Riding the Green Wave
Linda Roberts
01-May-07
Green investment, once the preserve of the ethically minded is attracting a more traditional investor, one seeking profit. And they’ve come at the right time. Media coverage is filled with features on global warming, rising utility bills and the impact of political unrest on energy provision. And the savvy businesses are catching on: consumers want green. Marks and Spencer beat the drum for retailers in January with a very public unveiling of its £200 million “eco plan” to make it the greenest retailer in the UK by 2012. Tesco swiftly followed suit, announcing its own major initiative to tackle climate change including the introduction of “carbon labelling” for the increasingly carbon conscious consumer.
Political parties are adding green to their agenda with the Government mindful to include green measures in their Budgets. Whether they’re voter aware or environmentally aware the result is the same: increased financial and legislative support for green policies and technologies. In addition to the fervour regarding climate change and its effects there has been a significant increase in environmental regulation in recent years giving rise to commercial opportunities for investors. At the same time environmental markets have enjoyed strong growth. There are now 90 quoted companies worldwide operating in alternative energy markets and many more unquoted companies. Popular markets include bio-fuel, fuel cell and solar technologies; less popular are the waste and water industries.
So what does all this mean for the angel investor? Put simply, opportunity is everywhere. Not only are consumers calling for green products and services, the UK and EU Governments are regulating for their introduction. We cannot hope to cover all the green markets available for investment in one article, or foresee all the emerging green markets of the future, but hopefully we can give you a taster
CLEAN ENERGY
Clean or renewable energy dominates the green investment opportunities as it has strong social, political and economical drivers. The International Energy Agency has predicted that renewable energy will grow from 0.5% of world energy to 6.5% by 2030 and that global energy demand is expected to rise by 50% over the same period. Investor knowledge is also strongest in this area, particularly in renewable technologies that have been with us for some time such as solar, wind, fuel cell and bio-fuel technologies. There is a growing consensus that action is needed to halt, or at least slow down, the damage caused by global warming; part of the perceived solution is the availability of clean sustainable energy sources.
The focus on renewable alternative energy sources has heightened political impetus after the recent disruption to European energy supplies following the disagreement between Russia and Belarus. Add to that the hike in energy prices in recent years and the scarcity of non-renewable fuel sources and the arguments for alterative energy sources become obvious.
Regulation and targets are also playing their part: G8 Governments have established national targets to generate at least 25% of electricity from renewable energy sources by 2025 in a move to counteract climate change and secure local energy provision. The EU’s “Energy Efficiency action plan” aims to reduce CO2 emissions by 30% in industrialised countries by 2020. It is also developing framework legislation that will aim to set energy efficiency requirements for products, while its Integrated Product Policy will seek to improve the environmental performance of products throughout their life cycle. Both the UK and the European Government have issued a series of directives for both energy and carbon trading. These directives are forcing businesses to identify technologies that will enable them to provide their products and services in an environmentally friendly way.
Technologies that have been with us for some time such as wind and solar technologies have reached a level of maturity that has brought efficiency and economies of scale. They are also experiencing buoyant growth - the solar power industry is already growing at 30% per annum and the wind power industry has averaged 28% growth over the last five years – these technologies have advanced to the point where they are now being considered as viable alternatives by both businesses and private consumers.
The cost of wind and solar technologies has halved over the past fifteen years and wind generated energy is approaching the cost of energy generated from other power generating sources. Offshore wind farms offer particular promise as larger turbines can be placed in stronger, more consistent wind. Domestic turbines are now being marketed to both green consumers and those with homes where traditional energy supplies are restricted. Solar technology is still expensive, but demand for it remains high.
WATER
UN figures claim that 1.1 billion people do not have access to clean drinking water and 2.6 billion people do not have adequate sanitation. This dire situation offers opportunities for companies who can provide infrastructure systems to deliver water where it is required and water purification technologies. Closer to home, recent droughts across Europe are fuelling the market for water management and water recycling solutions and most of us have felt the effects of hosepipe bans as demand for clean water in the UK has outstripped supply.
VEHICLE EMISSIONS
Road traffic already accounts for a fifth of Brtain’s CO2 emissions and the Government has forecast that our road traffic will rise by 40% in the next 20 years. Drivers of environmentally unfriendly cars are already being penalised through emissions based Company Car Tax and Vehicle Excise Duty, but is this enough to make them swap their over used and over sized vehicles for greener ones? Certainly US manufacturers are starting to consider that option. At the North American International Auto Show in January, green was definitely the new black. Toyota, the leader in environmentally friendly vehicles announced a hybrid powered pick-up truck and a hybrid gas-electric sports car to complement its successful hybrid gaselectric Prius. General Motors announced a hybrid concept car – the Chevrolet Volt – which can be run using bio-fuel, diesel or a Hydrogen-based fuel cell. BMW’s Hydrogen 7 is expected to steal a march in the production line, hitting selected US dealerships in April. The increased traffic volumes are also expected to give rise to opportunities in public transport provision and pollution reducing technologies.
