Saturday 1 October 2016

Investors starting to bet big on green

As renewable technologies become more cost-effective, investors are now waking up to opportunities in the previously unattractive green sector, says Joyce Fegan

Published 06/12/2015 | 02:30

Climate change is a reality - as is the energy revolution that has emerged to tackle it
Climate change is a reality - as is the energy revolution that has emerged to tackle it

Climate change and renewable energy are phrases long-associated with tree-hugging non-capitalist types, but in 2015, if you follow the money even in Ireland, you'll find business people are investing billions of euro in the new green sector. They're investing in companies that manufacture things such as solar panels, wind turbines and LED lighting. They're funding firms that build wind farms and companies that are developing software to run more efficient energy grids.

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In short, climate change is a reality and we appear to be in the middle of an energy revolution - the catalyst perhaps being the Paris climate conference, which ends this Friday. For the first time in history the world is on the cusp of having a legally binding and universal agreement on climate change thanks to the UN summit in Paris, known as the COP21 (Conference of Parties).

This potential agreement, which US President Barack Obama is strongly backing, coupled with the fact that the creation of some renewable energy sources is as cheap, if not cheaper, than more traditional supplies such as oil and gas, means the green sector is now attracting major investment.

"If you look at the next generation of investors they're very pro-environment. There is a trend to invest in companies that support society," said Chantal Brennan, the chief investment officer (CIO) with Davy Asset Management. "The UN principles for responsible investment are an important part of how we think about things," added Ms Brennan, referring to the investment approach taken at Davy.

In terms of environmental investments, "directionally it's the right thing to do", she added.

"People want to do the right thing by the next generation. We're all members of the global community."

For the time being she feels that government subsidies are still needed in some cases to get companies off the ground in the green sector and in time to take these away, hopefully leaving the firms standing on their own two feet.

One 'green fund' in Dublin, run by Kleinwort Benson Investors (KBI), has €1.5bn of client money invested in environmental equities.

So where exactly should investors place their money and what are the incumbents that currently stand in the way of this energy revolution?

Kleinwort Benson's chief investment officer Noel O'Halloran points to a few areas in which people are currently investing.

"Wind, solar, hydro are the three renewable energies, within wind you have turbine manufacturers. So from an investment point of view you have Vestas Wind Systems, they're a Danish company, and then you've wind farm operators, you've one called Gamesa, which is a big Spanish company.

"The other big area then is solar. There's a value chain there as much as anywhere else and the leaders would be a company called SunPower, which is probably the highest, most efficient manufacturer of solar panels globally.

"There are also very low-cost, very efficient Chinese manufacturers. There's a company called Trina Solar and one called Canadian Solar - even though it's actually a Chinese manufacturer," said Mr O'Halloran.

Kleinwort Benson have been specialist investors in this sector since as far back as 2001, and now, in 2015, they're seeing the revolution really taking hold.

"There's an increasing amount of dedicated money. We have in our environmental fund today about €1.5bn of client money invested in environmental equities from a Dublin point of view," Mr O'Halloran told the Sunday Independent.

For years, investors and big businesses have been extremely slow to back this sector but now 'grid-parity' means that the green industry is standing on its own two feet.

Grid-parity is a technical term meaning 'on par' - in other words, the generation of some renewable energies is as cheap, if not cheaper than the extraction and roll-out of oil or gas extraction.

"For instance today, wind energy in Eastern Brazil and solar energy in Northern Chile is cheaper than traditional energy sources.

"In India, where almost 400m people have no access to electricity, heavily polluting diesel generators account for the bulk of electricity. Solar is emerging as a cost-effective and cleaner energy source especially in areas where there is no electrical grid," reads the KBI white paper on energy solutions.

Furthermore, the cost of solar panels has reduced by 75pc since 2008.

But it's not just in renewable energy where the investible opportunities are emerging. Technologies such as super batteries and LED lighting are creating an economic stir too.

But the KBI white paper states that a breakthrough in battery technology is needed before the mass electric vehicle market will be penetrated.

"We expect lithium ion battery costs to decline rapidly through the latter half of this decade and this will result in heightened investor interest," reads the paper.

