Going Green – the investment opportunities

Theme of the month: Finding the new industries that will profit from the drive to a better environment.

Widespread awakening to the relevant global issues has now shifted the argument from whether the planet is undergoing detrimental environmental change to which direct measures need to be taken to address the problem. Doing nothing is no longer a viable option.
Geopolitically, the most stubborn longstanding opponent of developing a coordinated worldwide solution was the United States, but now even the Government there has finally conceded that action is necessary. Meanwhile, countries such as China acknowledge they have a problem which needs to be tackled, particularly relating to clean water provision, since the apparent extinction this year of one of their Olympics 2008 mascots, the Yangtze Freshwater Dolphin.
The sheer size, global scope and accelerating pace of the already identified changes will create a slew of major new industries over the next decade or two. Significant financial opportunities will arise from the new companies that emerge to develop profitable innovative solutions to the challenges ahead and therefore in due course become worldwide household names.For the first time in history such emerging green companies and sectors will have a widespread global impetus behind them given that climate change is now placed firmly at the centre of political and business agendas alike, with developments such as the Stern Review and commercial carbon cap and trading obligations. The resultant financial resources made available to these firms, whether through investment, subsidy or regulatory obligation-led demand creation, allied to the size of the problems should underwrite a long phase of worldwide structural growth.
Previously, emergent technologically based industries, such as semiconductors or biotechnology, were historically far more geographically constrained in their applications and were purely commercially led whilst having a variety of embedded competing sectors to overcome before they matured into well-established, large industries.
The same cannot be said for the new emerging green sectors – here the massive upswell in awareness of and determination to counteract climate change shows no signs of abating and is actually increasing all the time.
Meanwhile, stricter rules and regulations are coming into force concerning the environment, carbon emissions and recycling, which creates new business opportunities and product marketplaces.
Such companies could be located anywhere in the world, given the global nature of the problems, but all will have the majority of their business operations focused on improving the environment, thereby making a difference to the planet without necessarily being beholden to socially responsible investment (SRI) principles.
Furthermore, diversification in traditional global portfolios can be achieved by investing in these identified green sectors, as many of them benefit positively from factors that tend to negatively impact most other global industries. For example, a substantial rise in oil prices will help spur on alternative energy providers but undermine traditional industries like steel and autos that are heavy fossil fuel users.
However, what all these sectors have in common is that they are entering a structural expansion phase that will see them eventually become established global industries. They include the following 12 to 15 sectors: new materials, products and processes – fuel cells – recycling and materials recovery – waste management, decontamination, purification – power management storage and distribution – industrial gases – biomass, wave, wind and solar energy provision – materials and component suppliers – emission credit creation and trading. Similarly, within each and every one of these emerging sectors, there are multiple sub-sectors orsolutions to the same problem, so a broad selection of the relevant companies’ shares should be held within a portfolio.
At the same time, as only some of the key players are quoted companies many are either private or a small subsidiary or operating division of a much larger listed company; for example, Johnson Matthey is a critical component supplier to the entire global fuel cell industry.
As a result these industries and their constituent companies will differ in their stages of maturity, which adds another layer of diversification. Some are directly comparable to the semi-conductor and PC industries in the 1970s and 1980s respectively, when they were initially small but then rapidly expanded over the next 20 years to become pervasive. Others are far more established and merely finding other uses for their existing products. Reflecting this, the relevant sectors would vary by the applicable investment time horizon which would normally be the inverse of the maturity of the underlying industry i.e. newer, smaller sectors would have the longer time horizon.
This means their constituent firms could differ widely in their market capitalisation and size, so investors could benefit not only from the huge growth potential of small start-up firms but also the established profitability of medium and larger enterprises already operating profitably.
Chris Taylor is fund manager of the Neptune Green Planet Fund at Neptune Investment Management.