Ethical Investment In Energy

Posted on: 21 May 2008 by Gareth Hargreaves

Is green investment the way forward to power shares through stock market gloom?

With National Ethical Investment Week taking place from 18th to 24th May 2008, we take a timely look at investments that specialise in renewable and other 'green' energy.

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The Association of Investment Companies (AIC) has looked at member investment companies in the Environmental sector and gathered managers' views on alternative energy.

Whilst these companies should not be categorised as 'ethical funds', since their objectives are to invest in environmental and alternative energy securities as opposed to along strictly 'ethical' guidelines, their environmental focus clearly makes them significant stakeholders in the 'green' debate. There are also a number of Venture Capital Trusts (VCTs) specialising in companies focussing on renewable energy projects.

With global concern over environmental issues rapidly growing, the Sector Specialist: Environmental investment company sector has shown particularly strong performance. The sector is currently on an average premium of +3% compared to an overall industry average discount of 9.2%, a testament to how far the sector has come, and how appetite towards alternative energy investment has increased.

Indeed, Ian Simm, CEO of Impax Asset Management, Managers of Impax Environmental Matters, describes environmental investment as "the most compelling secular growth story of the 21st Century."

Environmental investment has moved firmly into the mainstream over the past few years, says Simm. "The investment universe, previously the domain of small technology start-ups, is now a rapidly developing area of the global economy with spectacular growth prospects. Impax have been successfully investing in waste, water and clean energy markets for over 10 years."

A number of managers have commented that often new environmental technologies are inspired by Government. Robin Batchelor and Sandie Christie, Managers of BlackRock New Energy Investment Trust, argue that the US election will have a positive impact on the outlook for renewable energy.

"This week, John McCain set out ambitious carbon reduction targets for the US were he to be elected, and with the two Democratic candidates also proposing to move renewable energy up a gear in the US, the presidential election makes the New Energy sector a very exciting investment proposition in 2008."

These managers also explain that, "Governments are basing their policy on the Stern Review which concluded that it is cheaper to act now on Climate Change, and the IPCC (Inter-governmental Panel on Climate Change) report which confirmed the science of Climate Change. Surging traditional energy prices such as oil, gas and coal have focused governments' attention on energy security and have also improved the economics of renewable alternatives."

"The themes driving the trust's investments have not changed since launching in 2000, but the New Energy world has come a long way. Eight years ago the Kyoto Protocol looked like it was destined for a bleak future and the oil price was a mere $30. Today oil is $120 and the second phase of Kyoto is under discussion.

"In today's carbon-constrained and energy-constrained world, nations around the world are looking for ways to reduce their carbon footprint and boost their energy security while providing sufficient energy to fuel economic growth. New Energy technologies can offer governments a cost-competitive low-carbon source of energy within their own borders.

"Wind power is the favoured technology today in the BlackRock New Energy Investment Trust, making up around 40% of the portfolio. Wind farms accounted for the largest share of new power plants built in both the US and the EU in 2007, due to the fact that wind is the only low-cost, scalable, renewable energy technology. Much of the EU's ambitious 2020 renewable energy and carbon reduction targets are based on wind power, providing our companies with a strong framework upon which to build their business plans.

"More expensive technologies such as solar power are also proving successful as governments enact solar subsidy schemes to pave the way towards cost-competitiveness in the future. Each additional government programme from countries such as Italy and Greece has reduced the industry's traditional dependence on Germany and Japan."

Meanwhile, Steve Read, Climate Change Capital (Managers of Ventus VCTs) comments that the Government has a strong need for new energy sources, especially in a time when the price of oil is reaching record highs and is therefore constantly looking for new ways to create energy.

Charlie Thomas, Fund Manager, Jupiter Ecology Fund, believes the green investment case remains very positive. "Factors such as high energy prices mean there is a direct economic imperative for moving forward on environmental issues and companies have not failed to recognise this. Currently, we are particularly interested in the clean energy theme, with emphasis on energy efficiency.

"Companies such as Itron and Johnson Controls in the US, as well in the UK insulation plays such as SIG, offer good prospects."

A revolution occurring in the world's electricity supply can help power investor returns even through a recession according to a leading fund manager. Andrew Moffat, who manages the CIS UK Income with Growth Trust at Co-operative Insurance, believes that companies developing new generation plants in emerging countries such as China and India can continue to grow despite an economic downturn due to rapid growth in demand for power. There are equal opportunities in western countries where ageing infrastructures need to be replaced and environmental legislation continues to bite.

Power groups addressing this future supply shortfall have the potential to deliver strong performance, and Moffat cites both International Power and Scottish & Southern Energy as two companies that illustrate the opportunity for growth.

