The growing environmental marketplace
The new year brought little relief to equity markets as performance lagged around the globe. In the midst of the ongoing credit and market crises, investors are seeking new strategies in an attempt to bolster portfolio performance. The demand for innovative investment solutions is driving the design of new index construction – in particular, the environmental marketplace is emerging as an increasingly popular product segment among both institutional and individual investors.
Environmental markets include renewable energy, energy efficiency, water technology, and waste and pollution control. At the moment, these markets are estimated to represent around US$250 billion in value, and are expected to grow in both size and scope over the long term, despite current financial market conditions. A number of socio-political factors, including proposed legislation by the US federal government and the European Union to limit emissions and encourage energy efficiency, as well as the United Nations’ global ‘Green New Deal’, are helping to drive sustainable growth.
On 20 January 2009, the United States inaugurated President Barack Obama. In the new comprehensive ‘New Energy for America’ plan, Obama pledges to “make the US a leader in combating climate change around the world”. The plan proposes to:
- Help create five million new jobs by strategically investing US$150 billion over the next ten years to catalyse private efforts to build a clean energy future.
- Within 10 years save more oil than the United States currently imports from the Middle East and Venezuela combined.
- Put one million plug-in hybrid cars, which can get up to 150 miles per gallon, on the road by 2015.
- Ensure 10% of US electricity comes from renewable sources by 2012, and 25% by 2025.
- Implement an economy-wide cap-and-trade programme to reduce greenhouse gas emissions by 80% by 2050.
President Obama’s proposals add momentum to similar initiatives advocated by the United Nations including a global ‘Green New Deal’, which the UN says could be a historical opportunity to rebuild economies debilitated by the credit crisis and target future investment for environmentally friendly markets. Achim Steiner, Executive Director of UNEP and a board member of the United Nations Principles for Responsible Investment, has said that the Green New Deal report prioritises the support of key sectors that it believes will generate the biggest transition in terms of economic returns, environmental sustainability and job creation. The success of this initiative stands to serve as a catalyst for future government and market-based investment into areas such as clean technology and renewable energy.
In January 2009, both Japan and the Republic of Korea announced new initiatives to encourage the growth of environmental markets. Japan has pledged to create up to one million new ‘green business’ jobs and offer zero-interest rate loans for environmentally friendly companies. South Korea plans to invest US$38 billion over the next four years to promote eco-friendly projects and create 960,000 new jobs. Projects will include
creating green transport networks and two million energy-saving ‘green homes’. Meanwhile, the European Union finalised a legally binding agreement in December 2008 to cut European greenhouse gas emissions by 20%, establish a 20% share for renewable energy, and improve energy efficiency by 20% by 2020.
MARKET GROWTH
Meeting global environmental sustainability goals will require significant investment in both alternative/renewable energy sources and energy efficiency. The International Energy Agency (IEA) expects that US$45 trillion will be needed to develop and deploy new technologies required to achieve a 50% reduction in emissions by 2050, effectively representing a ‘low carbon industrial revolution.’ According to environmental technology specialist and FTSE partner, Impax Asset Management, environmental markets are already growing at up to 30%, with aggregate revenues in excess of US$200 billion per year. There is also greater opportunity for investment, as the number of publicly investable environmental market companies is close to 1,000 today, compared to several years ago when private equity was the primary means for accessing these markets.
INVESTOR DEMAND
Investor demand for access to environmental markets differs from traditional responsible investment mandates and strategies. Responsible investment (RI) requires issues such as climate change, human rights, labour issues and corporate governance to be integrated into the investment analysis and management process. Interest in climate change as part of a wider responsible investment agenda is evolving into investment opportunities in their own right, including environmental markets (EM).
An important distinction is that EM investment actively seeks to invest in companies that demonstrate strong financial performance, growth opportunities and sustainability while contributing to a low-carbon environment; whereas RI strategies tend to take an exclusionary approach based on ethical values (for example, divesting from companies that don’t meet accepted social responsibility standards).
TRACKING THE ENVIRONMENTAL MARKETS
Indexes are a useful tool for investors looking for a means to identify, manage and gain exposure to environmental markets. They appeal to those concerned about the long-term effects of climate change, energy security and water scarcity on their portfolios, as well as those looking to capture the performance of those companies best positioned to operate in – and profit from – a future low-carbon economy.
In collaboration with Impax Asset Management, FTSE has developed a comprehensive Environmental Markets Index Series as a means of tracking these rapidly changing markets. The series is comprised of the FTSE Environmental Technology Index Series and the FTSE Environmental Opportunities Index Series. The former tracks environmental technology companies that derive more than 50% of revenue, technology invested capital or net income from environmental technologies. The latter represents over 470 companies globally that derive at least 20% of their business from environmental markets and technologies. These are further broken down by size and sector – isolating the world’s largest 100 environmental companies as well as the water, renewable energy, energy efficiency, and water and pollution control sectors for investors seeking greater granularity.
As we experience a shift to a low-carbon economy over the coming decades, public concern, political initiatives and investor demand will continue to drive the growth of environmental markets.
Jerry Moskowitz
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