Green entrepreneurs and asset managers are attracting interest from family offices and wealthy investors keen to explore a different type of engagement with ‘real assets’. Meanwhile, bond issuers are getting behind the market as well
Every few years a new theme catches the imagination of high-net-worth investors. In the 1980s it was emerging markets, in the 1990s it was technology, and in the last decade it has been green investing. The sector has evolved from screening out stocks not considered ethical, through a broader definition of ‘socially responsible’ to the current, positive ‘sustainable’ bias, particularly for low-carbon energy propositions.
The combination of innovative projects and financial structuring in the sector is proving attractive to single and multi family offices and to wealthy individual investors.
Charles Beazley, president of Nikko Asset Management Europe, says the demand pool breaks down into two categories: investors who allocate by conviction or philosophical imperative, including foundations and endowments, funds that have included a high moral purpose to their charter, or political influence, such as union funds, public sector funds, governments and sensitive corporations. The second group of investors is those that need to be convinced by investment logic, including the vast majority of pension funds and insurance assets.
“By allocation so far, the first category dwarfs the second,” he explains. Allocations in the US alone are estimated at over $2.7trn with over $200bn in mutual funds representing around 11% of assets now allocated to SRI investments, and growing at a rate of 18% over the last three years.
Sophisticated investors
Says Piers Denne, head of sales and marketing at Future Capital Partners, which is fundraising for a bio-ethanol plant in the UK, says the sector is perfect for sophisticated investors who understand longer term opportunities. “Family offices know about inter-generational commitments and the husbandry of wealth and resources, and many are comfortable with alternative investments. Like us, they want to meet the income demands of current investors and take into account the needs of a future generation.”
The green investment sector, and particularly green energy, has developed rapidly in recent years, and there remain plenty of opportunities to lose money, Denne notes. But investors have also become more canny, screening not just on ethical criteria but for business experience and solidity, and other types of investment risk.
“The chance to help save the planet is of course appealing. But how do you go about it? Is it a donation every now and then, or via backing a serious long term project that has a meaningful impact in the area in which it operates?” he asks.
The essence of Future Capital Partner’s Future Fuels project is processing UK feed wheat to produce two products – a renewable transport fuel (RTF) and a high protein animal feed. The RTF reduces reliance on imported oil and cuts carbon emissions during production, when compared to the production of fossil fuel transport fuels, by over 50%. Blending 200 million litres of RTF into fossil fuels is the equivalent of removing 60,000 cars from the road each year. The animal feed produced is sold via usual channels.
Proven technology
Funds raised will be used to build a bio-refinery using proven technology and with heads of agreement for offtake of the resulting product already in place. The proposal rests on projected demand generated by UK and EU legislative requirements to incorporate a set proportion of ethanol-based RTF into petrol by 2020, underpinned by punitive measures for any shortfalls, and other incentives.
“The appealing thing about bio-ethanol is there is an existing market for it and the end customer does not have to change their behaviour or buying patterns to use the product,” says Denne. “That has been the stumbling bloc for many other kinds of alternative technologies and fuels.”
Future Fuels estimates that to produce the required amount of RTF needs at least six large scale bio-refineries in the UK alone. Only three have even applied for planning permission. Investment in the Future Fuels project will be via a limited liability partnership, giving a share of equity in the project operating company, rental income from the plant and access to targeted UK tax allowances.
The project has commitments of some £20m already. The minimum investment is £50,000 or €50,000, whichever is greater at point of entry. The first close is set for the end of June. The anticipated exit for investors after five to seven years will be via an IPO or trade sale of the project.
Exploiting tariffs
Another new firm, London-based SolarField Investment Management, has just been formed to provide access to long-term yields available from Government-incentivised electricity generating Solar Photovoltaic (solar PV) installations across the European Union.
Solarfield aims to raise €100m in its first year, to be drawn down in €30m tranches. It will launch its first fund shortly, focusing on investments where experienced local contractors and Government sponsored feed-in tariffs – guaranteeing a premium over standard wholesale electricity prices over 20 years – make it most appealing.
A series of Solarfield funds will then target projects in Italy, Germany and Spain. Partner Chris Wilkins said opportunities for private investors to obtain direct exposure to the solar PV sector are very limited. “We believe the high stable yields offered will be very attractive to investors searching for total returns well above current inflation levels… the stable income stream characteristics of these funds tick many of the right boxes for…private wealth sustainable investment mandates.”
Such direct equity projects are hugely appealing to wealthy investors fascinated by the clean technology and motivated by the ethical dimension. But Nikko Asset Management’s Beazley says it has become clear that a bigger push was needed to address the substantive and complex environmental challenges the world is facing.
World Bank bond
In February Nikko announced a fund in partnership with the World Bank, investing in green bonds whose proceeds will support World Bank projects tackling the causes and consequences of climate change in the developing world. The Luxembourg-domiciled Ucits III fund has share classes in sterling, euros and US dollars, and the World Bank plans to issue further green bonds in other developed and emerging market currencies selected by Nikko AM.
Nikko AM already has a strong and long-standing relationship with the World Bank, which partnered with Nikko AM’s World Supporter Fund launched in 2007. This fund, which is emerging market oriented, has already attracted US$1.8 billion from Japanese domestic investors. The latest Nikko AM World Bank Green Fund is the sixth socially responsible and sustainable investment strategy to be launched by Nikko AM in the last decade.
New demands
Most investment offerings are equity related and often lack convincing evidence of out-performance against mainstream benchmarks. Inevitably, the definitions of companies that “qualify” and screening processes are very subjective, making it difficult for fiduciaries to allocate, and institutions to commit.
Investors want to help the environment but also want also safety, yield and transparency. Institutions are increasingly signing up to SRI and environmental principles, but need to be satisfied their investment objectives will not suffer. Investment managers, meanwhile, are finding the gap between themselves, differing investor expectations and the momentum created by the public policy debate is extremely hard to bridge.
The same challenges face governments and issuers, he notes. “Equity-led green investments tend to carry a lot of exogenous risk to their environmental task but if a percentage of the capital markets could be turned to hypothecated activity… then the potential investment pool is huge, and the numbers could be very, very large.”
Caroline Allen is managing editor of Global Wealth, an Incisive Media publication for Family Offices and Foundations. Contact: caroline.allen@incisivemedia.com
