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Clean tech trends to take notice of

18 February 2019

 

 

 

 

 

 

 

 

Clean-energy demand is now rapidly increasing, creating investment opportunities, write Virat Nehru and Nigel Bowen.

Globally, investment in clean-energy technology totalled an impressive $US332 billion in 2018 – a 62 per cent increase from $US205 billion in 2008, recent figures published by Bloomberg reveal.

For Australia, clean-energy investment was at $US9.5 billion last year, up 6 per cent from 2017, Bloomberg reported.

‘Clean tech’ is a general term describing products, processes or services that reduce waste and minimise use of non-renewable resources.

From electric cars to solar power batteries, environmentally sustainable technology solutions are part of a long-term global market trend to create products and services that deliver greater social, economic and investment returns.

These are increasingly demanded by consumers, whose awareness and preferences are changing; and government, which is implementing regulation, forcing companies to reduce their carbon footprints and adopt energy-efficient technology. (Institutional investment research house MSCI reported a huge increase in environment, social and governance regulations in 2018, mostly targeting investors.)

 

Tokyo is the world’s most populous metropolitan area and it will make renewable energy a feature of the Olympic Games when it hosts them in 2020.

Population drives clean-tech demand

The world’s population is forecast to reach 9 billion people by 2045 compared with more than 7.35 billion in 2015, according to the population division of the Department of Economic and Social Affairs of the United Nations Secretariat.

This forecast population explosion is expected to drive consumption of world resources higher and higher. As the population has grown it has also urbanised. Today, 55 per cent of people are living in cities, towns and other urban areas, according to the US-based Population Reference Bureau.

Despite accounting for only a minute fraction of the world’s surface, cities account for 75 per cent of greenhouse-gas emissions, with transport and buildings being among the largest contributors, according to the United Nations Environment Programme.

These trends are driving demand for alternative, clean technology to keep societies running sustainably.

Growth opportunities for investors

Australian Clean Tech managing director John O’Brien says clean-technology incorporates the industries of the future and the sector’s growth should drive increases in employment, investment and trade.

“Clean-tech companies deliver both economic and environmental benefits and their growth will be driven by the fact that they offer more efficient, more profitable and more sustainable ways of doing business,” he says.

There can be impressive opportunities for serious private investors in this area. Successful clean-technology companies are achieving high growth rates with high margins, allowing them to defend and expand their market positions. But, as this is a growth area, it tends to be more sensitive to investor sentiment, rising higher and falling harder than mainstream investments. This is made clear when we track the performance of specific indexes.

Locally, the Australian CleanTech Index – developed by Australian CleanTech – returned 13.9 per cent in the 12 months to the end of June, 2018, compared with the S&P/ASX 200 index gains of 8.3 per cent. (The clean-tech index measures the performance of 96 clean-tech companies, such as Meridian Energy, listed on the Australian Stock Exchange, and worth a combined $42 billion.)

But when we look at calendar year 2018, which featured a market correction in the last quarter, the clean technology index fell 8.7 per cent compared with the ASX 200 down 6.9 per cent.

On an international level, the MSCI Global Environment Index lost 9.3 per cent of its value in 2018, slightly above the MSCI World Index’s negative return of 8.2 per cent over the same period.

But in 2017, the environmental index (based on companies that derive at least 50 per cent of their revenues from environmentally beneficial products and services) recorded 29 per cent growth, compared to the world index of 23 percent.

Clean technology trends

Jaguar is just one of the many carmakers launching into the electric car market, with sales of its compact electric SUV I-Pace making 2018 its best ever overall annual sales result.

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There are four key themes in clean-technology investment which discerning investors should be aware of.

Climate change gets real

In a speech at the 2019 World Economic Forum in Davos, United Nations chief Antonio Guterres identified climate change as “… the most important global systemic threat in relation to the global economy”. And a recent MSCI report outlined that the average world temperature is on track to rise by 1.5 degrees by 2040, “inundating coastlines and intensifying drought, poverty and subsequent migration”.

