Green investing
February 2008
It took 150 years for the world’s population to double from 1
billion to 2 billion in the middle of the last century. It took
only 50 years for the population to triple to the 6 billion it is
today and the United Nations predicts the population of earth will
be 9 billion by 2050. Basic economic theory demonstrates a direct
link between population growth and gross domestic product (GDP)
growth. Between 2000 and 2030 global GDP is expected to double from
US$31.5 trillion to US$70 trillion. To support this increase in
economic activity, the International Energy Agency predicts a
worldwide increase of over 50% in primary energy demands by 2030.
However, in the fast developing regions of the world, such as South
East Asia, energy demand is expected to increase by well over
100%.
How will all this additional energy be sourced
and generated - especially against the backdrop of ‘peak oil’? This
concept was introduced by a former Shell Oil geologist named M.
King Hubbert who used statistical analysis to project the moment in
time when oil production from a well, region or indeed the world
would reach its peak year, when maximum production is attained. In
1956 he predicted ‘peak oil’ for the US would be 1970 and this has
subsequently proved to be correct. Debate surrounding the
date of global ‘peak oil’ is ongoing; however, the consensus
suggests the date will be some time between now and
2020.
The search to find alternative sources of
energy is underway. The surge in energy demand caused by global
economic development is a key driver; however, it is not the sole
driver. Other factors have been catalysts for this search too and
these include:
- Energy security – political conflict between
oil supplying and consuming nations has raised the spectre of
energy security. The need to secure energy supplies is essential
for any country to help secure long term economic prosperity.
- Climate change – the debate surrounding the
detrimental impact mankind is having on the environment by
releasing carbon from the earth’s crust into the atmosphere appears
to have ended. The Intergovernmental Panel on Climate Change has
stated with a 90% probability that humans are causing climate
change.
- Legislation – in recent years there has been
a marked transformation in social and political attitudes towards
the need to source alternative and cleaner sources of energy. The
Kyoto Protocol has triggered a wave of legislative demands issued
by signatory nation governments to their domestic corporate
sectors. Moreover, the US Energy Bill, signed by President Bush in
December 2007, is a clear indication from the world’s largest
polluter of its commitment to cut emissions and look increasingly
towards alternative sources of energy to power its economy.
The search is not, therefore, simply for
alternative energy - but for clean alternative energy. Substantial
research and development, and infrastructure capital expenditure is
being committed globally to the sector, which in turn also enjoys
governmental and related agency subsidies. The current sources of
clean energy are solar, fuel cells, wind, wave, hydro, geothermal
and bio – based. The estimated revenues in alternative energy are
around US$65bn per annum and are currently growing at 20%-30% a
year. This growth rate looks potentially very attractive to
investors, especially from a sector that is still in its relative
infancy.
It is very easy to get carried away with the
prospects of capturing substantial returns and it is important to
be aware of the risks. Within the sector, there are only 42
companies globally with a market capitalisation in excess of
US$500m – the investment universe is limited. The potential market
size is not clearly defined nor is the true commerciality of some
of the technologies in the clean energy space. This environment
tends to result in share price volatility as momentum trends
outweigh fundamentals. A significant threat to the clean
energy industry is the traditional energy sector, as participants
will not want to lose market share. Additionally, the clean energy
industries face a wide variety of political pressures particularly
from the oil exporting nations.
Notwithstanding these factors, gaining
exposure to the clean energy sector has become a theme we have
introduced into some of our discretionary managed portfolios during
2007. For those clients willing to accept the volatility and able
to commit monies for the medium to long term, the bank believes
investment returns will be attractive over time. To manage the
risks involved, the bank gains access to the sector via collective
investment vehicles which offer diversification across the key
industries, and whose managers have a demonstrable skills set in
selecting market leading companies in the sector.
Source: Morgan Stanley Research. Clean Energy Sustainable
Opportunities (16 Oct 2007)