Despite concern about the economic impact of dwindling reserves of fossil fuels and the intertwined issue of the cost of controlling or dealing with climate change, experts are convinced that investors can expect buoyant long-term returns from the so-called ‘cleantech’ sector over the coming years and decades.
Another beneficiary could be the Channel Islands, where Ernst & Young is looking to showcase its cleantech work, both as a hub for research and development and as a domicile and service centre for funds channelling capital into the sector.
Clean energy technology has experienced a “seismic shift” in attitudes in recent years, as governments and industry contemplate a future in which carbon-based resources will necessarily play a much smaller role in the global economy, according to Steve Lang, a partner at Ernst & Young and head of its UK and Ireland cleantech practice.
As carbon and energy security become a major issue, a huge amount of private investment is going into technology designed to enhance resource efficiency, he argues.
“From an investment perspective, cleantech is typically quite risky because of the stage of development,” Lang says. “It can involve technology risk, and often lots of planning and construction risk too. But in the long term there’s absolutely no doubt that investments in clean technology are rising at the aggregate level.”
Over the past decade, cleantech stocks have seen a comparatively robust annual growth rate of 10 to 11 per cent, he notes. “The long-term trend is obviously very positive, but it’s something we need to look at in terms of five- or 10-year periods. Its trajectory is enhanced and informed by government policy.”
Chris Matthews, a partner at Ernst & Young Jersey, says the value of the sector is linked to the future price of carbon fuels.
“Future energy prices are clearly only going upward,” he says. “Counterbalancing that with cleantech investment is a very sensible thing for investors to do – and that means more funds will be allocated to this area and more sensible projects will come forward.”
The Copenhagen and Cancun summits have demonstrated the limits to global action, but Lang and Matthews argue that bilateral and unilateral commitments on carbon emissions and clean technology are becoming increasingly common.
It is estimated that USD200bn was invested globally in the sector last year, a fourfold increase from 2004 despite the impact of the economic crisis, and predictions of the figure by 2020 run as high as USD500bn – aided by initiatives such as a green fund and green bank mooted by the UK government.
Says Matthews: “Once people get used to paying a higher price for carbon fuels, some cleantech projects will look much more attractive.
On the supply side, alternative energy sources include biofuels and solar, wind, geothermal, tidal and hydroelectric energy. On the demand side, cleantech is focused on managing and storing energy efficiently to allow predictive rather than reactive power management and improve control of emissions.
“The definition of cleantech is very wide,” Lang says. “You’ve got a whole range of technologies at different stages of maturity, with completely different risk and return profiles. It’s not easy determining which part of that curve you should invest in.”
This presents a challenge to the traditional venture capital approach because a return on cleantech after three to five years is not always possible.
“While there is more and more capital coming from that sector, we need to look at incentivisation,” he adds. “We need patient institutional capital that can commit over a 10- to 20-year period and that can live with volatility because it’s under pressure to achieve a short-term return.”
