One of the great debates in this day and age is the impact of mankind on the environment. Are we the major contributing factor to global warming, or is the world heating up of its own accord and is this part of a natural cycle? Leading on from this, if it’s the former, what do we do to reduce the impact we have and mitigate the damage already done?
What, I hear you ask, has this got to do with investing? Well, the simple fact is that a significant number of people believe that we do contribute to global warming and this has lead to a spawning of new investment opportunities - opportunities that promise significant returns, but based, sometimes, on untried or unproven technology. After all it is nigh on impossible nowadays to read a paper without someone trumpeting the next environmentally beneficial solution that also offers multiples of return.
Perhaps there is another way of looking at this. If one took out the ‘green’ or ‘environmental’ tag from the new wave of environmentally enhancing businesses what would we have? Could it be argued that what we have is mankind doing what it is good at, progressing, developing and creating? Ultimately the raw material for fossil fuels will run out eventually. When ‘eventually is’ doesn’t really matter, what is key is that when it occurs there are sustainable alternatives already in place.
So, the paradox for investors is, do they regard investments opportunities in the green sector, whether renewable energy, re-cycling, sustainable forestry et al, firstly for their green credentials or for the returns they have the ability to generate? Can they expect that these opportunities, over time, will give them high returns on their investments, or do they have to accept that the environmental benefit comes with the proviso of modest performance?
What also has be considered is how many of the investments carrying the green label can actually point to a quantifiable beneficial impact on the environment, rather than using the label as a means to attract a new breed of socially responsible investor?
To quote a great friend: “Always know your ‘out’ before you’re in”. In other words, what is the investor going to receive from the investment they make? Green credentials are all very well, but if you lose your investment and the project doesn’t get off the ground – nothing green has been achieved – and money has been lost.
So, if one were to have a check list of attributes to look for when deciding on an investment that has a positive environmental effect, what would it look like? Below are some suggestions:
1. Proven technology. Does it work? Has it been done before?
People discuss first/second/third generation technology and focus on the second or third without considering the first because it is regarded as sexy, being at the cutting edge of development. However, it is normally the first generation that is the proven technology, without which the second or third may not exist. If the first generation is up and running and proving itself with sustainable long term returns then weighing up the risk factor on second and third generation in relation to first is really important.
2. Is there an existing market for the ‘product’?
Creating new markets is very difficult, unless the product fills a recognizable void and then you have to prove that void. Having a positive environmental impact but not having to change consumer behavior in any way is much more efficient
3. What drivers are there around the market that will make it grow?
Are there any legislative mandates that are forcing the market to adapt? One that springs to mind, for example, is the blending of fossil fuels with renewable transport fuels (RTF’s). Mandated by European and UK legislation, this requires the blending percentages to increase from 3.25% currently to 20% by 2020 – a tenfold growth. Legislation that increases demand for RTF’s automatically, without increasing or changing consumer behavior as they will continue to fill their cars and not need to worry or know about the content of the fuel they are putting in.
So, back to the main question; why should investors be looking at green opportunities that have a tangible environmental impact, as well as high returns?
In simple terms - because, like any developing market, there will be winners that provide the investor with substantial returns, whilst providing potentially immediate and long term benefit to the environment. And one last thought: As this is a new market the returns can be uncorrelated to existing holdings in established markets/sectors, something that every investor should try to achieve within a portfolio.
Piers Denne is Head of Marketing and Distribution at Future Capital Partners. The firm manages Future Fuels, an investment opportunity that build an industrial scale biofuels plant in the UK. The opportunity offers a 30% annual return for investors, while the biofuels the plant will produce will have the same impact as taking 600,000 cars off the road over a ten year period.
Link to the article online here