Mr O'Halloran added that the general consumer demand to save money on domestic energy bills and cut down on carbon emissions is driving these investible opportunities too.

"A spectrum that's increasingly important is on the demand side, the energy efficiency side; how you cut down on the demand. And there is an incredible number of interesting companies coming into it.

"One is transport efficiency, this is where you're getting smart cars, electric cars. Obviously the leader there is Tesla, an Elon Musk company. That's very alive and real.

"The other one is building efficiency, so if you just look at Ireland every [new] house is now going to be A-rated, so [you have] things like Kingspan. Kingspan is actually a global leader, one of the few Irish companies I'd put into this universe, with the roof panels they're manufacturing that are going into A-rated homes.

"Another massive area of growth is LED lighting for homes, so your incandescent lightbulbs - they're going, ultimately," said Mr O'Halloran.

Backing this up is the fact that in 2015, Tesla is expected to offer a next version car for sale to the masses with a price tag of $35,000. This is compared with their first one a number of years ago that had a retail price of around $120,000.

Globally, three key statistics support all of these green sector developments and claims.

Firstly, according to a 2011 McKinsey Global Institute report, global energy demand is expected to grow by 33pc by 2030.

Following on from this, 90pc of this growth will come from emerging market countries. That's according to a Bank of America Merrill Lynch primer in 2013.

Finally the International Energy Agency (IEA) predicts that, of the $37 trillion currently needed for energy supply infrastructure, $16.9 trillion will need to be invested in power generation, transmission and distribution. More than 75pc of this investment will be in renewable generation, higher capacity and more efficient transmission and distribution systems.

"Clearly there's a revolution going on here, it's just hitting the mainstream now.

"I think it's really been accelerating in the last three to five years, but its genesis is back 15 years ago.

"A lot of these [green] companies started 15 years ago but there's just a lot more of them around, so as an equity investor the number of universal companies that we can invest in has probably tripled over that period, but it's really accelerated in the last five years. That's the renewable companies," said Mr O'Halloran.

"Economically it makes sense. The green movement wasn't seen as capitalist [before]. Whether [investors] believe in green or not doesn't matter, it's not an either or, it's that it makes sense," he added.

According to Mr O'Halloran, KBI's email inbox went into overdrive last week after President Obama's comments on climate change at the Paris summit - proving that investors are listening to world leaders and industry regulators.

"We still need a Paris agreement," President Obama said.

"So my main focus is making sure that the United States is a leader in bringing a successful agreement home." The US President added that rising seas and warming climates could be a drain on economic resources. "This is an economic and security imperative that we have to tackle now," he said.

However, even if investors listened to him, the US House of Representatives last week acted against his comments.

Just hours after President Obama verbally pushed the world for an international agreement to halt climate change, the US House of Representatives voted to block his effort, showing that the Obama didn't have support in his own country. The House passed a pair of resolutions that would prevent the American Environmental Protection Agency (EPA) from implementing measures to curb greenhouse gas emissions.

Green investment experts hope that the Paris conference will prove to be the long-awaited catalyst to spark the energy revolution, but if the House of Representatives' actions are anything to go by, it may be unlikely.

Adding to these doubt was one investment insider, who was hesitant to say we are on the cusp of the next economic revolution.

"It's not a sexy area yet. It would be an area that people would like to invest in. There are too many hurdles at the moment. If the use of the power of the renewable is cheaper, that's what it boils down to - hardcore economics. Obama can bang his drum until he's blue in the face. There has to be some major catalyst. At the minute it isn't attractive," said the insider.

However, Mr O'Halloran would argue against that belief based on what is physically visible on the roads and in the fields of our own country.

"There is a revolution going on and I think you'll look back in 10 or 20 years time and say 'my God, things really were changing.'

"If you go around Ireland you'll see wind farms, you'll see solar panels, you'll see battery-powered cars and you'll see LED lighting in your homes," he said.

The climate change conference is to end this Friday, historic game-changing agreement or not. Right now, the main thesis is that it is difficult to achieve any legally binding document at an international level. Regardless, that €1.5bn 'green fund' in Dublin says a lot.

Sunday Indo Business

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