Reaching the next level

Environmental investing is no longer the preserve of the ethically-minded few. Investors, from private individuals up to large institutions, have woken up to the spectacular growth on offer and are flooding into the sector.

The investment universe has also expanded beyond the realms of the small technology start-up, as large companies recognise the opportunities in this rapidly developing market.

There is growing awareness of the accelerating problems of climate change, the depletion of natural resources, water shortages and growing mountains of waste. Governments have responded with reams of legislation, leading to a fertile breeding ground for forward-thinking companies to develop products and services to address these pressing issues. Those stepping up to the plate are not just small businesses with unproven technologies, but established companies such as General Electric – making green investment a viable alternative even for the risk-averse.

Ten years ago there were just a handful of fund managers dedicated to investing in environmental companies and we struggled through hard times when returns were volatile and investors were not convinced by the business prospects.

Then the fuel cell sector enjoyed its time in the sun. Exuberant investors pushed valuations sky-high on hope rather than substantiated business plans. A poster child for the sector was Ballard Power, whose shares surged to almost $130 in 2000 but crashed back down to below $10 as reality kicked in. The continuing fallout from the dotcom bust made investors understandably wary of any stock that relied on new technology.

Happily the landscape has changed considerably since then and investment opportunities have proliferated. Five years ago, we identified about 200 'pure play' companies dedicated to implementing business plans based solely on environmental products and services. That has since grown to about 500 companies, and their total market capitalisation has increased from £50bn to £250bn, so we now have a very sizeable pond in which to fish.

This has in part been stimulated by the regulatory climate, which is increasingly favourable to environmental stocks. Germany is a shining example of a country that has built markets with effective legislation. It has a system of feed in tariffs, which place a legal obligation on utilities to purchase electricity from renewable energy producers.

The tariff rate is guaranteed, and determined for each technology, to ensure profitable operation of the installation. Because of government support for the scheme since 1990, Germany has become a world leader in renewable energy, generating billions of dollars a year in exports, creating in the region of a quarter of a million jobs, and saving around 100 million tonnes of CO2 annually.