The OECD warned in November that as a result of the financial markets crisis the number of unemployed in OECD countries could be expected to rise by 8 million people over the next two years. While government fiscal stimulus may deliver a short term salve to the wounds inflicted by financial markets, it is feared that by the second half of 2009 global growth may stagnate.
In this environment the question for investors is: where will the investment growth story come from? Even with low interest rates globally the damage to bank balance sheets will mean that a return to the prolific credit environment of the last five years is highly unlikely, impacting on industry sectors including consumer durables, housing markets as well as commodities.
A significant growth area that is likely to emerge is in so-called ‘sustainable’ investments. US President Barack Obama has committed to spending US $150 billion over the next ten years to catalyse private investment into clean energy. By 2012 it is planned that 10% of US energy generation needs will come from renewable energy sources. Over the following 13 years to 2025 the US’s renewable energy target will increase to 25% of total US energy needs. The potential for the US to embrace renewable energy comes as the European Union has already established its own renewable energy targets. Australia’s target will commence on 1 July 2009.
Louise O’Halloran of the Responsible Investment Association in Australia, sees there are significant investment opportunities in the green energy sector. “Globally we have at the moment around $148 billion invested across the world in environmental technologies but we need $450 billion invested to reach our global targets by 2012; that shows the kind of gap that will need to be filled.
Greg Chipman, Director of Global Private Banking and Wealth Management specialist CJC, expects to see continued inflows into thematic sustainable products focusing on climate change, water, clean energy and sustainable agriculture. “Strong global fundamentals remain which are not impacted by the financial crisis. In 2009 we are likely to see a move from a pure focus on capital preservation towards opportunistic buying across asset classes given reduced valuations. Obama’s presidential election and recent comments in relation to the US Government’s commitment to renewable energy and climate change are of significant interest to global investment and capital markets.”
Chipman cites for instance the 123% increase in growth in global carbon markets from 2006 to 2007 and tax incentives provided in the US Government’s $700 billion Housing and Economic Recovery Act for wind energy, geothermal and biomass projects, which has contributed to a 71% increase in US clean tech venture capital to $3.3 billion over the first three quarters of 2008.
While there are opportunities in sustainable investments there are also significant risks. O’Halloran says “There needs to be considerable prudent analysis around the type of companies that are emerging and the potential failure rate that could be substantial. The risk management style that is growing up around responsible investment will be particularly helpful in looking at these environmental technology stocks because it provides the structure to find more and better information about the underlying value of these companies as well as their governance - because for many emerging sectors governance can be the key failure area.”
Leading sustainability research provider Innovest Strategic Value Advisors believes that the processes that are used to assess sustainable investment opportunities have wider applications than green energy investments.
Dr Matthew Kiernan, CEO of Innovest and author of Investing in a Sustainable World: Why Green is the New Color of Money on Wall Street, believes that the financial markets crisis will lead to a change in thinking amongst mainstream investors. “This whole market meltdown is a trillion dollar advert for sustainable investing. With these sorts of allegedly hidden risks coming up and exploding this is precisely the time that the more comprehensive 360 degree risk radar approach, which sustainable investing has, is absolutely critical.”
Kiernan cites a study from Booz Allen Hamilton that predicts that by 2015, 15-20% of total managed assets will be managed in a sustainable investment way. Innovest has developed a four-stage analytic process that seeks to identify better-managed, more agile and more strategic companies. Kiernan argues that there is a benefit for investors in using sustainability indicators because of their ability to predict outperformance. “The beauty of sustainable factors in terms of investment opportunity is that these are not yet in widespread use as indicators. Not only do they work but they are not shared in any comprehensive way by the mainstream so there is still an informational advantage. The day will dawn when sustainability analysis of a company is as automatic and matter of fact and unremarkable and central as a PE ratio is today. And, by the way, sustainability factors work a whole lot better than PE has for the last 125 years.”
Castellas notes that one thing holding back these developments in Australia is a lack of significant investment opportunities in sustainable investment. “If we look at the number of investment opportunities and investment vehicles that Australian superannuation funds can invest in, they are quite limited. We don’t have the proliferation of investment products in private equity, in venture capital, in sustainable infrastructure, in property that they have in the US and Europe.”
Chipman believes that one of the barriers to entry for new product providers is a lack of awareness. “Major barriers to embracing product development opportunities are mostly supply driven. There is a lack of management awareness of commercial benefits of some of these initiatives - both in terms of net inflows and stickiness of clients, as well as a lack of skills and training of portfolio managers and advisers.”
O’Hallaron agrees. “The investment sector is not ready yet to make the best decisions that we could and I think that there is a lot of education that we need, and that is not just about how to assess environmental technology, it is how to assess an environmental technology company in a high risk environment. How do you look at a company’s environmental, social and governance credentials and not just its core business of delivering environmental technology? We have got a long way to go in this area and education will be key to ensuring that investors are equipped to understand a new world economy that will largely be built on an energy revolution.”