Will AIM move forward on green?

Friday, January 02, 2009

John Cowie and David Jones of accountancy and financial services group Smith & Williamson highlight some of the greener aspects of AIM

It should come as no surprise to anyone that AIM has performed badly over the past few months. Indeed, the FTSE AIM All-Share Index has suffered a much sharper decline in the last 12 months (down 58%) than that of the Main Market (the FTSE All-Share is down a ‘mere’ 40% as we go to press).This is exactly what economists would expect in a downturn from a market that seeks to attract growth businesses: the beta of their constituent companies ought, on average, to be greater than one. In other words, they should demonstrate higher volatility than a basket of ‘normal’ (for which read larger, established company) shares. To put it another way, in the good times, AIM should outperform the Main Market, rewarding greater risk with greater return. In the bad times, it should fall more sharply than the Main Market.This, though, is only part of the story. Listings are down, money raised is down and the number of companies delisting is higher than ever. In the 11 months to November 2008, a mere 104 companies’ shares were admitted to AIM (including re-admissions). In the same period, 218 companies delisted from AIM. Funds raised for new admissions this year are lower than at any time since 2003.To say that there is a flight to quality is simply stating the obvious. Investors will always look for earnings, quality management, robustness in difficult economic times and prospects. One of the softer attributes they may increasingly seek out is the attitude of a company’s board to the environment and the specific actions it may have spelled out to address this. The reason is not simply that the investor feels the need to support green initiatives (though that may be the case) – quite frankly, most investors are alive to the concept that a business with better green credentials is likely to have strong supply lines, a more loyal customer base and might even be able to command higher margins. In recognition of this, there was some talk early in 2008 of the need to set up a “green market” on the London Stock Exchange – Shadow Chancellor George Osborne even made a somewhat premature announcement that the Conservative Party was in discussions with the LSE to set up the Green Environmental Market. Although many could see the rationale for such an initiative, most doubted the practical application – how to define a “green” company and to what extent could you measure any given company’s environmental credentials? That said, only a sceptic would doubt the merits of an index against which companies could measure their own efforts and an index into which the institutional investors could put funds earmarked for businesses in demonstrably sustainable technologies.In this context, it is interesting to note that in September to November this year the environmental/renewable sector accounted for a significant proportion of funds raised on AIM. In September, AIM newcomer BioEnergy Africa raised £9 million to invest in sugar cane ethanol production in Southern Africa with an initial project in Mozambique. In November, the Ludgate Environmental Fund raised £18 million in a secondary placing for investment in the environmental/cleantech sector following which the fund invested €3 million in a €10 million funding round for agri.capital, a German developer and operator of biogas plants which either burn gas onsite to generate electricity or feed biomethane into the German natural gas network. Also in November, in a reverse takeover of synthetic fuel technology developer Velocys, clean fuel technology business Oxford Catalysts raised £10 million in a secondary placing. In October, in an introduction involving no fundraising, Irish green energy production group Kedco was admitted to AIM with an initial market capitalization of €35 million; Kedco specializes in the generation of electrical power from sustainable sources including wood and food waste through gasification or anaerobic digestion.Notwithstanding general investor nervousness, the drying up of bank funding and the collapse in oil prices, the environmental/renewable sector might be expected to continue to attract interest among investors in the coming year. As a recent illustration of investor focus on the environment, a group of more than 130 asset managers with an aggregate of US$7,000 billion under management including CALPERS, Blackrock, Deutsche Bank, HSBC, Schroders, BNP Paribas, Henderson and F&C Management, sent a statement on climate change to UN governments in November. The statement urged developed countries to agree binding global carbon emission reduction targets in a successor to the Kyoto protocol, whose main provisions expire in 2012 and encouraged the governments not to allow the current financial crisis to delay their efforts to address climate change risk. The perspective of these investors is not driven primarily by altruistic motives but by concern over the potential impact of climate change and climate policy on the global economy and on the value of their investment portfolios.__________For further information contactJohn Cowie, director at Smith & Williamson on0207 131 4333john.cowie@smith.williamson.co.ukOrDavid Jones, director at Smith & Williamson0207 131 4299david.jones@smith.williamson.co.ukSmith & Williamson disclaimerBy necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.