Protecting the environment has become a top priority, so what are the opportunities available to investors to get their money working for them and the planet?
Environmental investing is no longer the preserve of the ethically-minded few. Investors have woken up to the growth on offer and are increasingly focusing their attention on the sector. Fortunately the opportunities available are not packaged exclusively for institutional investors and through the use of products such as Isas and Sipps, private investors can now benefit from the wealth on offer.
Ten years ago there were just a handful of fund managers dedicated to investing in environmental companies and they struggled through hard times when returns were volatile and investors were not convinced by the business prospects.
Happily the landscape has changed considerably since then and investment opportunities have proliferated. Five years ago, we identified around 200 'pure-play' companies dedicated to implementing business plans based solely on environmental products and services. Today, the Impax portfolio managers can pick from a universe of approximately 1,200 companies fitting the necessary investment criteria, so we now have a very sizeable pond in which to fish.
Companies stepping up to the plate are not just small businesses with unproven technologies, but established large companies, such as French energy group, Schneider Electric - making green investment a viable alternative even for the risk averse.
This development has, in part, been stimulated by the rapid development of environmental regulation, which is increasingly favourable to the stocks in which we invest. The UK Government passed the Climate Change Act in November 2008 which commits the country to a reduction in greenhouse gas emissions by at least 80% by 2050; the following month the European Council reached an agreement on the EU's climate change package and has committed to a 20% reduction in greenhouse gas emissions by 2020 and for 20% of electricity to come from renewables by the same year. The trend continued into 2009. In the US, President Obama committed to allocate $150 billion over 10 years into environmental products and services to reduce greenhouse gas emissions to 1990 levels by 2020 and then by an additional 80% by 2050. He also signed the American Recovery and Reinvestment Act last month, launching around $80bn worth of green initiatives including the introduction of $20bn in green tax incentives.
Product development
Such legislation has led to a fertile breeding ground for forward-thinking companies to develop products and services to address these pressing issues.
Germany is a shining example of a country that has built markets with effective legislation. For example, it has a system of feed-in tariffs, that place a legal obligation on utilities to purchase electricity from renewable energy producers. The tariff rate is specified and backed by the German Government and designed to ensure the project generates attractive returns for investors. Thanks to government support for the scheme since 1990, Germany has become a world leader in renewable energy, generating billions of dollars a year in exports, creating quarter of a million jobs as at February 2009 and, according to a study commissioned by the German Federal Ministry for the Environment, has saved around 120 million tonnes of CO2 annually.
Consumer demand
Consumers and investors have also played their part. An increasing awareness of climate change issues has driven demand for environmental products and services, prompting producers to step up supply. Mainstream companies have recognised the trend and are scrambling to address this growing market.
Put simply, environmental markets are maturing. Investment managers targeting the sector can now invest in both larger, pure-play businesses as well as more diversified businesses with established environmental divisions that are benefitting from new regulation, technological leadership and a lower cost of capital. Good examples include the Danish company, Vestas Wind Systems, one of the biggest renewable energy equipment suppliers in the world, and Denso Corporation in Japan, a provider of hybrid and fuel efficient automotive technology.
We have also seen significant growth in the environmental sector through corporate activity. As the growth rates in environmental businesses have become increasingly obvious to the market, big business has woken up to the potential to acquire more attractive earnings growth and higher returns on capital by acquiring environmental sector corporates.
German industrial gases group, Linde is a good example. It transformed itself from a materials-handling and gases business into the market leader in the production and distribution of industrial gases when it acquired British competitor, BOC in 2006. It now has 21% of market share.
Elsewhere, consolidation among US waste management businesses has also benefitted the portfolio. The purchase of US group Metal Management in 2008 by the Australian company Sims Group created the world's largest scrap metal processor with 15 million tonnes of annual processing capacity. Furthermore, December 2008 also witnessed the acquisition of the second largest integrated waste management business in the US, Allied Waste, by Republic Services. This created a rival to the dominant market leader, Waste Management Inc and we expect the combined entity to achieve significant value from merger synergies and improved pricing power over the next couple of years.
Companies with strong earnings visibility and a more defensive profile are also likely to benefit. Portuguese company EDP Renovaveis (EDPR), the fourth-largest wind project developer in the world is a good example of this and the recently introduced stimulus measures are expected to contribute significantly to its further expansion.
With these companies and many more, investors can balance the security offered by large, established businesses, with the impressive growth of the environmental sector.
At Impax we have developed an investment approach that not only focuses on the small-cap sector, historically the driving force of the environmental technology sector, but also includes medium to large companies which have become significant investors in, and developers of, new environmental technologies in their own right. One of our funds, the IFSL Impax Environmental Leaders fund was established specifically to focus on this All-cap market and has outperformed benchmarks since launch.
Despite the current volatility in the wider markets, the growth in this sector is clear. Of course nothing is recession proof, but given the drivers, choosing to invest your money in the environmental sector could help secure your future, in more ways than one.
