Climate change billions have yet to yield any gold

Despite Ed Milliband's boasts, clean energy investments from the likes of Virgin and HSBC have bombed over the past 12 months
Cooper on Cash

To hear the government talk last week, you would think investing in clean energy was a sure-fire route to riches despite the recession.
Energy secretary Ed Miliband said Britain will double the share of its electricity generated from low-carbon sources by 2020. Of that, the proportion generated by renewable sources such as wind, solar and wave power will go up from today’s 6% to 30%.
The government believes the low-carbon sector will be one of the few areas of the economy that will grow during the recession and beyond, expanding at more than 4% each year up to 2014-15. Governments around the world have pledged $350 billion (£213 billion) to climate-related investments since the credit crunch began in a bid to boost their economies, according to figures from HSBC Climate Change Research.
Why, then, has clean energy been quite such a lousy investment? HSBC’s climate change index has slumped 38.6% over the past 12 months, despite the billions pledged to the sector. Some popular funds have performed nearly as badly. Virgin’s climate change fund, launched at the start of 2008, has dropped 36%. Even Black Rock New Energy investment trust has dropped 35%, although over five years it’s up nearly 85%.
So what has been going on? First, sceptical investors need to be sure governments will deliver. In the US, clean energy companies have only just started to claim their share of Obama’s stimulus package, and the money should start coming through in the final quarter of this year and into 2010.
Meanwhile, in Europe, the authorities have only just legislated to increase the proportion of energy supplied by renewables to 20% by 2020 — something they have been talking about for years. Even then, with the debt markets still closed due to the credit crunch, firms have been unable to raise funding for the big projects required to get that wind or wave farm off the ground. Another, perhaps even bigger, problem is that clean-energy stocks are simply growth stocks with a green hue — and investors haven’t wanted to go anywhere near those in the downturn.
Marketeers can dress up climate change however they want, but like several fads before it — technology, China, commodities — these sectors are inextricably linked with the business cycle. They will go up sharply when everyone is feeling positive and down when everyone fears the Great Depression.
Finally, there’s the oil price. When it’s high, it’s worth investing in the development of alternatives; when it’s low, the incentive disappears. So a bet on green technology is essentially a bet on crude.
That’s not to say there aren’t reasons to invest in the sector long term. As Robin Batchelor, manager of the Black Rock New Energy trust, said: “I don’t know of any other sector that has government-mandated growth targets.” However, it does mean you should not expect to make easy money.
Simon Webber, manager at Schroders’ climate change fund, said: “Some clean-energy sectors had become overvalued, which is why last year we generally didn’t own solar stocks, and have been selling some overhyped electric vehicle stocks.”
On the other hand, the energy efficiency sector has gained 16% this year against a gain of 4.2% in the HSBC climate change index and 6.7% for global equities. Energy efficiency has also been the biggest recipient of stimulus cash, taking 50% of the $350 billion earmarked.
Energy-efficiency stocks, which include British insulation supplier SIG, are now trading at a 20% premium to the climate change index, according to HSBC, but it believes this is justified. “With energy efficiency, there is no wrong option,” said Joaquim de Lima, climate change analyst at the bank.
And while in the UK wind power is proving a big disappointment, with turbine maker Vestas last week announcing it would close down its Isle of Wight factory with the loss of 600 jobs, the sector is going from strength to strength in other countries, particularly America. That’s why Batchelor holds stocks such as Vestas and fellow turbine maker Iberdrola.
The government’s announcement that it will publish a list of five options for exploiting tidal power in the Severn estuary, including a £21 billion 10-mile barrage from Weston-super-Mare to Cardiff , could benefit UK company Pelamis — but it is private.
When you have to search this hard for British companies that will benefit from our own government's funding, it’s clear green energy is far from a pot of gold. It’s telling that none of the mainstream managers has big holdings in climate change. If you're keen to get in, though, Black Rock or Schroders get advisers’ votes.
Kathryn Cooper is editor of the Money section