Green technology, like sustainable investing, traditionally attracted scepticism: their emphasis on improving the world, the thinking went, must dilute their focus on the bottom line and make them inherently less likely to be profitable than other forms of business.
That is no longer the case. With climate change a reality (whatever some politicians might tell you) and the planet’s population rapidly growing, urbanising and ageing, governments are now funding green projects and providing incentives for them.
Customers and other stakeholders are also increasingly demanding ethical behaviour from companies, and capital is flowing in the green sector’s direction. Since 2000 the benchmark MSCI KLD 400 Social Index has offered returns at least comparable to the S&P 500.
“For a lot of cyclical industries, demand across the cycle can be difficult to predict,” Carl Berrisford, Head of Sustainable Investing, APAC, UBS CIO Wealth Management. “Here we know that over the next 20 years the demand is going to be there. It’s the reason why it gives attractive returns. People are comfortable with the long-term growth potential of this market.”
Returns on green tech sectors
According to Berrisford, the green tech sectors with the best returns are:
Waste management and recycling at about 9 to 10 percent
Energy efficiency at about 7 to 8 percent
Clean air and carbon reduction at about 5 to 6 percent
Water at about 5 percent
Renewable energy, for example, accounted for 55.3% of all new power generation worldwide in 2016 – mainly because it’s no longer necessarily a pricey option.
“Historically renewable energy has been much less efficient than fossil fuels, but in countries that are exposed to a lot of sun it can now provide the same efficiency,” says Mario Knoepfel, Head of Sustainable and Impact Investing, APAC, Investment Platform and Services, UBS Wealth Management.
“That’s a big change from 10 years ago, and it means there’s less need for subsidies.”
The relative maturity of the industry means a full range of investment options is available, including stocks, bonds and direct investment.
“Depending on the motivation of the individual, there are a huge range of options, from liquid to very illiquid,” says Knoepfel. “On the liquid side, there are a huge number of companies listed on stock markets and bonds devoted to green technology, so you can easily build a portfolio. But there are also long-term investments, such as private equity. If a client is happy to invest for longer, due to the illiquidity it can provide premium returns.”
Green tech in China
Green bonds have exploded in recent years, largely thanks to China, which is responsible for about US$220 million of the US$700 billion global market, from a base of zero in 2014, as a new five-year plan has kicked in.
“China is the biggest investor generally in green technology,” says Berrisford. “In China specifically, there’s enormous sensitivity to this and complete comprehension of it across all age groups. Elsewhere, it’s more the millennial generation who are interested.”
“When it comes to impact investing, we see a lot of interest, especially in Asia, from the second- and third-generation owners of companies,” adds Knoepfel. “They’ve often studied abroad, have a totally different mindset, and want investments aligned with their personal values.”
Text by: Richard Lord