CleanTech Investing - The Green Gold Rush
According to UNEP, investors poured $2.9 billion into clean technologies in 2006, an 80% increase over 2005. Investments are expected to rise even higher by the end of 2007. Already in the first three quarters of 2007 U.S. companies alone have invested $2.6 billion in clean technology. Most of this funding went toward wind, solar and other low-carbon energy technologies.
Growing public concern over climate change and other emerging environmental and energy-related issues have spurred green investing. And as the number of socially motivated companies rises, so too will the ranks of investors funding them, as many investors believe it is the smaller innovative ideas that will make the greatest difference tomorrow, not the big named technological breakthroughs that may or may not ever come.
According to Vinod Khosla, founder of Sun Microsystems and one of the driving forces behind the once dominant information technology market, the growing climate crisis not only calls for immediate action, but is also starting to generate real financial opportunities. Khosla notes that the risks associated with investment in ‘dirty’ technologies, i.e. petroleum products, are rising and clean technologies may provide a lower risk alternatives.
In a recent interview he posed the question "How do you make a 50 year investment in an asset saying it’s economics, not knowing what the economics are going to be?" He notes that if carbon ends up costing $60 to $80 a ton, and each ton of coal produces three tons of carbon dioxide, coal effectively is costing hundred of dollars a ton. "That’s a big problem. So what do you do as an investor? You decide not to make the investment, because there’s too much risk."
Most investment firms now anticipate legislation will occur in developed countries that will impose binding carbon emission reduction targets for commercial and industrial sectors. While this will support the development of clean technologies through incentives and renewable energy targets, it will also impose higher operating costs for carbon-intensive enterprises.
During the Global Business Day at the recently concluded UN Conference on Climate Change in Bali, business representatives clearly stated that firm, legislated targets were required to encourage sound investments designed to reduce greenhouse gas emissions. Business does not like uncertainty.
"Everyone expects a global slowdown, so there is quite a lot of risk aversion, and there is evidence that money is being taken out of equities into less risky assets," says Ian Simm, chief executive of Impax Group, which operates an environmental fund specializing in alternative energies, water and waste assets. "But we are seeing investors willing to leave their money or increase their exposure to environmental markets."
"These are savvy investors looking for a growth area," Edward Guinness of Guinness Atkinson Alternative Energy Fund, which has achieved an annualized return of 27 per cent since 1998 by investing in wind turbine manufacturers, hydroelectricity and geothermal energy, said. "We also have investors who want to spice up their portfolio and have some assets in a volatile, but high-potential industry."
Bob Welsh, chief executive of VicSuper, one of Australia’s fastest growing superannuation funds, believes that venture capitalists must look beyond just technology ideas and climate change for these clean investments to be truly successful.
Welsh believes that unless the environmental externalities are taken into account from all human activities, the ability to keep generating the same revenue year after year will be undermined.
For example, a VicSuper venture called "Future Farming Landscapes" aims to put a value on eco-system services. Farmers will be rewarded, for instance, for efforts that contribute to preserving wildlife corridors. The $40-million project is aimed at generating economic returns while preserving the environment.
"It’s showing the way where super funds can eventually lead," said Welsh of the program.
Venture Capitalists in Developing Countries
Although the growing investment in clean enterprises is beneficial for the production and rollout of clean technology in developed countries, it falls short of addressing the environmental situation in developing countries.
Developing nations have called on the U.N. and wealthier nations to fund programs for technology transfer; to set up incentives for companies to share their know-how with the developing world; and to set international targets for such transfers.
These demands are being matched by those of private companies seeking greater protection of their intellectual property rights; assurances they will have the opportunity to profit from their investments; and better enforcement of regulations and corporate laws by host nations in the developing world.
"If you want funds, venture capital funds, going to such inventions, the entrepreneurs, the businesses that invest, need to know they’re going to get a return on their investment," U.S. Trade Representative Susan Schwab said in Bali last week.
"What is needed in the short- to medium-term is for developed countries to speed up the process of transferring climate-sound technologies to developing countries," said Maxwell Kofi Jumah, Ghana’s environment minister. "Time is running out and more action is needed."
Finding an acceptable balance for technology transfers that satisfies both the demands of the developing world and clean investors was an important aspect of the Bali conference. In its last days a draft technology transfer arrangement was debated which recognizes the following needs:
- The implementation of technology needs assessment and demonstration activities;
- Joint research and development program and activities in the development of new technologies;
- Enabling environments for the transfer of technology; and
- Licenses to support access to and the transfer of low-carbon technologies and know-how to the developing world.
Currently the Clean Development Mechanism (CDM) is the only UN sanctioned mechanism in place for the transfer of technology to the developing world. It allows developed countries to undertake greenhouse gas emission projects in developing countries to earn credits to offset targets they agreed to under the Kyoto Protocol, But until more appropriate regulation is developed that protects the business interests of companies involved in such projects, there will be little incentive for investors to participate in the CDM.
