Investing in Environmental Technologies

Investing in Environmental Technologies

Strong interest in environmental technology is here to stay. But investors should not lose sight of[…]

(Published in the Financial Times on October 27, 2005. Read the original here.)

The soaring cost of fossil fuels, fears about climate change and stricter environmental legislation have combined to create a fertile environment for innovation and investment in this long-neglected sector. Nevertheless, problems remain for those whose ideas stray too far from the boundaries of established technologies.

By most conventional investment yardsticks, these projects are simply too risky to consider. “The rate of attrition in the environmental technology sector is very high,” says an investment banker who advises on renewable energy finance. “There are an awful lot of ideas that come across the screen but 90 per cent of them will not get there.” Often, entrepreneurs cannot get the money to develop their ideas or, if they do, the technologies are not taken up due to conservative attitudes and unhelpful markets.

In 2004, the European Commission adopted an action plan for environmental technologies to address this problem. The EC has long earmarked research funds for environmental technologies, most recently through its sixth framework programme for R&D (the framework programme is a list of priority research issues drawn up every five years). The sixth framework programme allocated more than €2bn to spend between 2002 to 2006 in the areas of “sustainable development, global change and ecosystems”, making this the third-largest area for EU research spending after life sciences and information technology.

Europe has become a world leader in the development of environmental technologies, but the EC argues that more research is needed to develop these initiatives and reduce the cost of those that are already available but remain underused. The objective of the EC’s action plan is to optimise the use of funds within existing national and European research schemes, such as the sixth framework and the successor seventh framework, which takes over in 2007.

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One of the more interesting aspects of the action plan is that it emphasises the need to validate the technical maturity and economical viability of new technologies. It recognises that, for innovative technologies to make it in the marketplace, the latter stages of the R&D process must focus on identifying concrete applications and involving commercial partners.

One pan-European research project that seems to play to Europe’s strengths is a wind power initiative led by the Technical Research Centre of Finland (VTT). It includes 38 parties from around Europe and has a budget of €38m, making it the largest wind energy project in Europe.

The initiative aims to boost significantly the capacity of wind turbines by using longer rotor blades. The longer blades are subject to higher stresses, however, so the team is looking at various methods of countering this by optimising the blade structure. One such approach is the use of innovative “shape memory” wires embedded in the blades. When an electric current is passed through these wires, they heat up and change the shape of the blade.

This allows the turbines to operate in stronger winds than today’s turbines, which have to be shut down if the wind blows too hard. Shape memory is a classic example of a technology that has existed for many years but has struggled to find commercial application. By combining these innovations, VTT argues that the maximum capacity of offshore wind power plants can be increased from the current 5MW to as much as 20MW.

Triodos Group, a Dutch ethical bank, currently finances more than 150 renewable energy projects across Europe, and is a strong supporter of wind power. The bank’s UK arm recently launched an investment fund for private investors focused on the UK renewables sector and almost all the money has gone into wind technology.

“The pitch for investors is that wind is the more mature technology,” says Matthew Robinson, UK-based fund manager at Triodos. Nevertheless, the bank also sees good investment potential in energies such as wave power, solar and biomass. He argues that conventional banks do not understand what is involved in investing in these technologies, so Triodos specialises in this area, providing finance for projects that benefit the local community.

Triodos is not the only investment group interested in alternative energy. There are many ethical funds with exposure to environmental technologies as well as more specialised UK funds that focus specifically on this area, such as Impax Environmental Markets or Jupiter Ecology.

One of the best-known funds is Merrill Lynch’s New Energy Technology investment trust, which has risen by over 86 per cent in the past year. But just two years ago, the trust had collapsed in value and brought big disappointment to the long-suffering institutional investors who had jumped aboard the “clean energy” bandwagon when the trust launched in 2000.

This rapid change of fortunes illustrates the high-risk, high-reward nature of environmental technologies. Some experts believe that the risks are so great that companies in this sector will never make suitable investments for private investors. As a result, they look with some dismay at the recent rash of energy technology flotations on Aim, London’s junior stock market, which brings back memories of the dotcom boom.

“There is definitely a bit of a South Sea Bubble around all this,” says Mr Robinson. Triodos has been financing energy projects for over 25 years so “we have experienced both the good times and the disappointments”.

Jonathan Johns, partner in Ernst & Young’s renewable and environmental unit, says there is now huge investor interest in environmental technology. The industry is still young and investors believe that the more successful companies have the potential of achieving sales growth rates comparable to high-growth technology companies, with the added benefit that renewables projects tend to provide solid cash flows.

While some of the young companies investing in “the more peripheral” technologies seem destined to fail, Mr Johns believes the strong interest in the sector is here to stay. But he warns entrepreneurs and investors not to lose sight of the basics of investing in any innovative sector. “You can have the best idea in the world, but if you do not have a market you will not make it,” he says.

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