Investing in environmental solutions
There is growing acceptance that environmental problems are not going to disappear. In fact, current trends show that they are growing in importance. Green investment focuses on investing in companies responding to environmental challenges, either by developing a product or service which solves an environmental problem, or by working to limit their impact on the environment.
- Green investment seeks competitive advantage by spotting trends in environmental technologies at an early stage.
- The massive increase in environmental regulation over recent decades has fuelled a greater understanding of green issues. For a growing number of companies these regulations represent a growth market largely unaffected by economic cycles.
- Increased consumer awareness for environmental issues creates new markets for products such as organic food or renewable energy.
- Companies that put principles and systems in place to deal with supply chain issues such as child labour and sustainable timber are, for example, GUS and Argos.
- Sainsbury was named Organic Supermarket of the year from 2002 to 2004 by the UK Soil Association as an example of a company embracing the use of organic and fair-trade products. US food retailer, Wholefoods Market, specialises in organic foods.
With an increasing focus on climate change and energy security, over 48 countries worldwide have developed policies promoting renewable energy. Global energy demand is expected to rise over 50% by 2030 according to the International Energy Agency. Investments are made in technologies such as wind, solar and fuel cells, as well as emissions reduction.
Rising obesity and a focus on food quality have resulted in health-conscious consumers paying more attention to the food they buy and what they eat. Sales of organic food are now worth more than £1.12bn to UK retailers and the market is growing at twice the rate of the general grocery market.
Combined with an ageing population, the trend for healthy lifestyles has created investment opportunities in organic food, complimentary medicines and healthcare.
Increasing health, safety and environmental regulation across the globe has resulted in new markets for companies providing solutions to environmental and social problems. Examples include environmental consultancies and companies providing specialist equipment that minimises the risk of safety incidents.
Long-term performance from environmental solutions
The publication of the World Energy Outlook in November 2005 by the International Energy Agency (IEA) prompted wide-ranging international press coverage. It highlighted the need to reduce our global dependence on fossil fuels. While environmental concerns, in particular climate change, have been central to this debate, the issue that has dominated headlines of late is the concern over the long-term sustainability of non-renewable fossil fuels. This is particularly so in light of an increase in demand for this type of energy from countries such as China and India. Unsustainable energy trends means alternatives must be found In its latest World Energy Outlook, the IEA stated that global energy demand is expected to rise by more than 50% by 2030. The Agency warned that current trends are unsustainable and that if renewable energy sources are not tapped, oil prices will soar on increased demand and greenhouse gas emissions will rise by an estimated 52% by 2030.
Increased legislation will mean further growth opportunities
As concern grows over global greenhouse gas emissions, governments around the world are setting policy initiatives to promote and encourage the development and use of cleaner energy. Examples include the EU Renewable Energy Directive and EU Emissions Trading Scheme. The Chinese government has stated that 15% of all China's energy must come from sources other than fossil fuels by 2020. The successful outcome of the recent climate change talks in Montreal has sent a clear signal that the future lies in clean and more sustainable technologies.
The growth potential of renewable energy sources will attract a wide investment audience As businesses embrace these changes there will be more opportunities for growth in this sector. Fifteen years ago there were no quoted companies operating in the alternative energy sector. Now there are over 75 companies worldwide operating in either the solar, wind, or fuel cell area and many more at an unquoted level. These companies are of interest to all investors, not just those with an ethical focus.
Investing in environmental solutions is becoming increasingly important to all investors. Whilst climate change is the most prominent environmental issue in the news at the moment, there are many other reasons why a green approach to investing can pay for investors. Over the last 30 years environmental issues on a broader scale have increasingly moved to centre stage as there is wide acceptance that environmental problems are not going to disappear. Other environmental problems, particularly those associated with scarcity of water, natural resources and pollution, are believed to be amongst some of the greatest issues facing the world today. From an investment perspective, the need to reduce dependence on fossil fuels means that the renewable energy industry is a long-term structural-growth story.
