Profile: Oliver Yates
Investment banker and Macquarie Capital’s avoided deforestation advisor says: “We’re creating national parks by storing carbon and giving it a proper value.” So forests in developing countries can act as offsets for developed countries, including Australia, to meet their emissions reduction targets.
Oliver Yates know this business better than most and he’s happy to share with all and sundry how it’s done and why we should be doing more of it.
He was up on stage at the Carbon Market Expo on the Gold Coast last month thanking Federal Government Minister Greg Combet for his speech. He was also in speaking in panel discussions and interviews providing insight into how he thinks avoided deforestation programs can best work.
He was a key speaker and contributor last week to the Queensland climate summit (organised by the state government and The Climate Group). This everywhere-man is equally at home in the boardrooms and conference platforms, as he is in the jungles of Indonesia.
Giles Parkinson had this article on Oliver Yates and his work in The Australian (7 November 2009):
IT may be a prototype of the modern investment banker: hiking shoes, fedora hat, a measuring stick and a readiness to trek through jungles. For much of the past year Oliver Yates, head of utilities and climate change at Macquarie Capital Advisers, has been scouring the rainforests and peat swamps of Cambodia, Indonesia and Mozambique with his partners from conservation group Fauna and Flora International.
But the booty he is hunting is not a pot of treasure marked by the letter X on a crumpled map. It’s the plot on a graph, the one that predicts the value of carbon credits that will be generated by agreements for the protection of the world’s rainforests in the coming decades. It’s a number measured by the tens of billions of dollars, possibly hundreds.
Due diligence in this game is not satisfied by the mere examination of a spreadsheet, it’s done by going deep into rainforests, hugging trees (to test their width and carbon storage) and the depth of the peat. “We can look at satellite images but you are not going to know until you go there,” says Yates. “It’s all about proof.”
Macquarie, part of the ubiquitous Australia-based financier and deal-maker Macquarie Group, and FFI have released few details about their work, but they are quietly accumulating a pipeline of projects in anticipation of a global agreement for verifiable forest protection and biodiversity to balance emissions, where credits will be generated by the nascent international framework of REDD (Reducing Emissions from Deforestation and Degradation). Under REDD, forests in developing countries can act as offsets for developed countries, including Australia, to meet their emissions reduction targets. Countries can sell credits for the carbon stored in their forests to other countries to help meet overall emissions reduction targets.
The Macquarie BioCarbon team led by Yates and FFI is expected to launch at least six projects in coming years, with more to come. The revenue will be shared between landowners, local communities and investors.
“I love it,” says Yates, former office-bound US country head for Macquarie. “We’re creating national parks by storing carbon and giving it a proper value. It’s amazing that people haven’t done it before.”
The reason for that is that carbon has yet to be priced. Europe has its own emissions trading scheme and other nations are in the process of defining theirs. The US and Australia are keen for an international agreement covering the protection of forests.
Macquarie is also heavily involved in the trading of carbon credits from its London-based office and is a big investor in renewable energy. It recently bought Climate Friendly, a carbon offset company, and has approached others to expand its expertise and footprint.
It’s not the only investment bank moving into the carbon market. JP Morgan, Merrill Lynch and Goldman Sachs have bought companies directly involved in carbon markets and are involved in forest-based schemes.
Deforestation accounts for an estimated 18 per cent of annual human-caused greenhouse gas emissions, linked by many scientists to global warming, as carbon is released from vegetation through burning or decomposition. But the idea of ascribing a price to carbon, valuing forests for their environmental services and using a carbon price to halt deforestation, has created a polemic in the business and general community. Even some of those convinced by the science of human-caused climate change and the need to cut emissions have expressed concern about turning carbon into a market free-for-all, an environmental cause they say could be hijacked by the naked greed that has characterised so many booms and busts.
Critics of carbon trading say they find it ironic that what they see as a left-wing green movement should seek to solve an environmental problem through financial markets. Others find it just as ironic that business giants that made fortunes out of deregulated commodities markets should be calling so loudly for a highly regulated, tax-based system.
But Bridget McIntosh, an Australian who heads Carbon Bridge, a Singapore-based carbon company that acts as a negotiator between local project developers and investors, says the market approach is functioning well.
She specialises in projects such as small-scale wind farms, biogas, hydro and cement waste-heat products that generate credits under the UN-sponsored Clean Development Mechanism. She says virtually every cement kiln in Thailand and Cambodia has a waste-heat power generator.
McIntosh says she created her business to ensure that project developers and local communities get their fair share of the rewards from abatement. “Most bankers think I’m crazy,” she says. “I’m not a big business person, I’m a making-the-difference person.” But she cannot understand the fuss about the money-making properties of carbon abatement.
“You can’t get mitigation unless money is invested in projects, and if the project makes more money, why would anyone complain about that? We need to act now, talk is not getting us anywhere.”
Philippe Chauvancy, sales director of Paris-based BlueNext, which he says dominates the spot trade in carbon credits, says the carbon market and its financial rewards should be put into perspective. “The volume of carbon trading in one year is probably equivalent to what the oil markets do in one morning,” he says.
Chauvancy says most people involved in the carbon markets could earn higher salaries elsewhere and he estimates that most are true believers in what they are doing. “I think 80 per cent of the people trading in carbon are believers who think they will make a difference,” he says. “They know it’s just a little part of a much bigger picture. But we’re not the Salvation Army. We want to make money, of course.”
While the likes of Yates are lining up potential projects, most are holding off their announcements until the rules of the international forestry market are made clear. Though an agreement in principle is hoped for at Copenhagen next month, details of how the issues of certification and verification, ownership and governance could be some time in the making.
Wall Street banks can see an opportunity in environmental markets. So can a host of smaller and start-up investor and service providers, as their presence this week at the Carbon Market Expo on the Gold Coast testified. Many are involved in the voluntary market, also known as social carbon, which does not generate credits of high value but can prove lucrative to the developers.
As an example, last week Australian company Carbon Planet announced what it described as the largest rainforest carbon credit deal of its type, a contract for 10 million carbon credits – one credit is worth one tonne of carbon dioxide – valued at more than $US45 million ($50m).
Carbon Planet’s cut from this transaction is a fee of more than $US2.5m, plus other receipts for service fees and “reimbursement of advances”.
Still, the deal was shrouded in mystery. The company, in the process of listing on the Australian Securities Exchange through a reverse takeover of information technology company M2M, did not identify the source of the credits (believed to be in Papua New Guinea) or the buyer (described only as a large European carbon credit company).
In its original transaction documents, Carbon Planet said it had a pipeline of 25 REDD projects in PNG alone with carbon credits worth $1 billion. This is despite the fact REDD is yet to be agreed, let alone finalised. It estimated an average trading margin of 5 per cent on these projects, similar to the one announced last week.
Those pinning their faith in the ability of these markets to play their desired role in reducing emissions and meeting the ambitious abatement targets called for by the UN advisory panel recognise that the most important quality of these markets in their initial stages is their credibility, which requires a strong governance framework nationally and internationally. The European emissions trading scheme has been a crash test dummy for the sort of improprieties that can plague a nascent market, both from inflated emission estimates of EU nations and the recent rorting of value-added-tax credits from carbon trading.
It seems all sorts of people are attracted to these markets. One carbon fund executive was taken aback after getting into a taxi at Coolangatta airport on the way to the expo last week and explaining what he did. “Oh, I’ve got my own carbon fund,” the cabbie told him. “We’ve got a $500m line of credit and a fast-growing tree that reaches full maturity in five years.”
It seems that in carbon, until the rules are properly defined, anyone can play. Or joke about it.