Cashing in on the drive for efficiency

"Tackling climate change has meant picking up hundred dollar bills from the factory floor," said DuPont's CEO Ellen Kullman, referring to her firm's revelation that becoming greener did not entail becoming less profitable. Quite the reverse in fact: the drive for efficiency has the potential to boost profits for firms.

Since the financial crisis and the drive for austerity, European governments have scaled back commitments to subsidise green energy production and other climate change related activities. In the UK, the Department for Energy and Climate Change cut its feed-in tariffs for solar photovoltaic systems above 50 KW in August last year. In January this year, the Spanish government suspended new feed-in tariff applications until 2013, and Switzerland has consistently reduced its feed-in tariff in recent years.

This can create uncertainty for investors and lead to volatility in industries which rely on clean energy generation for their business. James McNaught-Davis, managing partner at WHEB Partners, a resource-efficiency specialist, says supply-demand volatility in the market for renewable-energy equipment has led to tighter margins, giving rise to a knock-on effect in related industries.

"Our infrastructure team invests in energy-generating projects in order to benefit from downward pricing pressure on equipment. Actually providing this equipment is less attractive," he explains. McNaught-Davis believes the reduction in feed-in tariffs will hit industries such as solar cell manufacturers the most.

A lack of consistency is a major problem for the green energy industry, according to David Armfield, partner at cleantech specialists Kinetix Corporate Finance. "When Greg Barker became minister of state for energy and climate change, he said he would deliver transparency, longevity and consistency. However, we've not seen consistency, and just recently his department has published a new consultation on biomass regulations, which again gives us more uncertainty," he explains.

With energy generation subject to the ever changing desires of politicians, investors are unsurprisingly wary of providing long-term capital commitments to the sector. However, some say that other forms of green investment, focusing on increased efficiency drives, are more stable and reliable investment propositions.

McNaught-Davis says that focusing on the efficient use of energy and materials currently offers the most attractive investment opportunities. Waste industries can be attractive in a number of ways. Regulations on firms to encourage them to reduce waste mean many are looking to cut the cost of waste management. "We've invested in a number of firms that are taking waste streams and then turning them into useful products. Companies can now deal with their waste in a cost-efficient manner by offering it to our investees at a low cost or even free, who are then able to turn it into a salable product."

One such example is WHEB portfolio company Resysta, which takes a common waste product, in this case rice husks, and turns it into a durable wood substitute. Such recycling efforts benefit from a desire among companies to reduce waste and are less vulnerable to changing government policies.

Energy efficiency is also providing access to green investments without the drawbacks associated with energy production. These types of businesses may even be benefiting from cost-cutting drives stemming from the recession.

With energy and fuel costs at an all-time high, the imperative to tackle energy waste is more pressing than ever. With the potential for significant savings, coupled with governance concerns over carbon emissions and environmental impact, energy efficiency is doubly appealing.

"Firms with business models focused on a technology that makes economic sense first, and is sustainable second, are a very attractive proposition," says Armfield. "Energy efficiency is an area that industry is very much focused on at the moment as it allows you to save money without relying on subsidies."

One such business is Breathing Buildings, backed by MMC Ventures, which provides ventilation systems that keep buildings cooler in hot weather and warmer during the winter, helping to reduce heating and air conditioning bills while also reducing environmental impact. WHEB recently backed WEMS, which provides a wireless energy management system for commercial premises, enabling them to control energy use while avoiding expensive wire retrofitting costs.

With energy prices set to remain high for the foreseeable future due to reliance on gas, oil and dwindling coal supplies and a lack of viable replacements at present, demand for energy cost savings is likely to remain strong. This is particularly true given the recession, when firms are looking to aggressively cut costs in order to remain profitable.

While governments flip flop over where to focus their green incentives, investors shouldn't be put off green investing. The drive for efficiency is vital to producing healthy businesses and today's economic situation offers a perfect example to do so in a sustainable fashion. As Benjamin Disraeli once said, "There can be economy only where there is efficiency."

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