Environment policy delivers improvements
Environment policy has been seen as one of the success stories of the European Union bringing improvements in areas such as cleaner air and safer drinking water. In the UK, DEFRA (the Department of the Environment, Food and Rural Affairs) is responsible for approximately 30% of all legislation coming from Europe, more than any other government department. In addition to increasing legislation, enforcement against offenders is also being stepped up In the US, federal initiatives like the Superfund program, which aims to clean up hazardous waste sites, have raised the financial stakes for businesses. This pattern is being repeated around the world. For example, in its latest five year plan, China announced a significant increase in environmental and health and safety regulation. These issues are set to remain high on the political agenda.
The trend for increasing regulation creates opportunities for consultancies. Their specific knowledge and expertise allows them to provide advice and develop solutions for companies who are subject to regulation and don't have sufficient expertise in-house.
Wind energy is essential if the UK Government is going to meet its target of 20% reduction in carbon dioxide emissions by 2010. This rapidly growing sector of the global electricity generation market and has averaged 28% annual growth for the past five years. A key new area of growth in the next few years is off-shore wind power.
With an increasing focus on climate change and energy security, G8 governments have established national targets to generate at least 25% of electricity from renewable energy sources by 2025. Around the world legislation is being put into place to stimulate the development and commercialisation of low carbon technologies.
Solar energy - a plentiful resource
The solar market grew by 60% per year from 2000 - 2004 and is predicted to grow by 30% per year through 2010 and beyond.1 Solar power systems harness solar energy and convert it into hot water or electricity.
Fuel cells - energy for the 21st century
Fuel cells are seen by many as the technology that will eventually deliver the zero emission vehicle. However they also have many other applications. Fuel cells use a chemical reaction between hydrogen and oxygen to create an electric current, heat and water vapour. They are quiet, reliable and can operate on a variety of fuels including hydrogen.
- Of all the renewable energy technologies wind is the closest to being commercially competitive. Given the current high energy prices, the most efficient turbines operating in the most favourable conditions are already cost competitive with oil or gas generated electricity.
- The largest wind turbines have blades over 50m long, towers higher than 100m and generate over 3MW of electricity, enough to power up to 2000 homes.
Alternative fuels - a natural growth story
Around the world, governments are stepping up their commitment to alternative fuels, particularly bio-ethanol and biodiesel. The EU, US, China, India and Brazil have all made commitments to achieve a minimum 5% blend of bio-ethanol or biodiesel in standard petrol and diesel vehicles. With other countries lining up to make similar commitments the opportunities for companies producing these fuels is enormous.
Grid connected solar technology is now the fastest growing energy technology in the world. It is projected to grow by 30% per year through 2010 and beyond. Wind energy is second behind solar, and has averaged 28% annual growth for the past five years and continues to grow strongly. The International Energy Agency predicts that renewable energy is set to be the fastest growing primary energy source growing from 0.5% of world energy to 6.5% by 2030. The recent commitment in the US Energy Bill towards bio fuels could see demand for ethanol grow by 11% per year. In Europe, demand for bio fuels could grow by as much as 60% per annum to meet the targets set by EU Bio fuels Directive. All these policies and market opportunities are driving the need for companies to develop alternative technologies. Fifteen years ago there were no quoted companies operating in the alternative energy sector. Now there are over 90 companies worldwide operating in the solar, wind, fuel cell or bio fuel area and many more at an unquoted level.
As the sector has matured, turbines have become larger and more efficient and costs have fallen. The best land based wind farms are now almost cost competitive with other forms of electricity generation.
Unsustainable energy trends means alternatives must be found
Rising energy demand, concerns over energy security, climate change and political instability has brought an increased focus and commitment to renewable energy. The International Energy Agency has stated that global energy demand is expected to rise by more than 50% by 2030. As a result governments around the world are setting policy initiatives to promote and encourage the development and use of cleaner energy. At least 48 countries worldwide now have some type of renewable energy promotion policy, including 14 developing countries. China also has targets to generate 10% of its total energy requirements and 15% of its electricity generating capacity from renewable energy by 2020.
The costs of many renewable energy technologies are declining with technology improvements and economies of scale in production. Costs for wind and solar technologies have halved over the past fifteen years. Wind is approaching cost competitiveness with other power generating sources, however further cost reductions are needed before solar becomes competitive. Even fuel cells are becoming competitive in certain niche applications such as remote power generation, domestic combined heat and power plants and as alternative sources of power for consumer electronics.
Strong policy support, declining costs and concerns over emissions from fossil fuels have led to the continued growth in the renewable energy sector. The results have been dramatic.
