12th November 2010
Commenting in Holden & Partners 2010 Guide to Climate Change and Ethical Investing, leading fund manager Tim Dieppe, director of Sustainable & Responsible Investment (SRI) at Henderson Global Investors, is clear about the potential growth of this efficiency theme going forwards.
Dieppe says the practising of efficiency has been "underrated and unrecognised" in the past by society.
This is changing fast, however, not least because of the growing pressure worldwide both on resources ranging minerals, agricultural land and water as well as the need to combat global warming through greater energy efficiency and development of cleaner energy.
But improving efficiency also saves money, and so provides not only an important environmental benefit but also a strong financial incentive. Dieppe cites a recent study by McKinsey to illustrate the point.
The study, available here in full, estimates that energy efficiency projects in the US, only recently overtaken by China as the world's biggest consumer of energy, as reported by Bloomberg, could lead to a reduction in energy consumption by as much as 23% by 2020.
That is pretty substantial but even more impressively, McKinsey reckons the $520 million cost of the projects could be recouped in as little as seven years via savings and efficiencies.
"It all amounts to an estimated potential market of $50 billion per annum, providing companies who can offer efficiency solutions with significant market opportunity," says Dieppe.
SRI fund managers are constantly on the lookout for companies that have innovative efficiency solutions to offer.
One such company is New York-listed Ameresco, which boasts a 10% share of the current $6 billion efficiency market, and is focused on developing energy efficiency solutions, including at the level of heating and air conditioning systems, for businesses and government organisations.
The efficiency theme, however, is broad-based and encompasses companies that may not be directly connected to the energy and resources industries.
An example of this type of company is NetApp, a Nasdaq-listed vendor of innovative data storage and management solutions. The company claims its solutions cut in half the physical storage requirements versus conventional offerings, with accompanying sizeable energy and cost savings.
Elsewhere, there is Philips Electronics, the Dutch consumer electronics giant, which earlier this year announced that its low-power LED-systems now account for more 10% of their annual lightning sales.
"This level of take-up for more efficient lightning is much higher than expected and highlights how clear efficiency benefits, with associated costs continually coming down, are a clear win-win for both businesses and consumers," says Dieppe.
Around the developed world energy infrastructure in many countries is badly in need of upgrading to more efficient standards, potentially offering ethical investors another rich seam to mine over the coming years.
Dieppe cites estimates that the US, for instance, has underinvested in its electricity infrastructure to the tune of $2 billion per annum for more than 30 years. That suggests infrastructure spending of $60 billion will be needed to prevent an aged infrastructure causing more and more problems going forwards.
Dieppe expects companies like New York-listed Quanta Services, a leading provider of repair and maintenance services for electricity transmission and distribution networks, to "benefit greatly from what will soon become unavoidable spending from the US government – although the US is not alone in this respect".
For Dieppe, the conclusions to be drawn from the current positioning of efficiency, in the broadest sense, and the very bright outlook for the area clear: "Efficiency as an investment theme is of natural interest to SRI investors on sustainability and responsibility grounds, but it is most importantly an area rich in innovation and investment potential to all investors.
"Companies that can present businesses and consumers with a clear financial benefit from their products, sometimes with no capital outlay, are companies that all fund managers should be investing in."
As for the Holden & Partners Guide to Climate Change and Ethical Investment, Dieppe highly commends it, saying it is one of the more substantial guides to the various ethical investment products, covering as it does all 120 ethical and environmental funds available to UK private investors.
In its guide, Holden, an independent financial adviser, has examined the top ten holdings of each of these funds and they are all shown in the report.
"Looking at the top ten holdings of a fund does give you a good idea of how the fund is managed and what kind of stocks the fund manager likes. You can also get an idea of the level of risk the fund manager runs by seeing how concentrated the weights in the top ten stocks are," he says.