Moffat says, "Power companies are not dependent on economic growth in the same way as consumer stocks, so can deliver performance even in the event of a recession.

"International Power is benefiting from the worldwide energy problem. It already keeps the lights on in 20 countries and is developing its business in emerging economies where supply is struggling to keep pace with demand.

"While Scottish & Southern Energy is committed to improving efficiency at its power generation plants in the UK as well as growing its wind power business in line with the Government's drive to boost energy from renewables."

Both International Power (209.4 per cent) and Scottish & Southern Energy (112.18 per cent) have more than doubled the performance of the FTSE All Share (50.06 per cent) over the three years to 31 December 2007, according to Lipper.

The CIS UK Income with Growth Trust - which can be used to fund an ISA - has a total return of 71.6 per cent for four years to 31st December 2007, significantly above the 50.2 per cent achieved by the UK Equity & Bond sector, and ahead of the 69.3 per cent return of the FTSE All-Share Index.

Triodos Renewable Energy Fund is managed by European ethical bank Triodos Bank, which has financed over 200 renewable energy projects across Europe over the past 25 years. This month Triodos Renewables has announced it is launching a major new share issue. The Fund aims to raise £8.5 million which will be invested directly in renewable energy projects and companies. The share issue will allow retail investors to join more than 3000 existing shareholders as part of the flourishing renewables industry.

Triodos Renewables invests in the fast-growing renewable energy sector. The fund has grown considerably since the last share issue and the combined capacity of its operating projects is now 23.45 MW, increasing almost sevenfold over the past three years. An investment since the company's last share issue in 2005 would have returned 22.9% or an average of over 7% per year. An investment of £2,970 will produce renewable energy output equivalent to the average person's annual carbon footprint.

James Vaccaro, Managing Director of Triodos Renewables says, "The renewable sector is a strong growth industry. Maturing technologies like wind energy are making real headway, as pioneering technologies like tidal come on-stream. The UK has been slow to take advantage of the commercial and environmental opportunity that the renewables industry presents but with the Government target of 15% of electricity supply to come from renewable energy by 2015 the UK must catch up.

"This new share issue means we can continue to build our asset base and invest in a variety of exciting sustainable energy projects. These include acquiring existing and planned sites, working with industry to provide a sustainable energy supply from brown field sites and developing partnerships to build new projects."

Triodos Renewables' expanding portfolio includes groundbreaking new technologies such as an investment in Marine Current Turbines, a tidal energy company whose first commercial turbine will begin operating off the coast of Northern Ireland later this year; 'Gulliver', a single wind turbine on Lowestoft's industrial coastline and Connective Energy Ltd, which is a joint venture between Triodos Renewables, Doosan Babcock and Carbon Trust Enterprises, developing ways to capture and re-use waste heat from industry.

Though green energy clearly offers opportunities, backing biofuels could leave investors' savings grounded as well as be potentially negative for the environment, warns Co-operative Insurance. While the company supports the use of biofuels it is concerned that continued growth may be unsustainable unless more is done to protect the environment and society. It is therefore warning investors to think carefully before investing in biofuels until more is done to tackle the sustainability of supply chains.

Use of biofuels has surged in recent years because of its attraction as a supposedly eco-friendly alternative to fossil fuels. Biofuels production is also heavily supported worldwide by governments keen to reduce their reliance on oil as well as provide additional income to farmers. The EU for example has set targets for 10 per cent of transport fuels to be supplied from biofuels by 2020.

Sam Lacey, Analyst at Co-operative Insurance explains, "On the face of it investing in biofuels appears attractive as governments worldwide are setting ambitious targets to significantly increase production.

"However, there is a risk that biofuels could actually have a negative impact on the environment due to the vast amounts of land required for production. More must be done to make their long-term supply sustainable. Initiatives by airlines and public transport companies to run vehicles on biofuels may appear eco-friendly, but could not currently be rolled out sustainably on a large scale. Co-operative Insurance recommends that companies take a cautious approach to biofuels and support the development of robust sustainability standards before rolling out biofuels to their fleets."

The area of land required to grow biofuels is so great that it could cause serious environmental problems if not managed correctly. For example, meeting increased demand could lead to deforestation, as has been the case with palm oil production in South East Asia - palm oil is a key ingredient for some biofuels. It may also push up global food prices and have disastrous effects on biodiversity.

Co-operative Insurance has been using the findings of a report on the risks and opportunities for the biofuels industry, issued last year, to lobby companies in which it invests to develop effective approaches to address the challenges. It has found that there are good examples of sustainable practices but believes the potential for large-scale expansion is limited.

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