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Comment: Green investing offers defensive play

Created:
28 May 2008
Written by:
Ian Simm

Having enjoyed a few weeks respite in the investment sunshine, investors are again becoming worried about storm clouds on the horizon. But salvation could be found in the the environmental sector where many stocks still have attractive growth prospects, defensive characteristics and reasonable multiples.

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Consumer spending in the UK looks set to decelerate further as the effects of the credit crunch bite more deeply and the price of raw materials continues to rise, leading to inflationary pressures in parts of the economy. Oil topped $130 a barrel last week and food prices are soaring and many companies are unable or unwilling to pass on these rising costs for fear of losing their share of an already weak market.

Against this backdrop, stock valuations in many segments of the market are understandably a cause for concern. Equity markets have rallied in recent months and are now almost back at the levels reached before the January sell-off causing many investment strategists to turn bearish again.

But the environmental offers a haven for investors in these troubled times. The high costs of fossil fuels concerning most companies are welcome to management teams in the energy efficiency and alternative energy sectors. Similarly, businesses focused on recycling are enjoying high margins that reflect the buoyancy of commodity markets.

Environmental legislation in many parts of the world is getting tougher, incentivising or obliging companies and individuals to invest in technology that will reduce pollution and resource consumption. For example, countries such as Germany and Spain have, for many years, offered generous government-backed stable tariffs for renewable energy and fostering the growth of several new, thriving sectors, particularly wind and solar power.

Outside the power sector, investment in infrastructure also makes a compelling investment proposition. Globally, governments are mandating billions to be spent on renewable energy infrastructure. The EU is close to finalising legislation that will require that at least 20 per cent of energy is produced from renewable sources by 2020 and governments are also imposing legally-binding obligations on local authorities and utilities to improve water and waste management.

Capital expenditure programmes in water, transportation and logistics markets typically include significant components of clean, non-polluting technology, which are increasingly cost-competitive. As they exploit these opportunities, companies active in the environmental sector are expected to grow by more than 20 per cent a year, way beyond the predicted growth of the wider mainstream economy. Their earnings, typically linked to industrial capital expenditure and often mandated by regulations, are therefore less exposed to weakness in consumer spending.

In our 14 years of experience in this area, management teams that employ proven technology in markets with robust regulation typically thrive, even in tougher economic times.

Ian Simm is chief executive of Impax Group plc.

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