Climate: investing in the environment

14 April 2003

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Terra Firma is currently negotiating a take-private for the Waste Recycling Group (WRG) in a deal expected to amount around Â£640m. At a time of increasing public and policy concern for the state of the environment, enforced and supported by EU directives and resources, does environmental control display the growth and cash-generative characteristics suitable for private equity investment?

WRG is one of the UKâ€™s largest waste management companies. There are two key reasons why the waste management sector is poised for growth. Most importantly, household waste production is currently rising by 3% per annum, leading to continuing demand. Secondly, a tougher legislative environment currently being introduced is leading to an escalation in demand for certain kinds of waste processing, and also greater barriers to entry. EU directives currently impacting the amount of biodegradable waste allowed in landfills will increase margins for waste management companies, through pretreatment processes and recycling.

In the case of recycling, the UK Government has set target rates of 17% and 33% for 2003 and 2015 respectively. That the current rate is estimated at just 11% highlights that rises in government incentives and consumer prices are inevitable. The Government has likewise set ambitious targets in other environmental sectors. By 2010, the UK is aiming to source 10% of its energy requirements from renewable supplies, and to reduce its carbon emissions by 10% on 1990 levels. WRG is one example of a company benefiting from the UKs renewable energy obligation. In 2002 the company produced 92MW of electricity from landfill gas, and the company is likely to continue to benefit from lucrative, non-fossil fuel contracts. One of the largest, recent private equity-backed deals in the UK environmental sector was 3iâ€™s investment in the a140m management buyout of Environmental Resources Management (ERM) environmental consultancy in 2001. ERM provides advice to the corporate sector on issues ranging from meeting safety and regulatory requirements, reducing waste, cleaning up contaminated sites, potential environmental damage from new developments and environmental risk assessment. Mike Turner, who coordinated the ERM investment for 3i, is enthusiastic about the commerical opportunities for the consultancy sector, and by inference the environmental control market generally. â€˜The key drivers in the market are regulation. ERM is a global company, benefiting from new regulations currently being adopted, at different rates, across the world. In Europe, the EU is the key driver, for example in permit and credit trading initiatives to reduce air pollutants and greenhouse gases.â€™ Turner points out that self-regulation by the larger multinationals operating in less developed nations is also generating increasing business for ERM, as such companies seek advice and support. â€˜Environmental concerns are receiving a higher priority from companies for a host of reasons, including brand and public perception motives, as well as actual costs such as physical clean-up and downtime.â€™