“We have reviewed all current and under-construction energy infrastructure around the world – such as power plants, refineries, cars and trucks, industrial boilers, and home heaters – and find they will account for some 95% of all emissions permitted under international climate targets in coming decades,” said International Energy Agency executive director Fatih Birol in a statement in November.

“This means that if the world is serious about meeting its climate targets then, as of today, there needs to be a systematic preference for investment in sustainable energy technologies.”

MSCI in its 2019 ESG Trends to Watch report reinforces this, saying technology is essential to limiting emissions and the worst effects of climate change. Climate change is driving investment and innovation in clean-technology and renewable-energy sectors, influencing consumer behaviour.

Electric cars are a clear example of this. From more than 3 million on the road in 2017 the International Energy Agency forecasts there will be a minimum of 125 million by 2030, and much more if public policy is more aggressive in tackling climate change.

Sustainable finance movement

Sustainable finance is investing with environmental, social and governance considerations.

At its broadest this is investment that excludes ‘negative’ assets such as tobacco or gunmakers. At its most pointed this can be investing in projects to return a quantifiable social or environment outcome, such as carbon-emissions reduction.

This broad sustainable focus is being increasingly integrated into business strategies to mitigate various business risks such as climate change.

Governments and regulators are implementing and reviewing policies to encourage sustainable financing and the transition to low-carbon economies. And foreign direct investors, traditionally seen as providing macro-economic benefits that fuel growth and productivity, are investing in and building sustainable businesses, particularly those with strong environmental objectives.

There is an increasing expectation from stakeholders, investors and customers that corporate Australia will integrate sustainability into its business strategy.

 

Tesla says its Hornsdale battery project, operated by Neoen, has generated global interest in the technology.

Renewable energy, storage and smart grid

Wind and solar-power generation is becoming increasingly cost competitive relative to traditional power generation.

“In power markets, renewables have become the technology of choice, making up almost two-thirds of global capacity additions to 2040, thanks to falling costs and supportive government policies. This is transforming the global power mix, with the share of renewables in generation rising to over 40% by 2040, from 25% today, even though coal remains the largest source and gas remains the second-largest,” stated the International Energy Agency in its World Energy Outlook 2018.

Essential to transformation is a modernisation of the electric grid to create ‘smart grids’ that can integrate smaller, decentralised and more efficient sources of renewable energy. Innovation, economies of scale and greater reliability in these technologies is speeding up their adoption, particularly in China, India and the US where pollution from coal-fired power plants is significant.

In Australia, a recent powerful example of this is the world’s biggest lithium-ion battery in the Hornsdale Power Reserve, built by Tesla in the aftermath of South Australia’s statewide power blackout in 2016. It has been outperforming coal and gas generators on key measures, according to a new report by the Australian Energy Market Operator.

Furthermore, the battery has been backed by a smart investment strategy. According to analysis from consulting firm Energy Synapse, the Hornsdale Power Reserve has made an estimated $1.4 million so far by buying power when prices are low and selling when they're high.

The success of Tesla in providing cost-effective and investment-savvy alternative energy solutions in Australia is an indicator that a move away from traditional coal and gas energy is already reaping good dividends.

Solar and wind power

But it isn’t a clear upward path for the whole sector. One of the biggest hits to clean-energy investment in 2018 came from the solar sector, which saw overall investment plummet 24 per cent from the year prior to $130.8 billion.

Part of this was due to the natural cycle of an evolving technology – as capital costs continue to decline sharply more solar rooftop panels can be installed at exceedingly lower prices.

And part of this investment drop came from a shortage of photovoltaic modules on the world market caused by recent policy changes in China, announced in May 2018.

Locally, the investment dip does not reflect a backdown from investment in solar and wind power. At the end of 2018, more than 80 wind and solar farms worth more than $20 billion were in development, which is about double the investment compared to the end of 2017. Two million homes in Australia now have a solar power system.

 

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below

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