In John Cassidy’s article entitled “What good is Wall Street?” published in the Annals of Economics section of the New Yorker, he likened banks to power utilities, distributing power (money) to areas of need and keeping a tally of consumption. Banks are in a commanding position to provide much needed funds for companies to operate. However, when banks grow a tad too greedy and try to make a quick profit, damages can be caused. Citigroup, for example, owned risky trading businesses and one of whom included the hedge fund that its current chief executive, Vikram Pandit used to run. Pandit used to run a hedge fund which he sold to Citigroup in 2007.
Hedge funds, when on a profitable roll may generate good returns, in excess of 40%, at least that was the figure that the top hedge fund managers were hitting at their peak. However, due to the highly leveraged nature of hedge funds (involves borrowing of huge sums of money), huge losses can be incurred when bets go wrong. Ironically, when Pandit took over as CEO, one of the things he did was to sell or close down Citi’s riskier trading businesses including his former hedge fund and split off the company’s most toxic assets to another entity.
According to Cassidy, banks serve another historical function, i.e. to finance the growth of industries, be it railroads, pharmaceuticals, automobiles, etc. Renewable energy industry and green technologies are no different. Morgan Stanley has raised money for Tesla motors which produces electric cars, and Bloom energy, an innovator of fuel cell technology. Goldman Sachs, Morgan Stanley’s main rivals were also involved in soliciting investors for ethanol producers, wind farms, and other alternative-energy firms.
However, in recent times, banks of Wall Street are not doing well in terms of financing new businesses. During the 3rd quarter of 2010, only 33 U.S. companies went public, and a mere paltry sum of USD$5 billion was raised. Majority of the activities on Wall Street revolve around the purchase and sale of securities that are tied to existing firms, rather than financing the development of a new company. The general trend is that trading volumes involving stocks, bonds, currencies and commodities have increased exponentially across many markets over the past 20 years. Thus, it appears that relying on the Wall Street to raise capital to fund the development of renewable energy industry or green technologies firms has its limitations.
The development of renewable energy or green technologies starts with basic science, and with greater understanding of mechanisms involved, it translates into applications. If viable, such applications will enter mainstream usage. Institutions of higher learning have a part to play in the research and development process of promising renewable energy or green technologies. However, the status of academic research in European universities is in uncertain times as public funding is cut due to ensuing fallout of the 2008 economic crisis.
Public funding accounts for up to 75% of European universities’ total funds. In a study by the European Universities Association (EUA), public funding cuts in Italy of up to 14% have already placed 25 universities at default risks. In Greece, the situation is likewise critical with cuts of over 35% from 2010 to 2011. Dutch universities faced cuts of up 10% this year. The Dutch reactor’s conference has estimated that the cuts in funding delivered by the education ministry will amount to 420 million euros between 2012 and 2014. In Spain, the estimated drop in funding ranges between 5 to 10% from 2008 to 2011 and amounted to approximately 800 million euros.
What is the impact of the cuts in public funding on research? EUA has found that research in institutions within Spain, Netherlands and Austria has been affected more in comparison with teaching. In Netherlands, funds for research and innovation have diminished. In Spain, the effects are manifested in the form of slower pace of research funding announcements and reduction or suspension of some research funding programmes. In Austria, cuts have affected the budget of the Austrian Science Foundation which has since ceased to fund universities’ indirect costs.
The round of funding cuts to institutions of higher learning isn’t restricted only to Europe. State funding to U.S. universities has been slashed as well. Although federal grants support up to 60% of research, U.S. decentralised public education system is state-supported as well. Two-thirds of U.S. universities with high research activities are state supported, which represents a huge chunk of research being carried out in the universities. Consequently, a panel of educators highlighted at an American Association for the Advancement of Science (AAAS) conference that the state budget cuts could pose a significant threat to the quality of research in U.S.
