Green machine

Prior to the collapse of Lehman Brothers, climate change was very much the topic du jour, receiving attention from policy makers, the public, politicians, celebrities and scientists alike. Today, as the financial crisis dominate the headlines, Timothy Geithner has replaced Al Gore as the man of the moment, and CDO rather than CO2 is the word on everyone's lips. Deal activity has dropped across the board, and as expected, the lack of available debt affects capital intensive industries. Despite the dramatic headlines, cleantech investors remain confident. "All sectors are effected by the downturn, including cleantech. But relative to many other sectors cleantech and, especially energy-related cleantech sectors, will be less affected," says Anders Frisk, founding partner and investment director of Sustainable Technologies Partners, a Swedish private equity growth fund.

A welcome state intervention

One of the reasons for the continued attractiveness of the sector is the government support that "green" projects enjoy. The state offers huge incentives to invest in cleantech, both in terms of regulatory changes which create new markets for products and services, and also in terms of economic bonuses. "Government incentives provide a momentum for the industry," states Kimmo Viertola, director of direct investments at Finnish Industry Investment, the government-backed investment company.

Increasingly a consensus has emerged, in reports and recommendations from governments and statements from pressure groups and intergovernmental bodies, that the solution to the environmental problem is political, and government must lead the way. "Although it varies from sub-sector to sub-sector and from country to country, most governments support the energy, water and waste sectors, either through direct economic incentives or by outlawing historic practices," says Nigel Taunt, director of the venture capital arm of Impax Asset Management.

Government incentives are, in turn, driven by unprecedented popular support for increased state intervention in these areas. "Green taxes and regulation are considered a vote winner," Taunt states. For the investors, however, the focus remains maximising returns. "Some will try to brand us ethical investors. However, we chose these markets based on the long-term sustainability and growth characteristics of the industry, which we believed would generate the best returns," points out Taunt, adding: "The fact that people feel good about it as well is a bonus." Frisk concurs: "Do-good investments must also be good for your wallet. Otherwise they will be no-good investments!"

Regulatory risks

In a report last year, KPMG found that regulatory risk related to climate change was the risk most often cited in companies' annual reports and sustainability reports. Similarly, a report commissioned by the Norwegian trade magazine and management think-tank Mandag Morgen and the Norwegian Ministry of the Environment, surveying the climate strategies of over 500 Norwegian companies, found that political risk is an important concern. Furthermore, the study's results showed that government regulation, rather than financial profitability, would be a stronger incentive to produce and execute a climate strategy for the firm.

Recent years have seen the emergence of several dedicated cleantech funds, such as the Swedish Sustainable Technology Fund, yet, as Frisk points out, the majority of cleantech funds are captive, such as Volvo Technology Transfer. For these firms, strategic concerns are often more important than the financial ones. However, the cost-saving benefits of environmental technology are bringing financial concerns to the top of the agenda, particularly in the B2B segment which is more driven by budgetary factors. As Ulrich Grabenwarter of the European Investment Fund remarks: "Especially in the current climate, the need for financial survival trumps ecological survival." He continues: "At the core of attractive sub-sectors within cleantech is new technology that reduces operational costs for enterprises, such as energy efficiency projects." He particularly highlights recycling and waste avoidance and re-usage as attractive opportunities.

Where there's muck there's brass

Of the few buyouts that have been completed in the Nordic region in the past few months, one is Swedish buyout house Priveq Investment's acquisition of waste disposal equipment supplier San Sac. Impax Asset Management has also invested in this field. The investor holds a 16.7% stake in waste management company The New Earth Solutions and clean recycling business Sterecycle. These new waste treatment technologies represent attractive investment opportunities, but as Taunt points out: "high plant construction costs are acting as a brake on development. Those with access to capital will prosper."

Viertola of Finnish Industry Investment adds more sub-sector to the list, predicting related sectors such as cleantech services will prosper: "Cleantech services includes planning, monitoring and reporting services which are often buried as smaller divisions in larger organisations. I think we will see more companies specialising in this field. Particularly, the timing for these companies is good, as they are less capital-intensive and the barriers to entry are lower." Taunt concurs, and observes that more investors are looking towards this end of the market.

A defining moment

Consistent numbers on cleantech investments are hard to find, as definitions of the sector vary. "Today many fund managers add cleantech to previous investment strategies simply for marketing purposes, as it is perceived as a 'hot' target," Grabenwarter explains, admitting that defining the term and the sector is difficult. "Cleantech is a broad category. The industry is not yet sufficiently sophisticated to define the term properly."

Others ask if we really need a rigorous definition of cleantech. As Frisk says: "At Sustainable Technology Partners we are solely focused on cleantech, and we know what we are looking for. So do our co-investors." Although some dedicated funds do not see the need for a strict definition, it could potentially raise questions of accountability. The financial turmoil has brought increased scrutiny to all areas of business and there is no reason why this shouldn't apply to the cleantech sector as well. "Awareness among funds-of-funds about what it means to invest in cleantech will increase over the years. This in turn will lead to increased requirements for accountability." Grabenwarter predicts, continuing: "As the industry matures, I expect we will see increased accountability, where fund managers will also be expected to report on their non-financial returns."

The green rescue

There is every reason to believe that the industry will continue to develop and mature. One politician even predicted that cleantech will be the vehicle that drives us out of the recession. The Swedish Minister for Enterprise and Energy, Maud Olofsson, said in a statement in March this year: "This is the time for us to invest in sustainable energy and smart technical solutions that make it possible to meet increased demand from a position of strength when the economy picks up." Despite the downturn, green investment has remained on the agenda. One of Finnish Industry Investment's portfolio companies recently closed a EUR100m financing round, so there is still a functioning market with opportunities for the best ideas. There is no lack of ambition: "We hope to repeat the pattern of the telecommunications sector, where Finland was at the forefront as a place to ramp up businesses," Viertola says. Nigel Taunt concludes: "A colleague of mine described cleantech as the mega trend of this century - I think he might be right."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Nordics
• Cleantech