Environment. Environment. Environment. It's become the biggest issue of the past year. But in classic entrepreneurial fashion, the problem that is global warming has also spawned new opportunities, particularly in clean-tech development and in carbon emissions trading and disclosure.

As a result, an entirely new species has emerged: the environmental capitalist. Distinguishing features include a keen understanding of international finance, a hefty dose of drive and a seemingly unshakeable belief that the profit motive represents the most realistic solution to the problem of global warming. James Cameron, an environmental lawyer who has spent the last two decades exploring ways in which public policy and capitalism can co-operate for the benefit of the environment, is one example.

Cameron has served as a trustee of the Climate Group, an international charity working to curb greenhouse gas emissions. In 1997, he negotiated the Kyoto Protocol on behalf of the Alliance of Small Island States (AOSIS), a collective of nations at obvious risk from rising sea levels stretching from the Caribbean to the Indian Ocean. He is chair of the advisory board of the Carbon Disclosure Project, whose website claims to hold the world's largest registry of corporate greenhouse gas emissions in the world.

Today, most of Cameron's time and attention is taken up by Climate Change Capital (CCC), the fast-growing investment bank of which he is vice-chairman. By investing in green energy facilities, CCC's stated mission is "to make the world's environment cleaner, while delivering attractive financial returns". He says: "There's real wealth to be created in solving the climate change problem and yet many people are only just starting to cotton on to that. Our job is to get that message out there."

Ahead of its fourth birthday, CCC has already built a carbon fund worth over $1bn. It has been very successful in attracting high-profile investors, including two of the world's largest pension funds, insurance company Swiss Re and energy company Centrica. These big-name investors are relying on CCC to navigate the complex world of carbon trading on their behalf-and turn a healthy profit. Interest in carbon trading is booming, confirms Trevor Sikorski, an analyst at Point Carbon, an independent market watcher. That's down to the Kyoto Protocol, he explains, which will require member countries to reduce their collective greenhouse gas emissions to 5.2 per cent below 1990 levels between 2008 and 2012. In order to achieve these reductions, Kyoto member-countries have committed to a system of "cap and trade" for carbon emissions. This means that, from next year, each country (or group of countries) covered by Kyoto must cap emissions at a certain level and issue companies in energy-intensive industries with permits to emit a certain amount of carbon dioxide.

"If companies do not use up all their permits, they can sell them to companies that need them. And if they want to emit more carbon dioxide than they are permitted to, they will need to buy extra permits in the market from companies with a surplus," says Sikorski.

Alternatively, companies may choose to buy carbon credits that are generated by emission-reducing projects in the developing world, under the United Nations Clean Development Mechanism (CDM) scheme. One carbon credit, or Certified Emission Reduction (CER), equates to one metric tonne of CO2.

While carbon trading under Kyoto officially begins next year, for about 5,000 companies operating at around 12,000 sites throughout the European Union, it is already a day-to-day reality, according to Sikorski. These companies, typically power stations and heavy industrial plants, fall under the EU's Emission Trading Scheme (ETS), the world's first mandatory carbon trading programme, which came into effect on January 1, 2005. While the ETS has had a rocky ride so far (see panel below), it has also come to dominate the global carbon trading market, in terms of both volume and transaction value.

Point Carbon estimates that, in 2006, global carbon markets saw transactions of 1.6 billion tonnes of CO2, worth €22.5bn—a growth rate in transaction volume of 250 per cent. The EU's ETS accounted for 62 per cent of the volume and more than 80 per cent of the value in 2006, which equates to one billion tonnes of CO2 transacted, worth €18.1bn.

