May 10, 2013 5:51 pm

Green goes mainstream in the hunt for yield

Chinese workers check arrays of solar panels on the rooftop of an enterprises building in Changxing county, east Chinas Zhejiang province, 7 February 2012. The United States Commerce Department said Tuesday (Mar. 20) it would impose tariffs on solar panels imported from China after concluding that the Chinese government provided illegal export subsidies to manufacturers there. The tariffs were smaller than some American industry executives had hoped for - 2.9 percent to 4.73 percent - which could blunt their effect on the market. But additional tariffs could be imposed in May, when the Commerce Department is scheduled to decide whether China is dumping solar panels into the United States at prices below their actual cost. A finding of dumping would result in additional tariffs that could be far larger than the anti-subsidy tariffs©Corbis

EU solar companies complain that Chinese rivals would have gone bankrupt without support from Beijing 

It’s not very often you hear the manager of a “green” investing vehicle say that “personally, I am pro-nuclear.” But there again, Stephen Lilley is not your typical dyed-in-the-wool green.

He is a partner at Greencoat Capital, which this year floated the £260m Greencoat UK Wind fund on the London Stock Exchange. The retail component of its initial public offering was well supported by private investors, and Lilley says that high net-worth and private client institutions hold about two-fifths of the company’s shares.

Many were probably not buying it for its green credentials, and the fund certainly does not market itself that way. “This is an infrastructure fund that just happens to be in the renewables space,” says Lilley, who adds that other successful infrastructure investments served as the model for Greencoat’s launch. “We asked ourselves: what’s the right product for investors? We looked at the way things like HICL and John Laing are structured, and that model seemed tried and tested.”

The central attraction of the float wasn’t a promise to save the planet – it was a starting dividend yield of 6 per cent and a commitment to raise that payout alongside the company’s rising – and inflation-linked – revenues. “It’s all about the yield,” admits Lilley.

The Greencoat approach is increasingly commonplace in the green investing space. Many of the mini-bonds launched to raise funds for individual wind turbine projects have also made much of their steady yields, and a guaranteed level of income is also one of the attractions of roof-mounted solar panels.

Greg Davies, head of behavioural and quantitative finance at Barclays Wealth, says the growing emphasis on returns has been partly driven by the financial crisis and the ensuing lower returns on mainstream asset classes. “It used to be that the main reason for investing in green vehicles was to do something to help the planet. Investors were prepared to accept slightly lower returns. But now, the returns have to be there too.”

Charles Middleton, managing director at Triodos Bank UK, says the profile of investors has definitely changed over the years. “When we started in the UK 17 years ago, we only offered a savings account. Our customers then were very deep green; they were much more interested in the social and ethical returns than the financial ones.”

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“As we have developed the range, we’ve tried to create products that are not so reliant on the social and ethical aspects,” he adds. “Our customer demographic has also changed and become younger.”

Does this amount to a sellout, a weakening of core principles in order to boost returns and attract more assets? Absolutely not, say managers. “The core criteria – no animal testing, no nuclear, no alcohol or tobacco – are exactly the same today as they were 25 years ago,” says Charlie Thomas, manager of the £400m Jupiter Ecology fund. But he too accepts that the nature of the business has changed. “It’s no longer about ‘tree hugging’,” he says.

Unlike many other investments in the same space, the Ecology fund is largely about growth, not income. “The emphasis behind the fund is quite clear on solutions,” he adds, particularly in the areas of resource efficiency, infrastructure and demographic change.

That wide-ranging remit, plus the fund’s unconstrained mandate, has resulted in a sometimes surprising collection of holdings. They range from JR East, a Japanese rail company, to UK pork products company Cranswick (a holding since the early 1990s) and building products group SIG, which makes insulation. Many of the UK holdings are mid-caps, which might explain the fund’s recent gains.

‘It sounded like a nice investment’

Anja Weidmann is perhaps typical of the newer type of investor to whom environmental vehicles now appeal. The 33-year-old dermatologist lives in Greater Manchester with her husband and baby daughter Rosie, and invested £1,440 in the Triodos Renewables fund both for herself and her daughter.

“Rosie’s great-grandfather gave her money and we were exploring what to do with it. Savings rates at the time weren’t very good, so we chose the Triodos fund after reading about it in the papers. It sounded like a nice investment for a baby.”

Like many investors, it is only one part of her overall investments. “I have my NHS pension and I also pay into a stakeholder plan, but I don’t have any other shares.” Her daughter also has some gift money in Premium Bonds.

Weidmann does not expect the fund to be a stunning financial performer. “I don’t expect it to be quite as good [as more mainstream investments] but I don’t worry about it – it’s a small pot of money and a long-term commitment, and it does pay dividends too.”

And sticking to the mainstream is no guarantee of great returns, she points out. “My husband bought an equity fund about ten years ago and it’s only just got back to the level it was then!”

The variety of holdings within green funds is a key weakness, according to Jason Hollands of fund broker Bestinvest. “You really need to look under the bonnet. They range from those with a ‘big tent’ approach like Jupiter Ecology through to those with more niche strategies around renewable energy, energy efficiency and waste management like Impax. The risk profiles differ significantly.”

