Cleantech: Investing in the future

Cleantech: it’s one of those words that once you see it for the first time, it seems to turn up in every newspaper. Although a reasonably common term in US venture capital circles for several years, ‘cleantech’ has until recently been relatively unheard of in Australia.

But what exactly is ‘cleantech’ and why does the definition seem to change depending on where you look?

An example of the guiding principles behind cleantech is provided by the US firm Clean Edge:

A diverse range of products, services and processes that harness renewable materials and energy sources, dramatically reduce the use of natural resources and cut or eliminate emissions and wastes.

Broadly, the term seems to encompass companies that have both environmental and economic benefits.
Cleantech however tends to be a more amorphous industry group than, say, environmental services, and a less rigid investment asset class than, say, financial services.

Sectors that appear to fit into the definition of cleantech without dispute include:

• Renewable energy – wind, solar thermal and photovoltaics, wave, tidal, hydro, geothermal, biomass and biogas;
• Water technologies that increase efficiency;
• Energy efficiency, green buildings and biomaterials;
• Waste management and recycling;
• Energy storage and fuel cell technologies;
• Low emission vehicle technologies; and
• Environmental Services

Other sectors are controversial with some including them within cleantech by reason of their environmental benefits whilst others reject them because of insufficient positive environmental benefits or too many perceived negative impacts. Examples include:

• Biofuels are seen by some as the saviour to high oil prices and energy security issues but by others as the cause of rising food prices, food riots and increasing monoculture.
• Carbon Trading is clearly driving much of the investment behaviour in cleantech, but it is questionable whether the act of trading has any direct environmental benefits.
• ‘Clean’ fossil fuels, including natural gas, coal seam methane, underground coal gasification, gas to liquids, carbon capture and storage and clean coal technologies, have reduced emissions profiles but, as fossil fuels are, at best, only transition resources.
• Nuclear power, along with its associated uranium production and treatment, clearly has a lower emissions profile than the fossil fuel equivalent but deep concerns remain over the environmental and social impacts of uranium transport, usage and waste storage.
• Agri-Businesses are often included in many measures of environmental performance due to their clear interaction with the environment, even though this interaction is not always a positive one for the environment and the communities involved.

It is clear that decisions on what is included as being part of cleantech depends on the viewpoint and vested interest held. Lobby groups, investment fund managers and participating companies all have desired outcomes that help shape their arguments on the definition.

Despite this, cleantech is not is just another term for Socially Responsible Investments (SRI) or Environmental, Social and Governance (ESG) performance. Cleantech is a term which embraces organisations whose essence, whose raison d’être, is to provide environmental benefits. SRI and ESG look at incremental improvements in company performance and can be seen as ‘operational hygiene’ measures that find the best in class. Cleantech is about doing ‘more good’ rather than ‘less bad’.

Regardless of the definition and of any environmental benefits that may ensue, the question remains as to whether the sector is one that should be of interest to investors.

Some commentators have dismissed the cleantech phenomenon as being a mere ‘green bubble’, similar to the IT bubble or the current leveraged debt bubble that is currently exploding. However the drivers behind cleantech’s growth are significantly different. Firstly, there are many real assets being constructed to provide core services such as power, water, waste and recycling. Secondly, the demand for these core services is growing due to population growth and increasing wealth. Thirdly, as the world continues to use and deplete its natural resources there is increasing pressure on communities to act sustainably. Finally there is the recognition of climate change and consequent regulatory regimes. This is a separate driver from those above and, whilst it will result in additional growth in some cleantech sub-sectors, it does not underpin the cleantech sector as a whole. As a result, the growth of cleantech as a whole appears to be unstoppable.

The question then is which technologies and which stocks are likely to outperform the cleantech sector benchmarks. Many cleantech companies are early stage and therefore have high levels of risk. Some of these risky companies have the potential to be world leaders and this may be of interest for the speculative investor. Some of the sub-sectors, however, such as water and waste, are more mature and have companies with steady and growing revenues which will be of interest to conservative investors.

Despite the lack of clarity on the definition of cleantech, it therefore seems to offer a range of investment options with the common thread that the investee companies are all working towards environmentally positive outcomes. Given the strength of the drivers behind the cleantech sector, it is an opportunity to invest in the future.

This article was originally published in the ASX monthly newsletter.