Around 80 per cent of trades under the EU's scheme were carried out over the counter using carbon brokers last year, while about 20 per cent of trades were on dedicated carbon exchanges. And London, says Sikorski, has rapidly emerged as the epicentre of the global carbon trading market. The early start by the EU's ETS has helped the environmental capitalists to determine where the best opportunities to make money out of carbon trading lie, says Sikorski. The large, established finance houses, such as Barclays Capital, have opted to match buyers of carbon emissions permits with sellers, taking a cut on the resulting deals. Meanwhile, the area of CDM projects has been of interest to newer entrants such as Cameron's CCC. On the whole, companies in this space tend to be smaller, specialist funds looking to invest in projects that range from wind farms to hydro-electric dams to systems that capture methane from pig farms. Their investments allow these projects to get off the ground and quickly begin generating CERs for each tonne of CO2 that is avoided. "These credits can then be sold to companies that need them, creating an early revenue stream from an investment that might otherwise be considered high risk because it is carried out in a developing country," says Cameron.

"The basic idea is that global emissions are reduced and developing countries benefit by gaining access to technology they would not otherwise be able to afford," says Pedro Moura Costa, president and chief operating officer of Ecosecurities, a company that is currently overseeing 360 projects in 36 countries. "Our current portfolio has the potential to generate 160 million tonnes of emission reductions, with a value in excess of £1.6bn."

Moura Costa founded EcoSecurities in 1997; today, it is one of the most established companies to have been born out of the carbon economy. Its flotation on London's Alternative Investment Market in 2005 raised £54m, and the company now employs more than 200 employees.

"We work with project developers throughout the credit creation process, from initial assessments, to developing full project documentation, to steering the project through formal approval processes, and monitoring and verifying greenhouse gas reductions," says Moura Costa.

In October 2005, for example, one of EcoSecurity's projects was among the first of the UN scheme's projects to be awarded CERs by the executive board of the CDM. La Esperanza in Honduras uses hydro-power to supply renewable energy to the national grid. Without it, he adds, the country would be forced to rely on carbon-emitting fossil fuels to generate the equivalent electrical power.

Another young company, Carbon Capital, is focusing its efforts on investing the money of high-wealth individuals in reforestation projects in the developing world. These generate wealth in a number of ways says Stuart Clenaghan, a former UBS investment banker and co-founder and director of Carbon Capital.

"First, in a sustainably managed forest, the trees themselves store carbon, sequestering it from the environment. And that attracts CERs," he says. "Second, commercial forestry creates not only timber, but also sawdust, offcuts and prunings that can be converted into biofuel." And finally, adds Clenaghan, the forestry projects are designed to establish a thriving local timber business.

But not everyone's a fan of environmental capitalism. Critics claim that the CDM projects simply encourage destructive development and, at worst, enable investors in industrialised nations to line their pockets at the expense of the communities in developing nations that host CDM schemes.
Clenaghan thinks this concern is misplaced: "Under the CDM, there are very clear guidelines for sustainable development and biodiversity. All of our projects meet those guidelines or exceed them," he says. "I'd also say that, unless you are careful to address the needs of the local community, chances are that your project will fail. We always start with local requirements and build out from there."

Carbon Capital's projects in the developing world, adds Clenaghan, have received robust support from the UK's Department for International Development (DfID). The company has been involved in the refurbishment of local schools and the creation of conservation corridors to protect biodiversity as part of its reforestation projects.

Point Carbon's Sikorski agrees. "A lot of people don't understand the CDM... they say it's just the rich world paying the poor world not to develop. That's a complete and pretty gross misreading of the situation. CDM is a powerful tool for attracting investment in sustainable development," he says.

James Cameron, meanwhile, is exasperated by the attacks levelled at carbon trading as a means to alleviate the problem of climate change: that is, that it allows polluters in wealthy countries to buy themselves a "get out of jail free" card.

"This kind of thinking has slowed us up for a number of years," he says. "But the carbon trading market only exists to reduce greenhouse gas emissions. There's no other purpose to it. And it can only work if there are real reduction targets, thereby creating a shortage in the market. That means that every single person that profits in that marketplace delivers an environmental benefit. It's not possible to do anything else."

Cameron's more immediate concern, he says, is increased competition from much larger, wealthier players. Last October, for example, investment bank Morgan Stanley announced plans to plough $3bn into beefing-up its positions in global carbon trading markets, including plans to pour funds into projects related to emissions reduction.

