As the smoke has settled in the aftermath of Copenhagen and we look toward Cancun, I have tried to analyse the actual and potential impacts of the “legally binding agreement that was not” and "deal that will not be". I have looked at the impacts global and domestic public policy and more importantly on capital flows and one issue keeps cropping up in various guises that pose real financial, moral and academic questions that need an answer as an investor, blogger and aspiring “ex-Smoker”.

How can I make a decent return on my investments in the current market, exploiting anticipated long changes in the global macro picture while reconciling these to my ideals of long term and sustainable investment?

Not even the investment community is safe from the green political correctness wave sweeping the globe. It is now seen as poor form for “good”, “green” or “socially responsible investors“ to invest in fossil fuels. So let me just come out with it… I invest in oil - not oil companies, just the actual commodity, (actually, derivatives representing quantities of the actual commodity)

Why?...Returns. While I believe in the coming green technology revolution, I am not confident that all the factors are in place to profitably exploit this in the short term. I have confidence in the underlying fundamentals, and I see it as a hedge against political instability and a good proxy to play the global growth story. There is substantial opportunity cost in not being invested in oil.

In due course, I expect the following:

• The price and volatility of oil to increase (relatively substantially) over the coming years.
• The price of oil will decrease substantially (and subsequently the volatility) at some point in the future as the realities of operating in a carbon constrained world, technological advances and potentially global climatic or geopolitical events and transition to a low carbon economy promise to irrevocably wean us from high carbon content fossil fuels.

However, at some point, there will be an inflection. At this point oil will see a substantial and prolonged fall, followed by falling volatility as new equilibrium ranges are reached.

This presents the problem of reconciling my conflicting priorities and values:

• I need to invest to make a decent return in the current market
• I am “certain” of the medium term outlook for oil
• I am “certain” of the long term outlook for oil
• I am uncertain as to the intermediate outlook for oil
• I need to reconcile my investment activities with my conscience as an aspiring “ex-Smoker”
• I need certainty as to where the inflection point will be and what exactly will drive this.

Here my personal trials and tribulations as a (moderately successful) personal investor are illustrative of an issue faced by literally hundreds of investment decision makers, (from the boards of multinational corporations, small and medium size companies, local councils, pension funds, finance providers and institutional investors) responsible for the hundreds of billions of dollars of investment needed to migrate to low carbon economy.

Namely, how can you make major investment and business decisions with implications lasting decades, if not longer, running to many billions of dollars, if there is not sufficient regulatory clarity?

This lack of clarity is evident across vast swathes of so called “governance”. Look at the Cop 15 decision to “take note of the Copenhagen accord of 18 December 2009” which contained no binding targets, no timelines and no abatement trajectory. Add to this, the continued emphasis on “our strong political will to combat climate change…” by every politician, and compare it to the actual delivery of concrete public policy instruments which provide regulatory certainty and allow businesses to plan ahead for the future in which the price of carbon reflects the cost of the externalities not currently accounted for as we transition toward a low carbon and more sustainable economy.

I want CCS to happen as much as the next person (assuming it will work, but that is a separate debate for another day) but major utilities have scaled back on clean technology investments in recent months and I don’t blame them. They have a fiduciary duty to their shareholders and cannot afford to throw billions at R&D, and implementation of new technologies in the hopes that whichever government of the day will support recognise their altruism and reward them. There is significant key opportunity cost and in investing now. Investing I CCS now for example could yield significant competitive advantage to late adopters who can learn from early mistakes without the significant up front investments.

Businesses and individuals respond to the incentives they are presented with in the most efficient and beneficial manner available to them. While rules and regulations can have perverse outcomes, the current lack of direction is, despite the “best intentions” of rule makers, having perverse outcomes as reflected above. Until such time as there is significantly more regulatory clarity, I shall be investing I oil before I invest in Cleantech companies.

Note: The (ex) Smoker is a City professional with over a decade of experience and high carbon living in the city, who is using their role as a leader in the environmental arena to mend their ways and to try to help the city and the country to migrate to a low carbon economy. One little bit at time....