Environmental technology is growing. Investment in the sector is forecast to rise 650% by 2016 as governments, businesses and individuals respond to pressure to clean up the globe.
Investors and fund management groups always seem to strive to find the next big investment opportunity. If a sector demonstrates strong growth over a short period, it is common to see many funds launched to take advantage of this trend.
The key is to identify whether this particular investment space represents a good long-term opportunity or just a short-term gain. The environmental technology sector has delivered growth of 64.7% over the past year. However, the sector’s annualised compound growth over five years is only 25.5%, which represents a steady growth story. What is more, much like the Bric (Brazil, Russia, India and China) story, the underlying drivers are solid and the best is yet to come.
According to Ernst & Young (E&Y) we are just at the beginning of growth in the environmental technology sector. E&Y’s research shows that in 2006, $100 billion (£50 billion) of investors’ money went into the sector. By 2016, E&Y forecasts, this will rise to $750 billion, an increase of 650%.
So what will prompt this rise in investment? Our core belief is that there will be three key drivers for the sector. Across the globe, governments, companies and individuals are acting together to clean up the world. In doing so, they are driving massive demand for new environmental technologies. A huge investment will be needed to tackle the environmental problem.
First, look at what the governments are doing. The problem of global climate change is firmly established on the political map. Rising and volatile prices, supply difficulties and blackouts have all illustrated the risks of being overly dependant on oil and gas. Indeed, it has been estimated that if energy and policies remain as they are, the European Union’s reliance on imports will jump from half to almost two thirds in 2030. About 84% of the EU’s gas and 93% of its oil would have to be imported.
In response to these estimates the EU has set the goal of cutting emissions by 20% by 2020. In Britain, meanwhile, last year’s Climate Change Bill announced a target 60% emission reduction by 2050. These two pieces of regulation build on 1997’s Kyoto Protocol, which has now been signed by 169 countries. The Kyoto Protocol’s emission reduction targets for industrialised countries expire in 2012.
Alongside the regulations being put in place is the large investment in clean energy being made by governments across the globe. China is likely to invest $200 billion in water infrastructure by 2028 and it has committed $180 billion to meet its own clean energy targets. In its first plan to combat climate change, unveiled last year, China committed itself to increasing energy efficiency by 20% by 2010 and to doubling the use of renewables by 2020.
Businesses, too, are taking action to clean up the environment. Market appetite for renewable and clean-tech initial public offerings has been buoyant over the past 12 months, with $8 billion raised worldwide. According to a report from the Carbon Trust, clean energy projects account for 10% of all European venture capital investments. The report also shows that investment in clean energy reached a total of just under €2 billion (£1.5 billion) between 2003 and 2006, putting clean energy on a par with European information technology, biotech and semiconductor venture capital investment levels.
Companies taking action to help clean up the environment include BT, which will invest £250m in the development of wind farms to reduce carbon emissions. This scheme represents Britain’s biggest corporate wind power project outside the energy sector. It will bring together third-party funding and energy partners to safeguard future supplies of clean, green energy for BT.
Meanwhile, Marks & Spencer plans to invest £200m over the next five years to become carbon neutral. Elsewhere, Coca-Cola has invested £60m to build the world’s largest plastic bottle recycling plant and Wal-Mart plans to spend £500m a year to increase the fuel efficiency of its truck fleet.
The final factor that will drive investment in clean energy is the action being taken by individuals. People are changing lifestyles to protect the environment. In Britain, 8% of adults have switched to a green energy tariff, while 88% recycle paper and 80% recycle glass. Sales of American hybrid cars rose fourfold between 2004 and 2006.
It is the alignment of these three powerful forces of change – government, business and people – in one cause that makes the clean energy sector such a compelling investment opportunity. We feel the best way to take advantage of this opportunity is via three areas: eco-energy (alternative energy), pollution control and clean water.
Areas within eco-energy include wind turbines, solar cells, building insulation, fuel cells and biofuels. Wind turbine businesses in North America and Asia are growing at 15% and 10% respectively, while the solar energy market is estimated to be growing at between 30% and 50%. California alone plans to add up to a million solar roofs by 2020 through its $3.2 billion California Solar Initiative. This is the most aggressive subsidy programme ever initiated in America.
In terms of pollution control, the average global temperature has risen by 0.8 degrees Celsius since the start of the industrial revolution. According to Greenpeace, if harmful emissions are cut worldwide by 50% by 2050 – meaning as much as 80% for industrial countries – the rise in global temperature can be kept below two degrees.
At present America is the biggest source of carbon dioxide emissions in the world but it will soon be overtaken by China. The Chinese people are so concerned about the level of pollution that during 2006 there were 51,000 public protests – almost 1,000 a week. This is hardly surprising considering that acid rain now affects one third of the country.
The water sector is now a $300 billion to $400 billion market, expected to grow by 7% a year through to 2010. There are now more than 200 companies involved in clean water, with a total market capitalisation of more than $190 billion. Types of companies include water treatment, water filters, infrastructure (pumps/pipes), water distribution and desalination. It is estimated that $200 billion is likely to be invested in China’s water infrastructure in the next 15 to 20 years.