"It's quite natural in new markets that you get pioneers who are capable of absorbing more risk and big banking institutions are more likely to follow rather than lead," he says. "But the market is changing fast, so pioneers like us have got to be sure they stay a step ahead. They have to be more nimble and better at judging risk than the big investment banks that will be coming towards their territory with menacing intent," says Cameron.

"To be frank," adds Clenaghan, "I think this is the most exciting business opportunity I have ever seen. It's a fantastic opportunity not only to create very interesting returns for our investors, but also to create a big solution to both climate change and sustainable development. And it's all been unlocked by the carbon market," he says.

Forewarned: future-proofing your business

Globalisation has "massively accelerated", according to SustainAbility's recent report, Raising Our Game. "While opportunities flourish, divides based on demographics, wealth, gender, nutrition, health, environmental resources, education, information, security and governance persist and in many cases worsen," says the report. "We suspect the game is about to jump to new levels of complexity and sophistication," says SustainAbility's John Elkington. The report foresees "a continued acceleration in the scale and speed of events and decision-making from business cycles to environmental impacts." It also identifies the importance of leadership, but sees it emerging from "unexpected directions" such as NGOs and companies.

It also offers seven recommendations to businesses on how to raise their game:

1. Plan for the unexpected
In a world that is accelerating and becoming more complex, it will be vital to build in flexibility whether in technology platforms, supply chains, or human resource policies.

2. Find true South
The extent to which the interests of the emerging economies will clash with those of the developed North can scarcely be exaggerated. So focus sustainability efforts and investments on regions and cities where the population is booming and development needs are highest.

3. Don't expect nice companies to come first
Even the best corporate citizens can be damaged by scandals, controversies, and economic discontinuities. Over time the capacity to create true blended value will become a defining characteristic of tomorrow's successful global businesses.

4. Co-evolve earth's immune system
Social and ecological shocks are already catalyzing the development of a civil-society-led "immune system" for the earth. Be part of this to help accelerate its development and serve as a source of market intelligence and creation.

5. Think opportunity—and innovation
Reframe social and environmental issues not just as risks but also as sizeable market opportunities.

6. Stretch
The scale of the challenges is immense and will require radical approaches to catalyse breakthroughs. Business and other leaders will need to reach beyond their comfort zones in finding new models, new technologies, and new partners in sourcing and scaling solutions.

7. Do the politics
This agenda is now political. Get involved and take stands. The time has come for the vision, courage, innovation, and enterprise needed to leapfrog into a different world. The time has come for us all to raise our eyes, our ambitions, our game.

For more information, visit www.sustainability.com

Carbon trading programmes

It is still early days for carbon trading. To date, the world's only mandatory carbon trading programme is the European Union's Emissions Trading Scheme (or EU ETS), although voluntary schemes do exist in the US and in Japan.

Launched on January 1, 2005, the EU ETS encompasses 2.2 billion tonnes of emissions from 5,000 companies at 12,000 installations in 25 EU member countries. Around 45 per cent of all EU greenhouse emissions, it is estimated, are covered by the scheme.

But in 2006, the EU ETS was rocked by the revelation that EU governments had inflated their requirements for carbon credits, leading to oversupply. That sent the market tumbling from €31 per tonne of carbon emissions to eight euros in April 2006. Supporters of the trading scheme insist that the next phase will be stronger for the problems experienced this year. This is a pilot phase, ahead of the first phase of Kyoto, they point out. "The lessons learnt in 2006 will be extremely valuable in terms of how the ETS is run in the 2008 to 2012 period," says Carbon Capital's Stuart Clenaghan.

So far, the signs are positive. In late 2006, the EU's executive announced plans to take a tougher line towards member states to ensure their estimates of likely carbon emissions are more realistic. Second, there is likely to be more transparency, making it easier to track whether countries are on course to meet their end-of-year targets.

More countries are likely to auction permits which, in the initial phase, were given by governments to companies free of charge. This will give businesses a strong incentive not to overestimate demand.