Responsible Investor

How to invest in clean tech

A guide to selecting investment strategies and fund managers in this nascent asset class.

A variety of funds are now available to long term investors wanting to capitalise on the investment opportunities present in clean energy and technology. In brief, funds tend to be private or public equity, project finance (including infrastructure) or a combination of these. Funds can be sector or theme specific, ranging from broad clean tech funds to narrower alternative energy funds or even narrower ‘niche’ funds such as methane recovery and water funds. Most funds are actively managed; although a number of public equity index funds have recently been introduced as have exchange-traded funds. At Mercer, we have undertaken considerable research into the investment opportunities available in these areas. With many hundreds of funds available to investors we have focussed our initial research efforts on a selection of funds across a number of asset classes, geographic regions, sector focus, size and business structures. Some of the early insights and common investment characteristics we have encountered are:

• Investment horizons tend to be long-term, and investors may wish to take a longer-term view to allow the maturation of markets, investment managers and investment opportunities

• Risk and return profiles are hard to establish given the relative immaturity of these sectors and their associated uncertainties.

Risk and return are driven by the underlying holdings that will tend to have high idiosyncratic risk and characteristics of sector concentration.

“Most funds do not yet have meaningful track records.”

Many fund managers are estimating that their funds will have comparable risk and return profiles as their counterparts in mainstream private or public equity markets, or project finance and infrastructure, although this varies on a fund-by-fund basis. Most funds do not yet have meaningful track records. Where track records exist these may be unhelpful in trying to forecast future risk and return profiles due to the rapidly evolving investment environment in which they are operating. The business environment five years ago in this area is vastly different to the operating environment today.

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