The future of green investing

November 2014  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

Global demand for primary energy is set to increase by between 27 and 61 percent over the next 40 years, according to some estimates. With 1.2 billion people worldwide unable to access electricity today, investment of up to $26.7 trillion is needed in infrastructure to close this gap and support the world’s growing global energy needs.

In light of these requirements, renewable energy, and investment in the space, has become a hot topic. Although it has been a nascent industry since the 1980s, green investing has been unable to make major inroads to date, despite the insistence of interested parties. Until very recently the cost implications associated with renewable energy infrastructure projects have proved largely prohibitive. While the average wind farm can cover an area of hundreds of square miles and have several hundred turbines on site, the price per unit can reach upwards of $2m. Accordingly, getting sustainable energy projects off the ground has been an arduous task.

Insolvency

Although there has been investment in green technology and companies in recent years, there have also been a number of high profile failures. From electric car companies in the US to solar panel manufacturers in China, the number of green companies which have filed for bankruptcy protection in the last two years or so has steadily increased. Firms including Solyndra, Fisker Automotive Inc and Evergreen Solar Inc have all entered the sustainable market with great fanfare only to fail shortly thereafter. Equally, the failures of now defunct lithium-ion battery maker A123 Systems, solar-panel maker Konarka, and electric-car-charger company ECOtality have also had a significant effect on confidence in the cleantech sector. The collapse of Fisker was a particularly damaging affair, as the Obama administration lost $139m on a loan it had made to the company.

High profile failures in this space have had a negative effect on the industry. Until recently, attitudes toward green investing were trending down. In 2013, investment declined for the second consecutive year. The biggest drop in investments came from Europe, down 44 percent on 2012, but they were also down globally. Although $214bn invested in renewable energy projects last year, this was a 12 percent decline compared with 2012 and a 23 percent decline on 2011. There have been a number of factors which contributed to the overall decline in green investments in recent years, most notably the European fiscal crisis and policy uncertainty.

The amount of capital invested by VC funds into cleantech companies also fell dramatically in 2013. According to data from Pitchbook, these investments dropped by approximately 62 percent last year. The number of deals closed also fell.

Renaissance

Despite these and other problems, investment in the green sector seems to have turned around in 2014. Built on the foundations of rising investment in sustainable energy, green investing has enjoyed a renaissance in 2014. Global clean energy investment climbed to $63.6bn in the second quarter of the year – a 33 percent increase on the first quarter and a 9 percent year on year increase for the same quarter, according to data from Bloomberg New Energy Finance.

Furthermore, in September Google announced that it was investing $145m in equity funding to SunEdison Inc, a manufacturer and provider of solar energy, for the construction of Regulus, its solar plant in southern California. The company’s investment in SunEdison means that since 2010 Google has invested in 17 renewable energy products. Google’s investments in this space have helped the firm to meet its pledge of helping advance the cause of green energy. Solar energy in particular has been an area of interest for the company recently. In April, it entered an agreement with SunPower Corp to develop a $250m residential solar installation in the US. It has also invested in solar leasing ventures with companies like SolarCity Corp and Clean Power Finance in the past.

Green bonds is another area which has seen significant growth this year. At the time of writing, more than $20bn in green bonds has been issued in 2014, according to the Climate Bond Initiative, an investor-focused non-profit group. Some observers have suggested that the green bond market, which provides capital for clean energy projects with a promised return on investment, will reach $40bn before 2015, a significant jump from the $2bn issued in 2012. Green bonds are becoming increasingly popular, most notably in the US and across Europe. However, in developing markets, where the green-financing gap is currently widest, it could take years for socially responsible markets to mature.

The dramatic decline in the cost of installing renewable energy equipment could play a significant role in the development of green investing in the coming years, particularly in the emerging markets. The fall in costs has served to drive the technology forward and increase the number of deployments seen around the world. Should the price of renewable energy equipment continue to drop going forward, it is likely that we will see increased adoption of cleantech in both developed and emerging markets.

Despite the notable recent failures of sustainable projects, investment in the sector does seem to be growing. What, then, is the future of green investing?

Patience

In many respects, sustainable investing is anathema to conventional investment groups. The timeframes within which companies develop and implement green projects are often prohibitively long for most VCs.

