Cleantech investment could break decarbonisation inertia

Nathan Goode hopes improving external conditions will support growth for the right kind of cleantech

The outlook for the cleantech sector looks to be improving. While the Climate Policy Initiative reported that global climate finance flows had plateaued at US$359bn in 2012, business growth indicators from our Q3 International Business Report (IBR) are positive, particularly as regards investment and R&D, although a shortage of talent remains a challenge.

Signs of a recovery in Europe are certainly welcome. Prioritisation of long term environmental concerns for consumers, business and government appears to have given way to shorter term agendas, such as the cost of energy. A return to growth in Q2 may spur the region into taking up its role as the global champion of green investment once more; although it seems very possible that Europe will lose its leading position in cleantech to other parts of the world.

China in particular has been busy. Its greenhouse gas emissions have rocketed from 10% of the global total in 1990 to around 30% today. Since the turn of the century, China has accounted for two-thirds of the global growth in CO² emissions. This came to a head in January when a smog settled on the capital with pollution at 40 times the level the WHO deems safe. Microblogs exploded in protest and the government responded by introducing a carbon market and pledging to spend US$275bn over the next five years cleaning up the air. Other measures have been launched too. The intensity of energy production has fallen by 20% over the past five years. And the official target of 20% renewable energy by 2020 is the same as Europe.

The global drivers for decarbonisation are getting more urgent with every passing year. The IPCC’s Fifth Assessment Report (AR5), released in September, stated that “warming of the climate system is unequivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia.” The scientists conclude with 95% certainty, that human activity is responsible for the majority of warming the planet has experienced since the middle of the last century. UNEP has warned that the gap between current CO2 reductions pledges and the levels needed to keep the global warming increase to a “safe” 2oC just keeps getting wider.

Sadly, however, important parts of the global economy remain effectively in denial about climate change, while elsewhere short term considerations threaten to pull policy–makers off-course. Some countries appear to be going in to reverse on climate change. Nevertheless, cleantech businesses are ramping up investment activity in plant & machinery (50%), R&D (45%) and new buildings (25%) according to the IBR. No other sector shows anywhere near this level of commitment to boosting its long-term growth potential. And as the sector progresses towards commercialisation, revenue (57%) and profitability (48%) expectations remain strong, second only to peers in the hospitality & tourism sector globally. However, for these expectations to be realised, cleantech businesses need to be smarter than ever in responding to real demand in order to find a sustainable growth trajectory.

One cloud on the horizon may be on the skills side. A third of the 500+ cleantech businesses surveyed over the past 12 months have cited the availability of skilled labour as a constraint on growth (33%), slightly above the global average (30%). The proportion rises to more than two in five in the emerging markets of Latin America and Asia Pacific. And there are signs that the battle for talent is placing upward pressure on wages: 73% of cleantech businesses expect to raise wages (18% above inflation), compared with 67% of businesses globally (14% above inflation).

We will be watching closely as the sector develops in the coming months. Improving external conditions offer a real chance for the sector to expand. It would be a shame if a lack of skills held this back.

Nathan Goode is Global leader for energy & cleantech at Grant Thornton.