Founded in 1919, Société Générale de Surveillance, commonly known as SGS, are now potentially the world leading Designated Operational Entity (DOE) working within the remit of the United Nation’s Clean Development Mechanism (CDM).
But did they become so well established through raw business acumen, taking the ‘first mover’ advantage in a fledgling industry, or being at the right place at the right time with the right connections?
Experience Always Helps
SGS were fortunate to be in a position to possess all of the above.
The responsibilities of the DOEs are extensive: verifying the emission reductions of projects and ultimately ensuring that this verification leads to the all-important Certified Emissions Reduction (CER) issuance.
In many cases, CER issuance will be the principal income stream during a project’s lifetime, so the choice of DOE is an important one. Historically however, this decision has been somewhat restricted, with the market taking on a distinct oligopolistic structure.
The most recent CDM performance data, supplied from the UNEP Risø centre, reveals that 93% of issued CERs came from five DOEs – from over 365 million CERs in total since 2005. Interestingly, and rather poignantly, 49% of all issuances were verified by SGS, with the next largest holding only 23%.
The dominant share that SGS accounts for in terms of issuance volume can be partially explained by the fact that it holds most of the large industrial gas projects in the CDM as clients. These sectors deliver around 75% of the total CER volume, and do so with relative frequency, i.e. once every 2-3 months.
Delving further into the CDM pipeline shows that SGS has projects operating in more countries than any other DOE. Importantly, these are predominantly projects located in China and India, the two most productive locations in the CDM.
In the relatively short CDM lifetime, SGS picked up a wealth of experience in the right areas: sectorally and geographically. It was a primary business aim to quickly establish themselves as the DOE of choice for any project in any location. SGS were performing well and leaving many in their wake.
Does Experience Always = Best?
In September 2009 however, the legitimacy of the CDM suffered a severe shock following the CDM Executive Board’s decision to suspend SGS for three months, after it was unable to prove its staff had adhered to inspection rules or that they were qualified to do so in the first place.
During this time, SGS was not permitted to upload any further project reports to the UNFCCC website, or submit any further requests for issuances. Despite this, it was only until 12 January 2010, after the suspension had finished, that issuances from SGS-verified projects ceased; such was the volume of their future issuance pipeline.
But this was not the first time that a large project auditor has been found failing to follow Executive Board procedures. SGS was the second such company to be suspended. Norwegian-based Det Norske Veritas (DNV) was found wanting during a spot check in November 2008 for comparable reasons as the above, and was similarly suspended for approximately three months also.
With a reputation comes a pressure to sustain business demand. During this suspension, a ‘gentlemen’s’ agreement was installed to help prevent other DOEs from poaching clients from DNV.
It is credible to assume that this approach was also adopted during the suspension of SGS, much to the relief of the company shareholders. Any delay in CER issuances as a result, particularly involving large volumes, would likely test the patience of sizeable project owners and their clients, who may not be as forgiving should it happen again.
As such, critics were quick to conclude that the suspension only further highlights the inadequacies of the CDM, and that such actions do nothing to allay any fears that the CDM is a risky venture. After all, project proponents already have many risks to deal with that span political, regulatory and eligibility boundaries.
Conversely, supporters of the flexible mechanisms suggest that these suspensions emphasize that the processes installed are working and that the credibility of the CDM is upheld because of it. Contracting is a required part of the project process and goes some of the way to safeguard CER buyers and in some certain circumstances, sellers.
In any case, until competition in the DOE market begins to show signs of improvement, it appears that SGS may yet hold onto their place as the most experienced of the CDM verifiers. And with project developers holding onto their mantra of ‘experience experience experience’, who can blame them?