Ways to make light work of energy

Fund Strategy - 28 March 2011 | By Shaun Cumming

Following the natural disaster in Japan and resulting nuclear crisis, renewable energy has received increased attention from investors. But for Jon Forster, a co-manager of the Impax Environmental Markets investment trust, renewable energy, despite this fresh attention, plays only a small role in environmental market investing.

“The wider focus is on energy efficiency,” he says. “For this reason, a technology such as light-emitting diode [LED] lighting has been tipped as one of the most important developments in environmental markets.”

Forster says use of LEDs is widening in domestic and industrial applications, making it an attractive buy for environmental investors looking for long-term growth.

LED-backlit screens are increasingly incorporated into household appliances such as televisions and computer monitors. Not only do they offer enhanced performance, they also reduce power consumption.

It is a common misconception that environmental investing is done solely on the basis of “green”, renewable energy sources. As an illustration of the sector’s diversity, the Impax Environmental Markets fund is only 16% invested in alternative and renew­able energy stocks, while waste, ener­gy efficiency and water make up 82%. (IT continues below)

Although solar panels, wind turbines and wave power feature in most environmental portfolios, Forster says that energy efficiency is a key industry driver.

There is a global energy supply problem, with each country facing its own pressures to tackle inevitable power shortages. Governments are spending money to increase efficiency, which serves several purposes: lowering energy consumption as a whole, lowering cost, and lowering emissions.

Forster says: “Industrial motors are using less power to do the same job nowadays than they used to, and buildings are becoming more energy efficient. One efficiency technology that we are particularly excited about is ground-sourced heat pumps, which extract underground heat and re-circulate it around a building.”

This is the main technology of the fund’s second-biggest holding, Nibe Industrier.

Government regulations can have positive and negative side-effects on environmental technology companies. According to Forster, one of the main reasons a company’s value might plummet would be if a regulation came into effect that rendered its particular technology unnecessary. Meanwhile other companies may make products that can benefit from regulation - for example, where a product might have to be introduced across an entire industry or country, by law, as part of an energy efficiency drive.

With government regulation a key risk that could affect the Impax Environmental fund’s performance, the firm employs a team which monitors changes in regulation around the world.

The fund is diversified by sector to minimise risk, and infrastructure projects are a key part of this. Forster cites the fresh water supply of a city as an example of energy efficiency infrastructure that needs to be updated and improved regularly.

While British equities make up the core of his holdings, Forster says he is upbeat on the Asian and European markets. He expects to trim American holdings, because of high valuations, in favour of alternatives in Asia and Europe - markets which he says offer better long-term gains.

He adds: “China has announced a five-year plan to tackle energy efficiency, which will present attractive investment opportunities. Germany is similarly dedicated to an aggressive energy-saving programme, so we are keen on both of these markets.”

Forster says that renewable energy sources will not supply enough energy to match the nuclear industry. But he adds that efficiency technology and infrastructure projects are the key ­factors that will help tackle environmental problems.

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