Bio fuels emit 40-80% less greenhouse gas emissions than fossil fuels. Bio fuels can be blended at up to 5% in fuels without vehicles needing technical adjustments. While the expertise for land based wind farms is now established, offshore wind farms offer significant promise as they benefit from stronger, more consistent winds and less visual impact on communities. Offshore wind farms can use larger turbines which are more efficient at harvesting wind potential. Biodiesel can be produced from the oil of crops including oilseed rape, sunflowers, and soybeans, as well as from waste cooking oils. Biodiesel is typically sold as a blend of 5% biodiesel and 95% ultra low sulphur diesel. Solar
Solar power systems harness solar energy and convert it into heat or electricity. Solar technology remains expensive but demand for solar products is robust so the outlook for the sector is bright. In January 2006, the State of California approved the California Solar Initiative. This initiative commits US $3.2 billion in incentive funds to encourage consumers towards installing solar power on their homes over the next 11 years. Almost 900 million portable electronic devices such as mobile phones, laptops, ipods and PDAs were sold in 2004, and the market for these devices grew by 12%. As electronic product designs incorporate more features they become ever more power hungry. Rechargeable batteries currently offer three hours of continuous operating time, micro fuel cells could provide over 20. The first fuel cell powered electronic products are expected to be launched to the market between 2007-2009.
The global water industry is big business. Developed countries may need to spend up to US $1 trillion over the next 20 years to upgrade water and wastewater treatment systems. China has one of the fastest-growing urban populations and economies in the world as 200 million rural workers migrate to the industrial and service sectors. Demand for water from urban areas and industry is expected to grow by 70% and 104% respectively between 2010 and 2030.1 The Chinese government has acknowledged the inadequacy of its water infrastructure and plans extensive development. An additional US $22bn would have to be spent in China on wastewater treatment alone to meet the needs of the additional 900m people living in urban areas by 2015.
Meanwhile in the US there are expected to be an additional 54 million water customers and 33 million wastewater customers by 2015. According to the US Environmental Protection Agency, US $600 billion will have to be spent on improvements to the nation's water and wastewater infrastructure over the next 20 years.
According to the UN 1.1 billion people lack access to clean drinking water and 2.6 billion people, representing half the developing world, do not have access to even a simple pit latrine. It is now highly unlikely that the millennium development goal of halving the proportion of people without access to clean water by 2015 will be met. Indeed, as living standards rise, demand for filters that improve living and working conditions tend to increase along with water consumption levels. Companies producing food, pharmaceuticals and electronics, require water treated to higher standards than drinking water. As industrial processes are refined and new products developed, particularly in electronic equipment, the purity of water required generally increases. In addition to this, companies are increasingly attempting to reduce overall water consumption and demanding increased rates of water recycling and reuse. This drives the need for continually more sophisticated and robust filtration equipment, water filters also help to extend the useful life of industrial equipment. Technological advances and environmental regulation can also lead to increased filtration content in new and existing applications.
The combination of our water-intensive lifestyles, a changing global climate and an uneven population distribution has led to challenges in supplying quality water. New water treatment technologies have emerged such as ultra filtration, which removes contaminations without producing harmful by-products. Given that filtration and purification provide a solution to water shortages, these technologies are likely to produce sustainable growth in revenue for the foreseeable future. In the UK there are signs of water shortages affecting the way companies operate. The country's largest water company, Thames Water, has banned hose pipes and sprinklers from April 2006 following similar steps taken by several other smaller regional water companies.
UK traffic volumes are predicted to rise by 40% in the next 20 years. Opportunities exist to invest in companies providing bus or train services and other aspects of an integrated public transport system. Some ethical funds actively invest in technologies reducing urban pollution or improving public transport systems.
London leads the way in the public transport revolution. In particular, the implementation of the congestion charge in 2002 has had a dramatic impact on public transport in London. Numbers of passengers using a bus is now at its highest level since 1968 and continues to grow. In 2004, light rail services (the DLR and Croydon Tramlink) recorded a sixfold increase in passenger numbers since 1994. There are now 70,000 fewer vehicle journeys into the congestion charge zone each day. Finally, the number of casualties on London roads has fallen. These are just some of the successes reported by Transport for London and illustrate how policy can make a positive difference. Our use of transport has many impacts on our environment Transport has a huge environmental impact.
