One man’s money-draining bet on climate change

ELEVEN years ago Dharsono Hartono, a former JPMorgan Chase & Co banker, spotted what he thought was a new way to make a fortune: climate change.

The plan was to snap up rain forest in Borneo, preserve it from logging and sell carbon credits to big polluting companies in the developed world. The earth’s temperature was rising, and this was a way to profit by confronting the problem.

“From an investor perspective, from a real-estate perspective, this is a new asset class,” Hartono said, describing his thinking at the time.

Investors around the world have poured money into assets like once-frozen farmland in Canada and groundwater basins in California, betting that warming temperatures will raise their value.

Another bet has been on what some investors hope will be the most profitable outcome of a warming climate: government regulation of carbon emissions. Those who correctly anticipate future government responses to climate change are likely to reap profits.

Hartono went in big. His company’s rain forest, a humid and swampy expanse home to orangutans and clouded leopards, is twice the size of New York City and has one of the largest carbon stores of any such project in the world.

But the carbon windfall never arrived. Hartono has sold just 20% of his credits to environmentally conscious corporations voluntarily buying credits, and has lost around US$20mil, burning through US$5mil to US$10mil a year in recent years. Other investors in Indonesia and Latin America who made similar bets, including one backed by Australian bank Macquarie Group, failed to sell credits and abandoned their rain-forest projects.

Like the climate itself, governments are hard to predict.

“Unfortunately this is probably one of the hardest businesses” to be involved in, said Hartono. “It all really depends on regulation.”

Things looked bright back in 2007. Hartono had returned home to Indonesia from the US a few years earlier, where he earned a master’s degree from Cornell University in financial engineering and worked in real estate for PricewaterhouseCoopers and JPMorgan.

His initial business plan was to buy up forest concessions to grow palm oil, the crop that is driving much of Indonesia’s deforestation. Those plans changed after Rezal Kusumaatmadja, an old Cornell buddy and an environmentalist, convinced him to attend a United Nations climate-change conference in Bali in 2007.

By then governments around the world were establishing markets that required polluting companies to purchase carbon credits to offset emissions, though no compliance market at the time accepted the international forest credits Hartono planned to produce.

He and Kusumaatmadja founded a company, PT Rimba Makmur Utama, and began securing rights to a stretch of Indonesian government-owned peat-rich rain forest. Instead of being a minor player in the palmoil industry, Hartono would try to be a pioneer in a new green industry.

“If tomorrow suddenly people start buying carbon, this is going to be a home run,” he thought at the time. He invested his own money in the project, with help from wealthy family members. International donors like the Clinton Foundation chipped in funding for projects such as mapping the local rain forest.

But Indonesia dragged its feet on granting permits, which Hartono had begun applying for in 2008. Only after actor Harrison Ford visited the project to shoot a documentary on climate change, and raised the issue with Indonesia’s forestry minister, did final approval come for most of the concession in October 2013. For an initial payment of around US$3mil to the Indonesian government, Hartono’s company gained the rights to the forestland for 60 years.

By then, however, some environmentalists were questioning private carbon-selling projects like Hartono’s. They argued that buying up and preserving rain forest to sell credits wouldn’t decrease net deforestation, since palm-oil barons would simply work around the few protected plots in the forest.

US legislation that would have put a price on carbon failed during the Obama administration. The European Union’s carbon market doesn’t include tropical forests amid worry that low-cost credits generated there would make it affordable to pollute.

Some specialised investors were intrigued, however, and gave Hartono enough cash to stay in business for several years.

“It’s not about short-term profitability,” said Stephen Rumsey, chairman of Permian Global. “We think the market will get there.” Rumsey, who co-founded European Credit Management Limited, which grew to have US$30bil under management before being sold to Wells Fargo & Co, declined to say exactly how much he put in.

Deep in rain-forest villages accessible only by motorboat, Hartono’s company got to work. It trained former loggers in new livelihoods, such as how to climb coconut trees to harvest sap for sugar. To protect the forest from dry-season burning, it paid locals to enlist in fire-fighting brigades.

Madona Melly Melani, 23, a local villager, received a small loan from Hartono’s company to boost her small business selling fried snacks. She was glad that the company didn’t burn the forest and pollute local rivers, as some palm-oil companies had done in the past. “I don’t really understand the concept of their business but I’m glad they take care of the forest,” she said.

While most of the credits lie fallow on Hartono’s balance sheet, there have been some purchases. Kering, a Paris-based luxury retailer, and Itoki, a Japanese furniture company, bought credits out of a sense of environmental obligation. They might also prove useful if regulation changes in the future.

There may be other sources of demand. The International Civil Aviation Organisation, a UN body that governs airlines, plans to require international carriers to offset excess carbon emissions after 2020. So far 76 countries, including the US, have indicated an intention to participate.

The Paris climate accords are expected to lead to an international carbon market after 2020, where countries that exceed emissions targets can purchase offset credits from countries that reduce emissions beyond their targets, potentially opening up new opportunities for Hartono.

“As an entrepreneur you start to see there’s a light at the end of the tunnel,” he said.

“At the moment, Dharsono’s is one of the only projects still running,” said Dewi Rizki, an Indonesian environmentalist who developed a short-lived forest project in Borneo with Macquarie. “Dharsono is crazy enough to wait.”