share price 12 months: +23%
Origin Energy is the largest of the green energy companies. It is an energy retailer with interests in several oil and gas exploration and production projects. It also operates in power generation, distribution of gas, with projects in Australia, New Zealand and the US. In recent years, it has invested in a number of renewable energy areas including solar and geothermal.
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By James Bennett
Despite the high level of recent debate over climate change, carbon trading and reducing greenhouse gas emissions, a recent survey conducted by international business coaching organisation Shirlaws found that only 2.5% of SMEs believed that “reducing environmental impact” would be a key challenge over the next five years.
Small business’s apparent willingness to dismiss concerns about the environment may have something to do with the fact they are not sure what to do about it. The latest Commonwealth Bank-CCI Survey of WA Business Expectations found that 44% of respondents were unsure about the most appropriate way to reduce greenhouse gas emissions.
SME attitudes towards environmental issues are in stark contrast to those of the big business. Numerous large companies have publicly committed to reducing greenhouse gas emissions and supporting other initiatives to help solve climate change.
In March, National Australia Bank announced it wants to become carbon neutral by September 30, 2010. NAB will aim to reduce the greenhouse gas impact of its operations to zero by improving energy efficiency and use. If emissions cannot be avoided, it will purchase carbon credits to offset any emissions.
NAB chief executive John Stewart says: “Global warming is clearly one of the most concerning issues of our time. Across the world people are becoming more and more engaged with climate change, and there is real momentum for all of us to reduce our impact, both at home and at work.”
So if a big bank can become carbon neutral, surely many of Australia’s smart, flexible and innovative small businesses can follow suit. The good news is that there are a number of quick and cheap changes you can make to cut your company’s greenhouse emissions, and plenty of free online tools to help you do it.
Where to start?
The first step in NAB’s carbon neutral push is to work out exactly how much energy it is using and where savings and efficiency gains could be made. That’s a good place for SMEs to start too.
There are many places to get an energy audit done. Some of the large electricity suppliers will do it and there are also a number of environmental consultants that specialise in measuring and reporting on a company’s greenhouse gas emissions. A good example is Energetics in New South Wales, which helped television program Sunrise become Australia’s first carbon-neutral TV show.
One of the best free tools can be found at the website of the Federal Government’s Greenhouse Office. Its energy audit tool includes 11 modules on topics such as lighting, ventilation systems, office equipment and building insulation.
There is nothing overly technical about the audit and it will help you pinpoint areas you can cut greenhouse emissions. Simply print off the module, walk around your workplace and answer the questions in the module to get a good idea of how much energy you are using.
Then follow the kit to produce an energy efficiency action plan. Each module contains short tips to follow and a page of resources that can provide more information.
It is important to note that improving your business's environmental impact requires a holistic approach. Cutting electricity and gas usage is one part of the solution, but your company’s energy requirements are likely to be a lot bigger than that.
For example, if your business uses hazardous chemicals, they will require specialised handling, transport and storage, which will invariably involve extra energy use.
Think about the raw materials you buy – do certain suppliers use less energy in their manufacturing processes than others? Consider your supply chain – can you make changes that will reduce the level of greenhouse gas emissions your logistic systems creates?
Energy
The key to becoming carbon neutral is to reduce the amount of energy you use, and that means cutting electricity and gas usage. There are plenty of cheap and easy ways to do this.
Start by using energy-efficient light globes, which are now readily available in most supermarkets. Think about the electrical appliances you use in your business.
Can machines be turned off when they are not in use? Could office equipment be turned off at the powerpoint at end of the day, rather than being left on standby overnight? Is the office refrigerator an old energy eater?
The next step is to buy GreenPower, which is environmentally friendly energy (usually hydro, solar, biomass or wind energy) that has been accredited by the Federal Government.
Most big energy suppliers offer GreenPower as part of their product range, and there is even a new energy retailer (Jackgreen Energy) that only sells environmentally friendly power.
GreenPower prices have come down markedly in recent years as competition has increased. You may also find that switching to environmentally friendly electricity will give you a free marketing tool – companies that use GreenPower for a certain percentage of their energy bill are allowed to use the GreenPower logo.
Transport
The other big source of greenhouse gas emissions in Australia is the transport sector, particularly motor vehicles. There are a number of ways to get your vehicles emissions down.
Simple ideas include organising car pools for staff, ensuring vehicles are maintained and running efficiently and getting staff to reduce their speed on the road (which will reduce fuel use).
If you want to take things a step further, consider adding a hybrid car to your fleet, such as Toyota’s Prius or Honda’s hybrid Civic. Another option may to be sign up to the program offered by Greenfleet, a not-for-profit organisation that seeks to naturalise vehicle emissions by planting trees. For $40 per vehicle per year, Greenfleet will plant 17 trees on your behalf. The organisation can also offset carbon usage in the office or for staff air travel.
Virgin Blue is the first Australian airline to offer passengers the option of buying carbon offsets on its flights. Customers pay a fee for the offset (typically about $1) and Virgin gives the money to the Australian Greenhouse Office's approved Greenhouse Friendly abatement projects.
Recycling
Most offices have paper recycling programs, but there are plenty of other consumables that can be easily recycled. Everything from printer ink cartridges, mobile phones and white goods to batteries, oil, furniture, gas cylinders and computer parts can be used again. Go to www.recyclingnearyou.com.au for a directory that lists recycling centres by location and product.
Another good way to reduce paper usage, and save on stationery and postage costs, is to organise with customers to use email for communications, invoicing and payments.
Water
It is impossible not to mention a few water saving ideas in a time of severe drought. Companies that use water as part of their production process, such as manufacturers or rural businesses, should examine ways to use recycled or rain water. There are even government grants to help fund water-saving initiatives.
But every business can do its bit to conserve water by checking that pipes are not leaking, using grey water in the office toilets and installing a water tank.
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Everybody likes the idea of being green, especially when someone else has to do all the heavy lifting.
According to a recent survey of 1741 US employees by Sun Microsystems published by Inc.com, 73% of workers want to work for businesses that are environmentally-friendly – but only 52% say they turn lights off when they leave a room at the office, and 34% report they turn off their computers at the end of the day.
Interestingly, people take more responsibility for conservation at home. The same survey found 92% of people conserve energy at home by turning off the lights and 58% shut down their computers.
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Almost 40% of US teenagers online consider themselves environmentalists, with 15% subscribing to views that could be described as “hardcore” green, according to a recent Jupiter Research survey reported by Promo magazine.
And what appeals to these green teens? Well, online shopping and sweepstakes apparently. Teens who identify with green issues are 5% more likely than other teens to enter online sweepstake-style competitions, 6% more likely to shop online and 7% more likely to buy from a bricks-and-mortar store after seeing an online advertisement (so much more environmentally friendly than all those paper pamphlets).
And they like music – green teens spend a median of seven hours weekly listening to recorded music, compared to five hours for teens overall, and they spend $US100 annually on music – 25% above the average for all teens, according to the survey.
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