Green light for investing in energy efficient companies

By Josephine Cumbo
Published: September 20 2008 03:00

Gordon Brown's recent pledge to invest £1bn in making thousands of homes more energy efficient provided some relief for householders struggling with soaring gas and electricity bills. But they are not the only ones who could benefit from this initiative. Investors are also being encouraged to plug into the potential of the energy efficiency sector.
Energy efficiency companies include those making "greener" lightbulbs, batteries, fans and lightweight motors. So, measured as a sector, the biggest companies have a combined market capitalisation that is estimated at $390bn (£218bn) and include companies such as Siemens and Philips.
About £36m of private equity and venture capital investment has also poured into the UK's energy efficiency sector this year and industry analysts say this is set to grow. "We see energy efficiency as the most likely recipient of venture capital and private equity investment for the remainder of 2008 and 2009," says Estelle Lloyd, managing director of VB Research, a firm covering clean technologies and renewable energy.
"Energy efficiency has a wide market including consumers, residential and commercial properties, utilities and property developers to name a few," she adds.
"Government policy is favourable to its growth and examples of this include new requirements for buildings to have energy performance certificates and zero-emission targets for new-builds by the year 2010."
Other factors driving bullish outlooks for the sector include EU and US targets to reduce vehicle emissions. Most major countries are also banning incandescent lightbulbs.
Fund managers say the sector's growth prospects are further underpinned by a recent rise in M&A activity by the industry's big players.
"Large established companies are seeking out growth opportunities and they see energy efficiency as one of these areas," says Bruce Jenkyn-Jones, investment director with Impax Asset Management.
"For example, Schneider Electric and Siemens just recently made acquisitions into the sector."
Growing interest in energy efficiency comes amid a global surge in funding for companies operating in broader alternative energy or environmental markets.
The amount of venture capital and private equity going into "clean energy" firms, including energy efficiency, solar and wind power, jumped in the second quarter of 2008 to a record $5.8bn, up from $2.6bn in the first quarter, according to New Energy Finance, which tracks trends in the sector.
Equity markets have seen similarly increased activity, with a spate of environmental fund launches this year. Recognising this trend, the FTSE Environmental Opportunities All-Share index was launched in June, providing a transparent performance benchmark for retail and institutional investors.
UK investors wishing to tap into the energy efficiency sector can do so via broad-based environmental or climate change investment trusts, or Oeics, which invest in a mix of sectors such as solar, wind and renewables.
But what distinguishes these funds and are they delivering returns?
"Funds like Virgin's Climate Change invest in companies that have lower carbon footprints, but aren't necessarily directly tackling climate change," says Nigel Parsons, investment manager with Bestinvest, the financial advisers. "Whereas a fund like Impax's Environmental Leaders is more of a direct play into medium and large cap energy efficiency companies."
Mick Gilligan of Killik & Co says environmental funds that are more direct plays are generally performing better, but the sector as a whole is holding up well. "I think these funds are a viable long-term theme as a lot of the underlying stocks are in demand," says Gilligan, whose favoured play on new energy is via BlackRock.
However, there may be downsides to investing in focused funds, say other advisors. "Neptune's Green Planet fund has underperformed what is probably a reasonable benchmark for it, the MSCI World Small Cap Index, since launch in late 2006," says Robert Lockie, a certified financial planner with Bloomsbury Financial Planning. "This does not prove that it is a poor investment (under two years is not enough data) but it does illustrate how hard it is to outperform a diversified index when there are noninvestment constraints."
But with the government yet to step up its climate change initiatives, advisers say the future will offer more choice for investors.
"Climate Change investment is not a fad or investment bubble because the fundamental drivers behind its existence are human development and it will require sustained investment over the next century," says Mark Hoskin of Holden & Partners, the wealth managers.
Copyright The Financial Times Limited 2008