In a new firm report, Reynders and Patrick McVeigh, president and chief investment officer, say three climate change-related investment areas stand out: energy efficiency, water management and sustainable agriculture. Within energy efficiency, they see two sectors, smart-grid technology and renewable energy sources, are poised for immediate gains. They point to a recent study by ABI Research that projects cumulative global investment in smart grids to total $45 billion over the next five years.
Reynders likes ABB Group, a Zurich-based global leader in power and automation technology, which can help renewable energy companies get their power to the grid. "It's a backbone play," he says. Other favorites include Vestas, a pure wind play, and Novozymes, a Danish company that controls nearly half the world's industrial enzyme market. It's making second-generation ethanol a reality by using non-edible plant material, he says.
Looking beyond carbon to other climate-change opportunities, Reynders likes Deere & Co. which has a $1 billion subsidiary focused on irrigation. It's also a leader in "precision farming," which uses GPS (the Global Positioning System) and GIS (geographic information system) devices on tractors to help produce better-quality crops using less fertilizer.
Deutsche Asset Management, a mainstream manager that's become a world leader in climate change investing, identified climate change as a mega-trend in 2005 and is holding fast to that conviction. "Delaying climate change legislation may slow down some of the progress; however, it will not stop it as global demand for climate change sectors is increasing rapidly and results in large and robust end markets," its institutional climate change investment division, DB Climate Change Advisors (DBCCA), said in its "Investing in Climate Change 2010" report.
Shifting demographics are driving global consumption and putting constraints on natural resources such as water and agriculture. This, in turn, will continue to drive the need for greater investment, says DBCCA. Global policy momentum and factors such as higher fossil-fuel prices and increasing concerns over energy security and climate change will also continue to boost demand for renewable and low-carbon energy production, it says.
Clean tech will continue to be a good way to mitigate climate risk and portfolio risk, says Bruce M. Kahn, a senior investment analyst for DBCCA and a Ph.D. in environmental science. "We still see the U.S. as a very significant market for climate change, but we could do better if there were better policies in place," says Kahn, who helped develop Smith Barney's environmental investment group when he was a financial advisor there.
DBCCA does think the bipartisan renewable energy bill introduced by Sen. Jeff Bingaman (D-N.M.), this year, formally known as the American Clean Energy Leadership Act (ACELA), could be "the basic building block for a more comprehensive bill that could include add-ons in the form of amendments." Two things it sees in its favor: It lacks the controversy of including a carbon price and it provides flexibility.
Nick Robins and his team at banking and financial services giant HSBC Holdings Plc., says, "We believe that the global transition to low-carbon growth will intensify over the next decade-in spite of regulatory headwinds," in their "Sizing the Economy" report published in September. Robins heads up the Climate Change Centre of Excellence, which HSBC created in 2007 to investigate risks and opportunities of climate change for the financial markets.
Robins' team forecasts the low-carbon energy market-capital investments in low-carbon infrastructure and equipment, plus sales of low carbon "commodities" such as renewable electricity, fuel and heat-to triple to $2.2 trillion by 2020 from $740 million in 2009. This assumes governments won't retreat from existing commitments to low-carbon economic growth or fail to introduce any additional efforts, but also won't widely exceed existing commitments.
Over the next decade, they expect low-carbon vehicles such as plug-in hybrid and full electric vehicles to surpass low-carbon power as the major investment opportunity. They also see China's low-carbon market overtaking the U.S., but not Europe.
James Cameron, vice chairman of London-based environmental investment manager and advisory group Climate Change Capital Ltd. (CCC), is keeping a close eye on Washington. "What happens in the U.S. will have a profound effect on the rest of the world," he says.
Much of the world is trying to analyze what's happening at the city, state and business level in the U.S., says Cameron, chairman of the World Economic Forum's Agenda Council on Climate Change. A coherent U.S. package would provide them with greater comprehension and confidence to move ahead with their own initiatives and investments, he says. "Picture yourself in the shoes of a senior politician in Australia, Canada or Japan, for example. They're all waiting on the U.S.," he says.
Meanwhile, Cameron thinks the U.S. and other countries should study China's large, fast-growing climate change initiatives and, if they can understand the risks, look for investment opportunities there. China is moving toward greater efficiency and GHG reductions in the economic interest of the nation over the longer term, he says. Cameron says he's amazed by the city of Tianjin (pop. 13 million) which in addition to being innovative in key technologies is developing financial instruments to channel climate change initiatives.
CCC likes general infrastructure opportunities with a clean energy orientation that can extend to water and waste. It's also interested in real-asset investments involving renewable energy (Cameron sees much potential in solar technology), smart grid and property. CCC has a U.K. property fund comprised of green and retrofitted buildings. Carbon capture and storage is another big interest.
U.S. policy has put a damper on interest in carbon financing, but there's still significant interest, especially overseas, says Kevin James, a Washington-based director in CCC's Carbon Finance Team. Although "the federal government doesn't seem to be on the fast track to legislate a price on carbon, California's climate program is under attack and the RGGI (Regional Greenhouse Gas Initiative) is trading at its floor ... there are still many technology providers big and small with critical technologies looking to take advantage of the coming low carbon economy," he says. This includes some private algae fuel firms in start-up mode.
Jeremy Grantham, chief investment strategist for mainstream global investment management firm GMO LLC, has said climate change will be the most important investment issue for the foreseeable future, but he didn't respond to our request to discuss what impact U.S. legislation may have and where opportunities may lie. Several other large mainstream managers told us it was a bit too early for them to discuss this topic.