A green investment

You need a number of things to get rich – a lot of passion, a healthy appetite for risk and a strong ethic. But most of all, you need a good sense of timing – the rich are experts at getting ahead of economic and societal trends and making money while the rest of us get left behind.

Which is why it makes sense to pay attention to this week’s announcement from billionaire investor George Soros, who is planning to invest $US1 billion in clean energy, and a further $100 million setting up a special environmental advisory group.

Details of Soros’ plan remain extremely sketchy. There is no word on what he’ll invest in or even when, although he has made it clear that this is a moneymaking venture, not a philanthropic one.

“I want to apply rather stringent criteria to the investments,” Soros told Bloomberg. “They should be profitable but should also actually make a contribution to solving the problem.”

While many of the world’s richest investors have ploughed money into green and clean energy – Warren Buffett and Bill Gates topped The Sunday Times inaugural Green Rich List earlier this year, for example – the sheer size of Soros’ investment is possibly matched only by that of Sir Richard Branson, who has pledged to spend around $US1 billion on alternative fuels over the next four years.

But the timing of Soros’ move raises some questions. While it comes just two months before the world’s leaders will meet for the big Copenhagen climate treaty talks, it is just a few weeks since new research showed investment in green energy has plummeted.

Data from London-based energy research firm New Energy Finance shows investment in clean energy across the globe plunged 22% in the third quarter to $US25.9 billion. Investment from private equity and venture capital sources – which is a good measure for tracking what the wealthy are doing – fell a whopping 46% to $US2.2 billion.

New Energy Finance predicts the total investment for 2009 will be $US105-115 billion, which is considerably lower than the $US155 billion in 2008 and $US148 billion in 2007.

So is Branson and Soros’ timing very good, or very bad?

News this week from China would certainly support the pair’s plans. Chinese magazine Hurun released its annual Chinese rich list, which revealed the nation’s 1000 wealthiest entrepreneurs. Top of the list? Two of the world’s wealthiest green billionaires.

In first place was Wang Chuanfu, owner of battery and electric-car maker BYD, which has attracted investment from Warren Buffett in September 2008. Since Buffett bought his $US230 million stake, shares in BYD have almost quadrupled in value.

In second place was Zhang Yin, with estimated net wealth of $4.9 billion. She became the first woman to take the top spot back in 2006 and her family controls a paper recycling and packaging business called Nine Dragons Paper.

That the richest people in China – a nation not known for its strong climate reduction policies – can come from green industries says much about the money that can be made in the sector, particularly if you have the right investors on board.

Yet despite the emergence of these green billionaires, there is still a strong argument that green investment remains a very immature sector and in many cases, returns remain volatile, small or, in some cases, non-existent.

The industry has also been hit extremely hard by the global financial crisis, with funding for clean energy projects and companies drying up, as highlighted by the drop in global investment reported by New Energy.

In the US, billionaire investor T. Boone Pickens abandoned plans for a $US10 billion wind farm because of logistical and financing problems. Australia hasn’t been immune to the green funding drought, as shown by the collapse in September of Solar Systems. The company was set to build the world’s largest solar power plant in the Victorian regional town of Mildura.

The flipside to this argument, of course, is that Soros and Branson will be able to earn great value for their investments as desperate clean energy companies clamour for funds. If they can pick the right companies, then Soros and Branson could get some very nice bargains.

But how much money the pair can make in the short-term may well depend on the result of the Copenhagen talks.

If governments come away from the talks and set high clean energy targets, and then actually put policies in place to meet them, then demand for clean energy will soar.

Indeed, Soros has clearly recognised that lifting demand by influencing government policy is crucial if he wants to make money from climate change. That’s why he will spend $US10 million a year to fund the San Francisco-based Climate Policy Initiative, which will work in the US, Europe, China, India and Brazil.

“The problem of global warming is primarily a political problem at this point,” Soros told Bloomberg. “The science is beyond dispute, but how do we achieve the objectives we all know are necessary? That is a political problem.”

George Soros is best known for making $US1.1 billion in the early 1990s betting that the value of the British pound would fall. At the heart of the score was Soros’ bet that the Conservative Government would withdraw the pound from the European Exchange rate mechanism.

Soros was essentially betting on politics then, and he may well be betting on politics now.