Shift to low-carbon economy will boost clean technology prospects
INVESTING in clean technology used to be perceived as an activity that was primarily the domain of slightly hippy do-gooders with little interest in high-yielding returns. But any lingering misconceptions of tree-huggers and poor returns were swept away earlier this week when billionaire George Soros said he planned to invest $1bn in clean-energy technologies over the next decade.
Besides philanthropy, there are sound reasons for Soros and others to be investing in developing cleaner technology at the moment. The sector is growing more rapidly than average, with returns of 15-20 per cent per annum expected over the next three to five years. In contrast, average corporate profitability is predicted to be just 5 per cent or less per year.
A recognition that we need to reduce carbon emissions will ensure continued demand for investment in companies that are developing clean technology solutions. Industry analysts at New Energy Finance forecast that total new investment in clean energy will reach $300bn a year by 2020, but warns that this amount will still be below the $500bn that would be required to limit the rise in the global temperature to 2C or less.
Crucially, governments across the world are choosing to support firms that provide low-carbon, more efficient solutions, whether they are technological or more focused on innovation and consultancy.
James Cameron, one of the founders of Climate Change Capital, which is a specialist fund manager and adviser in this field, says that even in developed countries, which because of the recession are likely to see little or no growth for some time, clean tech investments are likely to be favoured in part because of government support. Globally, about $400bn of government money has already been allocated to green markets.
And in emerging markets, he says there are tremendous opportunities for these clean technologies to be deployed and for business to grow, especially since the governments also want the growth to be as low carbon as possible. China is now the world’s largest emitter of greenhouse gases, accounting for 20 per cent of annual carbon dioxide emissions. But the government is targeting 20 per cent of its energy from renewable sources by 2020 and it is estimated that as much as 37 per cent of its 4 trillion yuan stimulus is allocated to “green tech”-related areas.
Asset management firms and investment trusts have opened up the clean technology sector to the private investor. These firms select companies from across the world that have a majority of their activity in clean technology and they offer a number of different funds. The wealth of opportunities in Asia has driven Impax Asset Management, a investment manager which specialises in the environmental and cleantech sectors, to establish a fund focused on Asian environmental markets.
Expected to launch in the next couple of weeks, Impax’s chief executive Ian Simm says this fund is being set up for three reasons: Firstly, to take advantage of the cost advantages that Asian companies have in serving global environmental markets. Secondly, there is now a wealth of environmental regulation and policy in Asian markets, which has only really appeared in the last four to five years. And thirdly, there are around 350 clean tech companies that are based in the region so the market is much deeper.
“I think that it is going to be the best performing area in our space because it is coming from a much smaller base. It may be more volatile because the companies are typically slightly smaller than average, but in the medium to long-term it is one of the best areas to be in,” Simm says.
Most of the companies that Impax invests in are mid-caps, with a median market capitalisation of $800m and include companies such as Spanish wind turbine maker Gamesa and Austrian waste management firm Transpacific.
Climate Change Capital manages one listed venture capital trust available to individuals. Known as Ventus, it is primarily focused on small to medium sized onshore renewable energy projects in the UK, offering firms the finance they require to complete their developments and deliver returns. Their investments include a number of wind farms as well as biomass energy, landfill gas energy and small-scale hydroelectric power.
These funds are provided by specialists in the sector but other major players such as Jupiter also have funds investing in clean tech companies. Equally, you could look at exchange-traded funds or directly invest in UK-listed companies.
It is expected that the major players will agree to move towards a lower-carbon economy at the UN climate change summit in Copenhagen in December.
However, specialist clean tech investment managers expect the details of any deal to be worked out in 2010, and clearer investment strategies will emerge then.
With a long-term commitment, both politically and financially, to cleaner technology expected to be reached, the long-term returns on clean tech firms are likely to be both consistent and profitable.