Transformative sustainable energy projects require extended incubation periods and intensive investment of capital. Neither of these is typically conducive with standard private equity and VC investment, which typically prefer high-impact exits across a relatively short timeframe. Many VCs have struggled to exit their cleantech investments in recent years with the kinds of returns they need to cover other loss making projects. A number of VC-backed cleantech startups have been sold privately in recent years, at comparatively low prices. Solar energy firm MiaSolé, for example, was sold to Chinese clean energy firm Hanergy for just $30m in 2012. The sale of the company came after MiaSolé had attracted $550m of funding.

Accordingly, many VC firms are beginning to expand their investment horizons beyond renewable energy projects and are starting to invest in other alternative sustainable projects. Organic products, vegan foods, transportation platforms and ‘clean web’ products are all garnering interest, and are more likely to see the required profitability and exit opportunities.

China goes green

Until recently, environmental, social and governance (ESG) concerns have been primarily the preserve of industrialised western nations. Solar and wind power in particular have been the most popular renewable energy sources in western markets, most notably in the US. From an investment standpoint, the bulk of the activity, historically, has come from the west. Globally, there is roughly $13.6 trillion in professionally managed assets concerned with ESG issues, yet only about 2 percent of that funding comes from investors in emerging markets.

However, attitudes are beginning to shift throughout the emerging markets, and particularly in China. Government subsidies have been offered to encourage Chinese firms to invest more in wind, solar, and hydro technologies. Although China already has the world’s largest installed capacity for wind power, there are plans to double the number of wind turbines installed over the next six years.

Furthermore, in September China’s State Council approved a national plan with specific targets to tackle global warming. Among those plans the Council called for around 15 percent of the country’s energy consumption to come from non-fossil fuels by 2020, up from 9.8 percent at the end of 2013. Although there is clearly lots of work to be done to achieve these aims, China has been making some progress. According to data from the Pew Charitable Trusts, China is currently the world leader in clean energy investment. Chinese investors are becoming particularly active abroad. In recent years the country’s outward foreign direct investments (FDI) have increased enormously. In 2013 alone China invested over $90bn overseas, making the country the third-largest source of outward FDI. Chinese FDI into the US now handily outstrips US companies’ FDI into China.

Green investing domestically is also on the up in China. Increased focus on projects such as smart grids have helped to facilitate new project financing mechanisms throughout the country. As a result of these mechanisms, a new gamut of investors will be in a position to invest both overseas and in Chinese cleantech projects. As clean energy is expected to account for over half of China’s energy consumption by 2050, investors are increasingly keen to enter the Chinese alternative energy market. Investment in the Chinese alternative energy sector topped $6bn in 2013. ‍

Funding will not be sourced exclusively from private investors, however. In September 2014, the Chinese government announced plans for a new $16bn investment designed to help stimulate growth in the country’s electric vehicle (EV) market. Recent estimates suggest that there are currently around 70,000 EVs operating in China. The government hopes to increase this figure to approximately five million, including plug-in hybrid vehicles, by 2020.

Under the auspices of the 12th five-year plan, announced in 2013, China put forward a new sustainable growth drive based on a number of factors, including the government’s aim to tackle the country’s poverty problem, the expansion of Chinese economic development and the air pollution issues plaguing the country’s major cities. The five-year plan called for the mobilisation of significant amounts of capital. In August 2013, the State Council also announced plans to grow a corporate green bonds market in China.

Currently, the demand for green bonds in Asia and other emerging markets remains quite low, although some green bonds have begun to surface in certain parts of Asia and Africa. Through its government scheme, China has been at the vanguard of the Asia green bonds market. The country is currently the leading issuer of climate-themed bonds, with $164bn outstanding. The majority of Chinese issuance to date has come from the China Railway Corp, a state-owned company.

Although green bonds are a relatively new asset class, the majority of which are denominated in dollars and euros, they are rapidly growing. Earlier this year, however, the International Finance Corporation issued the first ever yuan-denominated green bond in London. In late September, a number of pension funds, insurers and asset management firms worth around $2 trillion all committed themselves to investments in climate change solutions. Some of the world’s largest development banks have also pledged their support to green bonds and will help to grow the market in years to come.

Conclusion

Although the green investing sector has faced its challenges, there does at last appear to be a consensus forming behind the importance of sustainability. Companies, investors and governments are awakening to ESG issues, but if the global demand for energy is to be met, it is imperative that capital is committed to the cause from a variety of sources. The private sector in particular will have a pivotal role to play.

© Financier Worldwide

BY

Richard Summerfield