Examining environmental investment opportunities
The focus on climate change and its implications in terms of assessing economic cost and investment portfolio risks are increasingly being highlighted by political and industry commentators across the globe. However, the investment opportunities that are emerging from the transition to a low carbon economy have been paid comparatively little attention from the consulting and asset management profession. Investors, including High Net Worth Individuals (HNWI) are increasingly examining what investment opportunities this transition creates, and how best to access them.
Environmental Markets
The impact of climate change is set to alter the global economy over the medium and long term. Although the G8 goal of reducing global greenhouse gas emissions by 50 per cent by 2050 is not yet legally binding, and the global negotiations around a successor to the Kyoto Protocol have delivered little concrete policy, individual nations continue to compete for leadership of the future low carbon economy. As the race to be at the forefront of the next industrial revolution continues, there is an expectation that low carbon technologies will benefit and grow, providing attractive and long term investment opportunities for HNWIs.
A recent report from Pew Charitable Trusts estimated that, based on current government policies clean energy investment will reach $1,700bn in the next decade. However, if clean energy policies are strengthened significantly as expected, Pew projects that $2,300bn will be invested in clean power assets over the next 10 years, offering companies and investors enormous opportunities.
It is important to note however that it is not only the renewable energy sector that will benefit from the changes required to deliver a low carbon economy. Other companies adapting their businesses to include activities in emerging sectors such as energy efficiency, water infrastructure and pollution and waste control also have important contributions to make in addressing not only climate change but the interrelated wider environmental threats facing global society. These include larger companies e.g. Siemens, which now generates about 29 per cent of its revenue through energy efficiency and other environmental technologies.
Eurosif, the European industry body for responsible and sustainable investment, estimates the 2010 European HNWI Sustainable Investment market to be approximately €729bn, representing an average of about 11 per cent of European HNWIs’ portfolios as of December 31, 2009. This is a growth rate of 35 per cent over the two-year prior period. Following its research, Eurosif predicts that by 2013 the share will have increased to 15 per cent, just below the €1,200bn mark.
A New Opportunity
A decade ago, very few environmental technology investment opportunities were available other than those from a small number of pioneers specialising in this area, such as Impax Asset Management. Today both institutional and retail investors are presented with a wide range of investment products focused on environmental themes and assets invested in these products have grown substantially.
According to Bloomberg New Energy Finance, new global investment in clean energy alone reached $243bn in 2010, up from $186.5bn in 2009. Public market investment in particular bounced back from its recession-driven lows and rose 18 percent to $17.4bn in 2010. This growth also comes at a time of change for the HNWI investment category, with new net inflows to sustainable investment coming from existing wealth owners and increasingly from new entrant wealth owners; particularly among the younger generation. In the Eurosif survey, 78 per cent of family offices and HNWIs stated sustainable investment would increase with the generational transfer of family wealth. The combination of both growing financial products and growing allocations from this investor category makes for an exciting future for sustainable investment.
Until now, thematic funds often used by HNWIs, have tended to focus on pure play environmental technology companies (which have a majority of their business in one or more environmental technology areas) and have primarily been in the private equity, venture capital or small cap investments. However, there has been little in the way of products and services which enable investors to identify and access the larger listed equities that have a significant clean technology business.
Today, with industry innovation and investor demand, interest in this area is no longer limited to smaller cap technology companies. Exciting investment opportunities are now also emerging from larger companies who are adapting and transitioning their business models to exploit the path to a lower carbon economy. In addition investment tools, including indices, are an important part of this process, providing much needed visibility to the performance of environmental markets.
As more capital and interest develops within this space, a major hurdle has been how to identify or classify the activities of companies active in environmental markets on a global scale. FTSE Group has developed a taxonomy for these emerging low carbon sectors and services that can be used by investors to accurately identify analyse and measure the performance of groups of environmental technology and service businesses. The Environmental Markets Classification System is used to create the FTSE Environmental Opportunities Index Series, which includes both sector and regional sub-indices. The increased transparency of the performance of these sectors will enhance the ability for investors to implement climate change related investment strategies.
A look ahead
As interest in environmental markets continues to develop, investors, such as HNWIs will seek transparent but increasingly sophisticated investment approaches. This will challenge the market to develop a range of investment tools to reflect this growth and meet the needs of a variety of investment strategies. At the same time, global investors will have a key role to play in decarbonising economies and rewarding companies that adopt sustainable and responsible business practices.
