June 25 (Bloomberg) -- JPMorgan Chase & Co. is reorganizing EcoSecurities, the carbon-emissions company it bought for $206 million, to pursue further takeovers even as the market for greenhouse gases shrinks.
“It is possible that EcoSecurities will be in a position to make additional acquisitions in this area over the next few years,” said Mark Nicholls, an independent director for the Dublin-based investor in carbon credits. Nicholls served as its chairman from 2005 until the takeover by JPMorgan last December.
“This was not a trading play, not a one- to three-year plan, but a long-term plan by JPMorgan to get into this space, and we are delivering on that plan,” he said in a written response to questions.
Boosting its wager may help JPMorgan strengthen its role in a market that the U.S. Commodities Futures Trading Commission says has the potential to be worth $2 trillion. Before that, EcoSecurities Chief Executive Officer Paul Kelly must ride out a slump in emissions trading after the U.S., the European Union and Australia reined in plans to build carbon markets.
The acquisition “looks to the future, but we don’t know what the future is,” said Gus Hochschild, an analyst at Mirabaud Securities LLP in London. “People are taking options.”
Scale of Business
EcoSecurities has taken stakes in 341 emissions-cutting projects in developing nations, more than any other company under a United Nations-supervised climate change program, data compiled by Bloomberg show.
In return, the company earns tradable credits that may be sold to other investors or to industries that use them as pollution permits. Other UN credit investors include Italian utility Enel SpA and Goldman Sachs Group Inc.
The value of UN-sponsored credits produced last year dropped 59 percent to $2.7 billion as the bureaucrats running the system struggled to process applications, the World Bank said last month.
Kelly, the JPMorgan executive who led the acquisition team and now steers EcoSecurities through the slump, has cut back investment in new projects until the regulatory outlook clears, just as competitors are doing, Nicholls said.
“There’s not enough clarity to continue to be able to invest in the market robustly,” Kelly told a May 26 conference in Cologne.
Curbing Costs
Kelly is also reining in costs.
EcoSecurities also cut jobs, according to three former employees who asked not to be named. Nicholls declined to comment on layoffs. The company had 290 staff in 25 countries at the end of 2008, according to its annual report.
The restructuring meant “significant attrition,” said Abyd Karmali, global head of carbon markets at Bank of America Merrill Lynch, said in a telephone interview. “There are a lot of people on the beach.”
“Most people feel that JPMorgan were buying a portfolio and happened to get 200 people along with it,” said Trevor Sikorski, an analyst at Barclays Capital in London. “We used to have a fairly good relationship with Eco, and we just don’t see them anymore.”
Turning Profit
EcoSecurities earned 255,000 pounds ($378,000) on sales of 60 million pounds in the first half of 2009, in the last report before the takeover. That performance followed six straight years of annual losses.
Even as EcoSecurities made a profit, the UN program for reducing emissions was running into trouble.
The supervisory board suspended TUEV SUED AG from verifying projects in March, the third auditor to be sanctioned in the past two years. That has added to a backlog that has developed as regulators try to determine whether thousands of projects will deliver genuine carbon-emissions savings.
Officials in 2009 approved 684 projects to begin generating credits and have more than 2,900 unregistered projects waiting to be assessed, according to the UN. It takes on average more than three years for projects to earn their first credits after their applications are submitted, the World Bank said.
Climate Talks
UN-led negotiations to secure global limits on carbon dioxide emissions are stalled after world leaders failed to broker a deal at the Copenhagen climate summit in December. The WilderHill New Energy Index of 88 renewable-energy stocks, after surging 40 percent in 2009, has slumped 25 percent this year, more than the 7 percent drop of the MSCI World index.
Other companies are following similar acquisition plans.
EcoSecurities was set up by Brazilian scientist Pedro Moura Costa in 1997. It advised companies in nations such as India and China on how to claim UN credits for cutting emissions, sometimes taking stakes in those projects, and helped them sell the resulting certificates. Polluters in Europe or Japan use UN credits to meet their obligations under climate-protection laws.
Under Moura Costa the company sometimes allowed employees to pursue their interests ahead of profits and the cost structure grew too large, Nicholls said.
“In the early stages it was a bit of a lifestyle company,” Nicholls said. “The overwhelming wish of the independent directors was to try and get profitable. We received a number of approaches and everyone involved a significant cut in the cost base.”
--Editors: Todd White, Reed Landberg
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