Profile: James Thompson, CFO of Ecosecurities

James Thompson, Ecosecurities CFO

In his own words, James Thompson went ‘straight into the thick of it’ at
Ecosecurities.
The former Greenergy
CFO stepped into his latest role as finance director back in mid-January during
a particularly turbulent time as the company was preparing to post its annual
results.

‘The auditors arrived fairly soon after, and we began making the preliminary
announcements of the results, and doing the investor road show. So it was a
matter of going straight into the thick of it,’ he says.

Thompson had to deal with less than pleasant annual results, which had been
preceded by warnings and a drop in share value. And he had to present this even
though he was new to the company.

He believes its was probably his accounting background that allowed him to
handle what could otherwise have been a very awkward situation in front of
shareholders.

‘I think the professionalism that you have in part from being an accountant,
is all pervading. So there is, in many respects, that sort of transparency and
reporting which you try to make as objective and ­ emotionless is not the right
word ­ but one which is managed and governed by rules and by transparency rather
than by emotion,’ says Thompson.

He had a lot of hard questions to answer, from both investors and analysts
after the company posted a full-year loss before tax of E43.3m (£34.12m),
compared to the E27.6m in losses expected by analysts.

‘In part, I think it was understood that I’d only been there two or three
weeks and therefore there was no animosity from them. They were doing their job
and I was doing my job, and it was a perfectly polite and professional
discussion.’

Given his recent background in an environmentally friendly industry, he might
have expected an easier ride in his new job. And Ecosecurities was a top p
erformer.

It was created in early 1997 to provide carbon finance expertise to projects
reducing greenhouse gas emissions and had evolved into a global competitor,
which listed on AIM in 2005. Now it has 400 projects under its belt, set to
deliver 130 million tonnes of carbon dioxide reductions by 2012.

But it’s bright prospects didn’t deter the financial press. on the back of
the results. Perhaps the most difficult part of Thompson’s job however were
press articles which drew attention to the losses ­ unsurprising since
Ecosecurities is one of the world’s biggest developers of carbon offset projects
­ plunging shares by 18%.

The company’s losses were worse than expected, and partly due to the failure
of a contract to deliver 900,000 carbon credits to a company in Mauritius.
Ecosecurities had to then cough up E9.2m.

But the failure to deliver the credits did not lie with the company itself
but rather with the system it had to go through in order to have its carbon
credits recognised. In order to sell carbon credits, they must first be
registered with the United Nations’ Clean Development Mechanism, established
under the Kyoto Protocol.

The CDM allows for the creation of Certified Emission Reduction credits,
which are tracked, reviewed and audited before they can be registered. But the
UN processing as a whole had slowed down as companies like Ecosecurities stepped
up their efforts to increase the rate at which they were applying for credit
registrations.

‘There’s a whole process to it. There are auditors involved, and they’re
overworked, and the UN secretariat, a sort of civil service, is overworked.

‘Essentially they had too many of these schemes coming to them for approval
and they couldn’t get through them quickly enough,’ said Thompson.

In addition, the certifying body added more complex regulations to the
scheme, which meant more rigorous processes in assessing and granting approval
for the credits.

‘There were concerns that in the past, the approval of projects had perhaps
been given too easily. So there was a much higher level of sending projects back
for review and that review created more work, took time in itself, but created
more work for the whole system again. Every time you delay a registration, you
don’t get carbon credits until you’re registered, so they were lost from our
books,’ he says.

The company’s accounts took a hit when a contract signed in 2005 with
delivery due in 2008 had to be settled in cash rather than CERs.

‘At the time the contract was signed back in 2005 it wasn’t clear what the
procedures would be. There was a provision in the contract that said if there
was a problem with settlement, we’d do it on a mark-to-market settlement basis.

‘So commercially, it doesn’t make much difference if you’re given cash as
value or CERs which are liquid commodities.

‘But in accounting terms, you account for CERs on a cost basis, and we were
buying the CERs very cheaply, cheaper than their market value, and selling them
at higher value.

‘But we’d done this contract back in 2005 when the prices of CERs were much
lower. So on a mark-to-market economic commercial basis, for us, it was not

particularly exciting.

‘In terms of the accounting we had to make a provision in 2007, which we will
recover subsequently. I think most of the analysts understood that, and when you
read the analyst reports they all say that it looked worse than it is. But a lot
of the journalists didn’t have the time to get into contract. They wanted a
headline,’ says Thompson.

His assessment is quite true ­ as there appears little doubt that the credits
will sell for higher than their original cost price, when registered. Last year
alone, the CER market was estimated at some £32.7bn.

‘I think people saw all these things, but equally they saw there was also
going to be a slowing of issuance of CERs from our portfolio. And that probably
affected share prices more than anything else. And the slowing is impacted on
through the auditing system and the UN,’ he says.

Other issues that affected their year-end figures concerned the hiring of a
greater number of highly-skilled academics with doctorates, so as to increase
the rate of project development and documentation.

Also of issue is that the company’s biggest asset, its portfolio of projects,
is not on the balance sheet, because the credits have not yet been registered.

But looking ahead, this year marks the first commitment phase of the Kyoto
protocol ­ an important period going forward to 2012 during which time developed
countries are committed to reducing emissions by at least 5% from 1990 levels.

‘We’re already looking forward to what will happen after 2012, which is the
final year of the commitment period,’ says Thompson.

He’s never looked for a particularly feel-good factor in the appointments
he’s taken up, but there’s no doubt of his ‘clean’ convictions.

For Thompson admits he once even turned down a job with British American
Tobacco, on account of it being a cigarette business.

The next hurdle he faces is the AGM at the end of the month. No doubt
analysts and shareholders alike will be keen to look for signs of Thompson’s
past leadership ­ he spent five years as CFO of Greenergy, an independent
company trading in bio-fuels. He also served as CFO with USIT World and spent
eight years in the corporate finance divisions of ING Barings and Paribas.

But as far as Thompson is now concerned, the future is the important area
that he will focus on.
‘We have to make the most of the resources we have, and achieve the best result
possible from where we are. That may involve changing ­ and you do have to
sometimes make decisions to change tack. Business is not like politics, where
you can’t be seen to be changing mind. Circumstances change and the right thing
is to change. And the market we’re in is rapidly evolving.’

Kyoto protocol

The Kyoto Protocol was agreed on 11 December 1997, at the 3rd Conference of
the Parties. As of November 2007, 175 parties have ratified the protocol.

Of these, 36 developed countries (plus the EU as a party in its own right)
are required to reduce greenhouse gas emissions to the levels specified for each
of them in the treaty. One hundred and thirty-seven developing countries have
ratified the protocol, including Brazil, China and India, but have no obligation
beyond monitoring and reporting emissions.

The United States has not ratified the treaty. Scientists and critics say
there is some debate about the usefulness of the protocol, and there have been
cost-benefit studies performed on its usefulness.

Carbon market: latest figures

According to the World Bank, the global carbon market grew to a whopping
$64bn (£32.7bn) in 2007, more than doubling over 2006, according to a new
highlighting the state and trends of the global carbon market.

The European Union Emission Trading Scheme (EU ETS) also saw a doubling of
both value and number of allowances transacted to the tune of $50bn.