Climate change: mother of invention and investment returns

We need clean tech and lots of it. The cleaning-up of every industry will play a crucial part in our transition to a sustainable economy over the coming decades. Clean tech’s high year-on-year growth will continue over the long-term given the enormity of the environmental challenge we face to maintain the planet as a life-support system. We already use natural and synthetic resources at a rate that would need 1.2 earths to sustain (see fig F in download). At the same time, world population and demand for resources continue to rise, particularly from India and China. The business-as-usual scenario of continued overshooting of the environment’s ability to support us (see the blue line in fig F) is ecologically impossible to maintain. Its consequences would be rapid economic and population decline due to limited water, food and energy resources. This will be familiar to many readers, but its fundamental links to the future of clean tech are often forgotten. It is clear to governments, scientists and Forum for the Future that the solution is a transition to an eco-efficient economy: one that drives sustainable economic development whilst bringing our resource use and waste production down to levels that the earth can cope with. To make this transition, we must use far fewer resources and change the way we work,play, buy, and invest. Technological change will be pivotal.
Change creates opportunity and necessity is the mother of invention. Financing the innovation and expansion of clean technologies presents great opportunities to investors. Forum for the Future is working with its partners to drive this change and make sure it is on the right path. Earlier this year, we published our ‘Clean Capital’ report on financing UK clean tech firms. Figure D (see download) shows the main drivers that this identified for long-term growth. The drivers fall into two categories. Firstly, those related to the need for transition in regulatory pressures and emissions controls. Secondly, those driven by the profit-motive: technological advances and demand growth. Investors should bear both types in mind. The regulatory drivers will strengthen and become more sophisticated but many clean technologies are under-utilised on a pure cost basis. For example, insulation of new building can save €200 for every tonne of CO2 avoided.
What are the prospects of a clean tech bubble? Unlike the dot-com boom and bust it is clear that there are strong, long-lasting and predictable drivers for clean tech. The dot-com bubble was driven by unbridled

optimism in the potential of new and unknown media; speculation beyond sensible limits.
However, the differences between dot-com and clean tech are not all good for the investor. Unlike websites, the development of novel and hi-tech hardware is cash intensive and often reliant on other companies in the innovation and supply chain. This means high chances of unforeseen serious problems that can cause high volatility in the value of clean tech firms. The demand for large amounts of capital and the inherent risk mean that investments often need to be syndicated, potentially diluting gains.
Volatility goes both ways though. For example, Biofuels Corporation lost 97% of its value because the price of its feedstock rose sharply. It was eventually delisted from the London Alternative Investment Market. Conversely, Q Cells earnt Apax Partners, the UK private equity company, a 27-fold return on investment over 22 months. The point is that all high-tech, high-growth companies have the prospect of volatility: there will be short-term singular disasters, overvaluations and speculation but the demand for clean tech will only grow because of the strong drivers behind it.
How large is the demand for clean tech? The scale of growth in clean tech needed to transition to sustainability are huge. Figure W (see download) shows the now famous Princeton Wedges Model for stabilising carbon emissions at 7 gigatons per year until the year 2050-2055, which is half the business-as-usual prediction. Each wedge is an existing clean technologylow-carbon option (most are based on clean technologies) that saves 1 gigaton. This level ofemissions would stabilise the atmosphere’s concentration of green house gases at 550ppm (CO2 equivalent). It is currently at 430ppm. To give an idea of the scale of growth in each of these technology areas that the wedges represent, solar capacity would need to increase by 700 times and an area the size of Portugal covered by wind turbines to complete two wedges. Even at 550ppm, scientists think it likely that temperatures will rise by more than two degrees celsius: the level the European Union believes will lead to dangerous climate change.
The science shows that the demand for low-carbon technologies may well be even greater. What options offer the most emissions reductions to investors? The London Accord is a consortium of investment houses, academics and NGOs researching this question right now. As a sponsor, Forum for the Future is finalising a paper on the possible wider sustainability impacts of the options considered. For instance, some second-generation solar cells use highly toxic materials in their production yet offer clean electricity generation and poverty alleviation to developing countries. Some technologies that currently fall under the clean tech umbrella are cleaner than others. It is likely that the drivers will become more discriminatory and favour the cleanest of the clean techs. The European Parliament is already considering the sustainability implications of different types of biofuels over their life-cycle in the proposed Fuel Quality Directive because it has become clear that some biofuel production methods are more environmentally and socially damaging than others. Investors would be wise to look for the most sustainable technologies, and not just in terms of carbon emissions,
as these will be the more robust over the longer term. The findings of the London Accord released on 19 December will help greatly to gradehelp investors to themore completely understand the sustainability of the technologies assessed.
Our Forum for the Future’s role in the London Accord mirrors our awareness that current interest is dominated by climate change. Sustainability is about taking a holistic approach and there are many other problems that innovative technologies can help solve. In particular, the amounts of waste produced continue to rise, as does our demand for clean water. These demands also present huge market opportunities for the right companies.
The investment market has responded by launching themed funds in these areas.
Companies that can innovate low-carbon and low cost technologies will be the winners of this century. Forum for the Future is working on ways to bring clean tech companies together with their partners to helpstrengthen the routes to market for clean technologies. The role of investment is also hugely important.
There are significant opportunities for short and long term gains. Given the strength and importance of drivers for the sector, the growth of clean technologies has a long way to go.
Will Dawson is a senior sustainability advisor on financial markets at Forum for the Future.
Forum for the Future – the sustainable development charity – works in partnership with over 120 leading organisations in business and the public sector. They see financial markets as a key sector and provide strategic advice to their partners on issues from overall sustainability strategy and sector-specific trends through to new product development, sustainable investment strategies and operations in emerging markets. For more information please see: Forum for the future