WHY WASTE IS NOT A TOTAL WASTE
UK domestic recycling has doubled in the last four years, reaching nearly 27% in 2006. This is largely due to pressure on households from local authorities striving to meet the Government’s statutory target to increase their recycling to 25%. This increase in recycling, and strain on landfill sites, has created opportunities in waste collection, treatment and recycling and will lead to further opportunities in technologies that reduce the waste mountain or create recyclable materials. The introduction of the Waste Electrical and Electronic Directive in January 2007 assigns responsibility for the recovery and disposal of a wide range of electrical and electronic equipment, including office IT kit when it becomes waste. The related Restriction of Hazardous Substances Directive bans the placing on the EU market of new electrical and electronic equipment containing any of six hazardous materials. These Directives will create further opportunities for investment in sustainable WEEE management and “ewaste” reduction technologies.
HEALTHIER LIVING
Everyone wants to live longer and better and health-conscious consumers’ shopping baskets have been reflecting that desire in recent years. A survey by the Food Standards Agency in 2006 revealed increases in both awareness of the “5 a day” guidance and actual consumption of fruit and vegetables over the previous year. Sales of organic food have doubled since 2000 and are now worth more than £1.2bn a year to UK retailers. The market is growing at twice the rate of the general grocery market and is expected to reach £2bn by 2010. Investment opportunities exist in organic and health foods and general health promoting products and services.
CLOSER TO HOME
The UK’s 21 million homes account for 27% of CO2 emissions. The Government has announced proposals to ensure that all new homes in England will be carbon neutral by 2016 as part of its target of cutting CO2 emissions by at least 60% by 2050. The proposals include changes to building and planning rules, and a star rating system that reveals a property’s energy efficiency to potential home buyers.Homes with “zero net emissions of carbon dioxide from all energy use in the home” will be eligible for a time-limited stamp duty exemption. This includes energy consumed by household appliances and electronic equipment, not just those associated with heating, hot water and ventilation. Opportunities therefore exist for investment in greener household and entertainment goods in addition to energy related products.
For existing homes, the Sustainable Developments Commission has determined that retrofitting current technologies, such as better insulation and more efficient heating systems, is the most cost-effective way to reduce a home’s carbon emissions.
TAKING THE GREEN PLUNGE
Obviously the Business Angel Networks are the first place to look for qualified “investment ready” opportunities. However there are a number of investment organisations that seek private investors to invest in green opportunities.
Sustainablebusiness.com posts details of funding organisations looking to invest in green companies and to attract additional investors. Cleantech Venture Network identifies companies with innovative clean technologies for its Member Investors. The Carbon Trust runs an Incubator programme that supports qualifying companies with promising low carbon technologies. As the company develops, investment is sought from a variety of funding sources, including angel investors, to develop the company and its products.
The Environmental Industries Commission, the lead trade association for the UK’s environmental industry, has launched a “Gateway to Global Investors” in partnership with city financiers Angel Bourse that aims to find investors to provide financial backing for environmental enterprises looking to expand.
To date, the level of funding provided to start-up environmental companies is low by comparison to other industries. This new initiative aims to fill the gap by matching unquoted qualified investment opportunities in these growth sectors with both institutional and private investors to help small companies with environmentally sound technologies to gain access to pre- IPO investments in the region of £100m per annum.
GOVERNMENT AID
The Government also provides funds that invest alongside angel investors, matching private investment pound for pound: these include the Early Growth Funds which aim to increase the availability of small amounts of risk capital – between £20,000 and £200,000 - for innovative and high growth businesses; the Regional Venture Capital Funds which provide funding in amounts up to £500,000 to SMEs who demonstrate growth potential and the Enterprise Capital Funds (ECF) which help fund SMEs seeking up to £2 million of equity finance. Investment proposals are often championed by an angel investor when they are proposed to an ECF; however ECFs do receive unaccompanied proposals and in these cases will either direct the potential investee to an Angel Network or put the investee in touch with an angel who is known to have relevant sector expertise.
GREEN ANGELS SOUGHT
For example, the IQ Capital Fund, run by NW Brown & Company Ltd works in partnership with the OION, GEIF and SWAIN Angel Networks. There are currently six ECFs; of particular interest to potential green angel investors is the 21st Century Sustainable Technology Growth Fund run by E-Synergy Ltd – a £30 million fund which operates across the UK and focuses on high growth companies employing leading edge sustainable technology. An example of its investee companies is Hydrogen Solar, a company dedicated to the production of hydrogen through renewable carbon free processes aimed at petro-chemical refineries and industrial users. An extra £100 million is being made available for the ECF programme during 2007.
CAUTION ADVISED
Environmental issues are an ongoing problem, unaffected by economic cycles; consumer interest is more fickle. As with all growing markets, caution should be exercised when making green investments - many angel investors got their fingers burnt when the dot com bubble burst. Although there are long term drivers pushing green markets in the forms of rising energy prices, scarcity of resources and climate change, industry watchers have expressed concerns that some areas, in particular, clean energy could be showing signs of overheating evidenced by very high price/earnings ratios, the high number of recent AIM listings – including many pre-revenue listings – and over valuations driven by competitive deals. But if you stick to the basic rules for all sound investments: experienced, astute management; quality products with unique selling points and high growth, predictable market potential you may not just make money, you could save the world.
