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Cleantech potential is no longer a dirty word

Last year aw the great focus of 2007 – climate change – give way to the more immediate and pressing problems caused by the credit crisis and the subsequent extremely rapid collapse of the world economy. You only need to look at some of the figures to see the extent of the reversal of fortunes – oil prices hit an all-time high of $147 in July but by the end of the year, they had lost more than two thirds of their value – on Christmas Eve, oil was $35 a barrel. Other commodities slumped as well. In 2008, the Reuters/Jefferies CRB Index of 19 raw materials fell 36%, the most since the gauge debuted in 1956, to 229.54, despite reaching a record 473.97 on 3 July.

Initially relatively resilient in the face of the deterioration in conditions, the WilderHill New Energy Global Innovation Index, or NEX – an index of clean energy stocks – dropped sharply in the final quarter of 2008. "An eye-watering plunge began in September as the oil price fell, the world economy weakened and it became clear that it would become much more difficult for renewable energy project developers to get debt finance from private sector banks," said clean energy analysts New Energy Finance.

The index ended the year 61% lower than it started 2008, hit by the economic slowdown and the removal of one of the key drivers for clean technology – the soaring price of fuel. So it would seem an inauspicious time to be thinking about the investment opportunities created by climate change. "It is a very interesting time, because the general economic situation is appalling," concedes Nigel Meir, fund manager of Ludgate Environmental Fund, which receives a high proportion of its funding from family offices and private investors.

However, a number of commentators have pointed out that the issue of climate change has not gone away, just because the global economy is in freefall. Michael Liebreich, chairman and CEO of New Energy Finance, said: "The sector is not immune to the ills of the wider economic and financial world, and it is suffering some effect. However the growth fundamentals for clean energy remain robust.

"Policy support has increased in many countries, and should get a further boost from the arrival of President Obama. Concerns about energy security and climate change will not be removed by short-term shifts in the oil price. New Energy Finance continues to forecast new investment in clean energy of more than $500 billion a year by 2020."

President Obama's administration will clearly be much more pro-active on climate change than his predecessor's and his inauguration is likely to give the issue much more prominence in 2009 as governments work towards a successor to the Kyoto Protocol, which is meant to be negotiated at a meeting of the UN Framework Convention on Climate Change. In Europe, the EU has finally agreed its Renewable Energy Directive, mandating that 20% of its energy should come from renewable sources by 2020, that there should be a 20% improvement in energy efficiency and that the EU should cut emissions of greenhouse gases by 20% by the same deadline.

The EU's Emissions Trading Scheme, the world's largest cap and trade scheme, is set to be joined by similar initiatives in Australia and Japan while the first of three regional schemes in North America started last year. The UK has taken a step further by introducing the world's first climate change legislation committing the government to binding targets to cut emissions.

All of these measures – aimed at meeting UN targets to cut emissions by 80% by 2050 – help to build the institutional framework for investing in climate change issues and combine with the growth in interest in sustainability issues and fears over resource depletion to make this a good area to invest in. "The world has finite resources," says Meir, "so we are all going to have to look at ways of being more efficient so we can preserve what we have got."

Efficiency is one of the themes of his fund, epitomised by its investment in Hydrodec, a company that recycles contaminated oil from electricity transformers, cleans it up and sells it back to utilities. "It is a perfect 'closing of the loop'," says Meir.

Family businesses are ideal investors for the clean technology sector, he adds. "They have a long-term, sophisticated view because they are in business themselves. We invest in growth companies and our investors understand the need to grow a business. Often they bring more than just cash to their investments – often we are able to benefit from their expertise and their networks."

One of the key issues for families is to be able to diversify away from stock markets, says Ian Simm, chief executive of investment group Impax. "Family offices want uncorrelated investment opportunities," he adds. "Clean technology offers opportunities beyond quoted securities, including private equity, venture capital and individual project finance."

Many of the most promising investments in this area are in infrastructure projects for power generation, transportation and water – the developed world needs to update its ageing infrastructure while emerging markets need to install it and "climate change is a key feature of policy for these investments".

"Areas like this that have a heavy degree of public sector capital expenditure give you some shelter from the business cycle and they also offer good growth rates," Simm says. Infrastructure investments are likely to receive a further impetus this year as a result of the push by governments around the world to boost spending and jobs in response to the economic slowdown.

"All eyes are on Obama to see whether his focus on providing green jobs will provide a new underpinning for this area," says Emma Howard Boyd, head of Socially Responsible Investment at Jupiter Asset Management. "A particular focus will be on efficiency, whether that is fuel efficiency in vehicles or energy efficiency in buildings."

Bernard Fairman, founder and managing partner of Foresight Investment, says many opportunities are centred around infrastructure of one sort or another, including waste-to-energy, recycling and solar-powered electricity generation.

Wind and solar power remain the driving forces of clean technology investment, representing about 40% each of clean tech market capitalisation, according to Merrill Lynch analyst Steve Milunovich, "but the variety of companies in the private market is much greater and presages a potential boom in 2–5 years in distributed power, second-generation biofuels, storage, transportation, building materials, and water".

Merrill adds that funding difficulties are prevalent, and it is clear that debt-driven deals are harder to come by as a result of the drying up of liquidity. "Late-stage companies that depend on project finance used to get 70–80% in debt but now are closer to 50% when they're fortunate enough to get any funding," the bank said in a report published in December 2008, while tax equity investments have dried up as companies see their profits decline, cutting the amount of tax they need to offset.

"Many of these deals require banking and that has been difficult to come by as banks concentrate on their own problems," says Fairman. Yet canny investors who raised money when times were good are now well-placed to pick up some bargains. "The market looks very cheap on a 2–5 year view," says Simm. Certainly, there still appears to be money available for the right opportunities.

Ludgate raised $25 million towards the end of last year, while family offices were among the investors to boost by £23 million the clean tech fund of WHEB Ventures, the fund run by Ben Goldsmith. Meanwhile, Stanley Fink, former head of the world's largest listed hedge fund Man Group, is to chair Earth Capital Partners, an independent boutique focused on sustainable investments that aims to raise assets under management of $5 billion within the next five years.

"If you are looking to preserve wealth for the next generation, you need to take a long-term view – and this is the sort of area you should be interested in," concludes Howard Boyd.

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