Over the last few years, resource constraints have often been the drivers behind policy developments. One such policy, the EU Landfill Directive, which sets annual limits on the amount of rubbish going into landfill, has drawn attention to recycling and waste management.
"Just as in other areas of environmental investing like renewable energy and water use, changing public and political attitudes to resource use and disposal have created opportunities within waste management," says Rebecca Dixon, an associate at Mercer. "And there are a number of ways to access them. Some project-focused funds have similar properties to both private equity and infrastructure, but it is also possible for listed equity managers to identify the companies that are best placed to benefit from the move to more efficient and cleaner waste disposal, recycling and use of waste products as resources."
Usually the main risk for such investments is the waning of political support.
"But risk and return characteristics also depend on the asset class, for example investing in listed equity tends to be less risky in terms of liquidity and length of capital commitment compared to say, private equity," says Dixon. "However, investing in a private equity or infrastructure fund may offer greater potential returns."
UK-based New Earth Solutions (NES), which offers bespoke treatment processes for commercial and municipal waste, launched its Recycling Facilities Investment sub-fund in July and has since raised around £5.1m (€6.56m). While the fund is open to both institutional and retail investors, around 90% of the investors so far have been from the retail sector, most commonly via an international offshore bond.
"Investors come into the fund because recycling facilities such as NES are not directly linked to the wider economy, while at the same time they can expect returns between 12-15% per annum," says David Connor, director of Isle of Man-based investment fund provider Premier. "In addition, we hope that, over time, the fund will have a low-volatile profile in the region of 1.5-2% supported by the long-term, eight-to-20 year contracts NES will negotiate with local authorities throughout the UK.
"The plan is to eventually build 50 low-tech plants over the next five years, with local authority contracts underpinning the success of each development."
NES will for the foreseeable future concentrate on the UK - one of the worst-performing countries when it comes to waste recycling.
"There is so much potential in the UK," says Connor. "NES currently has two operational plants and has just received planning permission for another and is waiting for the results for planning permission applications at six other sites. However, expanding abroad will not be ruled out."
But waste management opportunities vary according to country.
While Floris Lambrechtsen, director at responsible investment advisory company Double Dividend, knows of some Dutch investment funds with one or two waste companies in its portfolio, it remains a small market for institutional investors in the Netherlands, he says. "In small, dense countries without much storage capacity for landfill, there tends to be a lot of experience with waste management other than landfill, and new technologies have already been developed," he adds. "But it is definitely a growth market in countries that have only just started to avoid landfill."
NES is not the only company that has spotted opportunities in this sector. "Advanced Plasma Power already has one small-scale plant in Swindon," says Samantha Hill, a spokesperson at Carbon International in the UK . "And it aims to open its first full-scale plant later this year, which will create more investment opportunities exclusively for institutional investors."
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