And as if it is not enough, the House Appropriations Committee passed a bill that slashed USD$1 billion from the Department of Energy’s (DOE) current spending. The bill amounted to $5.9 billion less of what President Obama requested for DOE. Reuters reported that the bill cuts off $1.9 billion from what the White House requested for investments in energy efficiency research, renewable energy such as solar, wind and geothermal, fuel-conserving vehicles, weatherisation, biomass and other programmes.
Needless to say, budget cuts impacting research in U.S. and European institutions could pose a significant impact on basic scientific research of promising renewable energy and green technologies, and their subsequent development. This is also compounded by political development in U.S. which will see allocated budget dedicated to research and innovation being slashed. Hence, it appears that the limited abilities of banks to finance development of renewable energy and green technologies, in addition to budget cuts and bill changes affecting research and development – all point to a bleak outlook for renewable energy and future green technologies development.
However, all is not lost, and there is a potential funding solution that will sponsor research and further development of renewable energy and green technologies. They come in the form of sovereign wealth funds (SWFs). SWFs are owned by individual sovereign states and come in two forms – commodities and non-commodities. Commodities SWFs are excess revenues accumulated by a country that exported its natural resources. Non-commodities SWFs typically obtain their funds from accumulated foreign exchange reserves or fiscal surpluses. The Norwegian Government Pension Fund and the Kuwaiti Kuwait Investment Authority are examples of SWFs. During the fallout of the 2008 economic crisis, some troubled financial institutions were bailed out by SWFs.
A rather innovative approach involving the role of SWFs in renewable energy development was suggested by Patrick Bolton, Roger Guesnerie and Frederic Samama in a preliminary paper entitled “Towards an International Green Fund” published by the Committee of Global Thought (CGT) at Columbia University. They suggested the establishment of an institutional vehicle that could accelerate our global economy into one that relies on renewable energy. This vehicle is dubbed the “International Green Fund” (IGF) and is responsible for providing and coordinating the finance of green investments and R&D on renewable energy around the world. The trio highlighted the following rationale for setting up an IGF to coordinate the investment of SWFs – if SWFs work on their own, they are obviously unable to implement a coordinated investment strategy on a global scale.
There are four benefits gained from a coordination through the IGF:
Coordination of the sourcing and deployment of new green and renewable energy technologies has the benefit of shortening the development cycles. A combination of technology sourcing and deployment functions within a professionally managed IGF will significantly reduce time to implement new solutions.
Coordination via the IGF also benefits renewable energy and green technologies research and development through standards setting and knowledge sharing.
Coordinating investments through an intermediary institution such as IGF will help allay fears of political and national security concerns. The downside of inviting investments directly by an SWF is always the speculation that the latter has a political agenda, given the fact that it is a state-owned entity. Thus, IGF offers a viable intermediary vehicle for investment.
Coordination will also lead to better preparedness in tackling systemic risks such as natural catastrophe. Since climate change may affect more than one actor, it is a necessity to coordinate and share knowledge about it and come up with a mitigated approach and best response.
The authors also discussed the advantages enjoyed by SWFs in making green investments. The first obvious advantage is in line with an SWF’s goals in transferring of benefits to future generations not only in the form of wealth, but also a preserved physical environment. Secondly, due to the nature of most SWFs obtaining their revenues from oil sales, they are exposed to oil prices volatility, and green investments provide a valuable hedge against it. Thirdly, green investment assets have performed well, as indicated by the FTSE-Environmental Technology index series. Fourthly, green investments will contribute to a positive image of SWFs as socially-responsible investment entities.
Thus, although research and development of potentially promising renewable energy and green technologies are hampered by cuts in institutional funding within the U.S. and Europe, in addition to passage of a bill that slashes funding for development of such areas and technologies, there is still hope for continued funding to spur their development. SWFs comes to the fore, and an innovative solution by Bolton and colleagues proposed the creation of an intermediary vehicle known as the International Green Fund (IGF). This IGF will speed up development of promising renewable energy and green technologies, and improve the level of R&D through standards setting and knowledge transfer. Anyway, such investments are in line with investing in a better tomorrow for future generations, aren’t they?
Photo courtesy of joselito83, Flickr Commons