Wealthy countries, meanwhile, are pushing free-market answers to speed the diffusion of green technologies. The United States and the European Union, for instance, have proposed removing barriers to 43 green goods and services such as wind turbines.
India is demonstrating that with a little help from the developed world, developing nations can provide clean technology investment opportunities for venture capitalists. Thanks in large part to New Ventures India (NVI), created in December 2005 with funding from the United States Agency for International Development (USAID), venture capitalists have begun scouring India for entrepreneurial opportunities that look promising.
New Ventures India specializes in identifying such companies, helping them to develop attractive business models and marketing them to interested venture capitalists. NVI has over 40 venture capitalists in its Clean Investment Network and estimates that 40 per cent of all venture funds will eventually come to India.
‘‘These investments make economic sense. They aim at maximum yield by using the minimum resources, hence minimising waste and increasing profitability-and it is this profitability that will drive this business up,’’ says Suneel Parasnis, country head of New Ventures India.
In India, the ‘clean energy’ market is beginning to grow quickly and will reach $1 billion over the next 15 years. This month at a large Investors Forum organized in Mumbai, 157 companies sent in their business proposals compared to only 50 from the previous year. This progress is seen a promising sign for the developing world, but according to Parasnis ‘‘there have been delays and second thoughts. After all, the VCs are putting large sums of money in a sector that is still seen as nascent."
The Future of CleanTech Investing
"Investing in new technologies can be fraught with pitfalls and is not for the inexperienced or the faint of heart," Said Mark Heesen, President of the National Venture Capital Association. "Prudent, long-term, knowledgeable investment in cutting-edge technologies has been the hallmark of venture capital in the past and should be the mantra in the cleantech space as well. Short-term ’tourists’ should steer clear."
A recent study by New Energy Finance also found that venture capitalists were able to invest only 73 percent of the funds that had been raised and had not been able to spend $2 billion of available money. With so much funding unable to be invested, some industry insiders are wondering if there are enough good investments available to justify the amount of capital being raised and if the green venture capital bubble will burst in the near future. Earlier in 2007 several clean technology venture capital funds closed their doors including Climate Change Capital, a €200-million fund, and Technology Partners, a $300-million fund.
Regardless, the trend toward green investments is strong, and growth in the market may be an indication that the competition for good projects is getting more intense and investment deals are getting bigger. Clean technology investors see the future as opportunity and a little more experience and wisdom will smooth out the bumps.
"We are seeing the quality and quantity of deal flow has increased markedly," said Diana Propper de Callejon co-founder of the venture capital company Expansion Capital Partners. "We’re looking at 50 to 75 new ventures each month and there has been no slowdown."
With much of the venture capital investment in solar, wind and biofuels, market insiders believe there are several untapped investment areas to be discovered.
A report released in January of 2006 by Cleantech Venture Network, LLC, suggests that by 2009, cleantech will grow to 8-10% of all capital investments, up from 5% in 2005. The report also notes that for the cleantech venture community to remain successful in the next decade, above average investment returns must be achieved.
The 2008 U.S. federal election results may provide a challenge to such high investment returns. The United States accounts for over two thirds of venture capitalists investing in clean technology worldwide; however, leading Democratic candidates for the 2008 election have vowed to offer between $10 billion and $50 billion of funding per year towards the development of clean technology.
The addition of such large funds from governments may make high investment returns impossible, and may remove the need for cleantech venture capital investments. Some investors believe the funding process could become too political, with too many strings attached. "Markets support the industry," said Jeff Siegel, a renewable-energy analyst at Green Chip Stocks. "The government putting money in is not going to fix the problem."
Many venture capitalists don’t believe there is a problem to begin with and that a government infusion of funds is not necessary. Venture capitalists feel that there is adequate money being invested in environmental technologies and there is all ready evidence that demand is outpacing supply.
"There’s a lot of private investment capital already focused on investing in tech startups in this arena," said @Ventures principal Matt Horton. "Governmental support may be more useful in creating markets and demands for technology provided by our companies."
Instead of developing clean technology venture capitalists believe government’s role should be creating incentives for clean technology such as reducing subsidies for oil and coal, making alternative fuel tax credits permanent, creating cap-and-trade systems for carbon emissions, and pushing up demand for alternative energy sources that would diversify the electrical grid.
Many investors also feel that governments could also support projects and technologies that are risky or large-scale enough to deter other investors such as tidal energy which has not yet proven that it can become a commercially viable technology.
Concern over statements made by Democratic candidates may be premature. The 2008 U.S. election is still a year away and the Bali Climate Change talks indicated that world leaders are looking to investors and business to play a significant role in mitigating climate change and averting an environmental catastrophe. As the technology becomes more familiar and legislation is developed, particularly in the United States, it is likely that the clean technology market will continue to grow from venture capital investments.
As Mark Heesen, president of the National Venture Capital Association, said in a statement: "There are major opportunities for venture capitalists to totally reshape the energy market throughout the world, as governments, consumers and companies are demanding innovation in this space.