CO2 emissions from transport have risen throughout the 1990s and account for around 25% of the UK's total emissions. Transport contributes to poor air quality. The Department of Health estimates that up to 24,000 early deaths each year result from poor air quality in our cities.
Noise from transport causes disturbance, with aircraft noise being a key contributor Road transport is predicted to grow a further 33% in the next 20 years. A threefold increase is forecast in demand for air travel by 2030. These trends indicate that, despite technological advances, the environmental impacts of transport will grow unless action is taken by government, business and individuals.
As a society we are currently producing more waste than ever before. The UK alone produces around 400 million tonnes of waste each year- 25% of which is produced by households and businesses. The rest comes from farming, construction, mining and dredging of rivers. In England and Wales about 100 million tonnes of waste is still sent to landfill each year. Yet landfill space is set to run out in the next five to ten years. The UK waste sector is estimated to be worth over £7 billion per annum. An estimated £10 billion is needed to invest in approximately 1,500 new facilities to recycle, reprocess, treat and dispose of our waste.
The UK Government's statutory target to increase local authorities' recycling to 25%, has led to the doubling of UK domestic recycling rates in four years and has committed to recycling 50% of waste by 2020 and recently raised landfill taxes to help achieve this goal. This increase in recycling, and pressure on landfill space, has spurred businesses to seek opportunities in waste collection, treatment and recycling. Technologies designed to reduce waste or develop recyclable materials are also investment options. The European Union Landfill Directive has been brought in to require that all waste is treated before being sent to landfill by October 2007. Further, 50% of compostable waste, that produces methane as it decomposes, must be diverted from landfill by 2009.
Existing markets in recycled materials demonstrate that waste is valuable. The US recycles about 65% of its steel. More steel is recycled than aluminium, paper, glass and plastic combined. Brazil recycled 95% of its aluminium can production in 2004, a volume of 121 thousand tonnes, which saved enough energy to power a Brazilian city with a population of over one million. Globally, waste accounts for 3% of greenhouse gases and over half of these are from landfill sites.
But more markets can be created. For example, if all the plastic bottles currently landfilled in the UK were sold they could generate over £27 million in revenue. To stimulate an increase in recycling the UK Government has provided £420 million in public sector funding for 2003-06. By raising the landfill tax the Government is providing further policy support for recycling.
Opportunities within the waste market are mostly driven by new legislation. Increasingly strict environmental standards encourage the diversion of waste from landfill. Alternative forms of waste disposal, such as recycling and incinerators, are the way forward. There are several European Directives relevant to waste management which if enforced effectively will generate a value for waste. Indeed, the UK Government's statutory target to increase local authorities' recycling to 25%, has led to the doubling of UK domestic recycling rates in 4 years to 23% in 2004/05. However every household could recycle up to 60% of its waste.
This increase in recycling, regulation and pressure on landfill space, has spurred businesses to seek opportunities in waste collection, treatment and recycling Technologies designed to reduce waste or develop recyclable materials are also investment options.
- UK households discard almost 30 million tonnes of waste each year.
- Over half the household waste in England consists of garden waste, waste paper and board, and kitchen waste.
Focus on health fuels demand for organics and health foods Growing public concerns over health, nutrition and food safety have resulted in significant opportunities for producers and retailers of organic and health food products. In the UK, sales of organic food increased from around £100 million in 1993/94 to over £1 billion in 2003/04.
Strong growth is forecast in both the UK and US markets over the next 5-10 years - 11% per year up to 2007 in the former and 9% to 16% up to 2010 in the latter. The "functional food" market is also a growth story Here companies produce foods or dietary components that utilise, for example, plant and vegetable extracts identified for their health-giving properties Ageing populations create opportunities The global population is ageing. According to the UN, there will be 1.2 billion people aged 60 and over by 2025. In the UK more than a third of the population will be over 55 by 2025. As this trend develops, the private sector is well placed to meet the growing demand for healthcare products and services, as well as products that allow us to live longer and more healthily. Companies are meeting these demands. Around 20% of the food we buy off supermarket shelves goes straight to the bin. This means that every household throws away £424 of wasted food each year.