So do the exclusion criteria; Hollands notes that F&C Global Climate Opportunities has a position in Monsanto, the US developer of genetically modified seeds. In many other funds, this stock would be excluded.

Another frequent criticism is that the entire green investment business is based on either state subsidies or sky-high prices for conventional energy. But Thomas thinks that the financial crisis, and the associated pressure on government spending, is changing this.

“The subsidy profile is falling. Alternative energy needs to compete without subsidy, and in Italy, Spain and large parts of the US, it can do so,” he says, citing improving efficiency and sharply lower fabrication costs for solar panels (although some have alleged these are the result of selling below cost) and have resulted in a crippled manufacturing industry). It’s also important to look beyond the UK. “By 2015, China will have 150gW of wind and solar capacity – compared to UK’s total generation capacity [from all sources] of 80gW.”

Hollands points out that even the Ecology fund – the product he recommends to those wishing to invest in environmental funds – has underperformed the MSCI World index by 19 per cent over five years. Many other funds have done considerably worse.

Are green-tinged funds doomed to underperform? Not according to Meir Statman, a professor of finance at Santa Clara University in the US. Statman believes in the “no effect” hypothesis, where the returns on socially responsible funds, which includes environmental funds, are statistically no different from other vehicles over the longer term. “I have found in my studies that the returns of socially responsible investment (SRI) mutual funds were approximately equal to those of conventional funds,” he says.

What really makes the difference is something more controllable: cost. SRI funds with high costs underperform other SRI funds and conventional ones, says Statman. “Socially responsible investors need not sacrifice returns for their values, as long as they invest wisely.”


Climate of change

Environmental funds were first launched in the 1980s – Friends Provident Stewardship and Jupiter Ecology were among the pioneers. They tend to invest in companies that make a positive environmental contribution, such as public transport or recycling, or which are developing technological solutions to environmental problems. A later generation of funds based on specific themes, such as climate change – which Bestinvest’s Jason Hollands labels “particularly faddish” – emerged in the noughties.

Ethical funds, sometimes called socially responsible investment funds, started to appear in the 1990s and “muddied the water somewhat”, according to Barchester Green’s Jonathon Clark. Initially, they screened out companies in certain sectors, such as defence or tobacco, but have since become less prescriptive – prompting many investors to criticise them as marketing gimmicks.


Green investing risk ladder

Highest risk: Carbon credits

Beware of cold callers promoting carbon trading schemes or investment opportunities. They are usually fraudulent. The Emissions Trading System allows industrial groups to trade emissions permits, but it is not suitable for individual investors – and the price of the permits has collapsed in recent years.

High risk: Green shares

Choosing your own shares, rather than buying a fund, allows you to set the rules as to what’s in and what’s out. Large companies involved with things such as public transport and waste management are relatively safe, but picking winners in an area where technology is still developing and where many companies are dependent on grants or subsidies is very tricky, say stockbrokers. UK-traded green “concept stocks” include Trading Emissions (carbon trading), PV Crystalox (solar panel manufacture), Ceres Power (combined heat and power boilers), ITM Power (hydrogen energy) and TEG Group (waste management). Many of them have performed very poorly.

Medium risk: Mini-bonds

Many companies have funded individual renewable energy projects via “mini-bond” issues, where investors lend money to companies for a fixed term at a set rate. Returns are attractive; a Wind Prospect bond issued in 2011 pays 7.5 per cent a year, an Ecotricity issue 6.5 per cent. But there is no secondary market, the prospectus is not subject to regulatory scrutiny, the debt is often unsecured and the bonds are not covered by the Financial Services Compensation Scheme.

Low risk: Funds and VCTs

Environmental funds come in many shapes, sizes and styles. There is so far relatively little in the passive space for UK-based investors, although the introduction of a new FTSE Environmental Technology index might change that. Among the funds commonly recommended by Barchester Green are offerings from boutique managers, such as Cheviot, WHEB and Kames. “Cheviot has international exposure and has money in bonds as well as equities,” notes Jonathon Clark, chairman of Barchester Green. The big player among investment trusts is the £315m Impax Environmental Markets trust, which trades at a 15 per cent discount to net assets. At the riskier end of the spectrum are various venture capital trusts investing in solar and wind projects. These attract generous tax reliefs but have often performed poorly.

Lowest risk: Solar panels

Many companies market roof-mounted photovoltaic panels as a source of guaranteed and rising income. According to the Energy Saving Trust, the cost of installation varies from £4,500 to £9,500.

Energy companies pay the householder up to 15.44p per kWh for the energy generated under the Feed-in Tariffs regime until July, plus a premium for any units exported to the grid. That equates to an annual return of around 5 per cent, depending on the efficiency of the panels and the weather. Tariffs are guaranteed for 20 years and index-linked. Other schemes, such as those promoted by Lightsource, lease land or buildings for industrial-scale solar facilities. But not everyone is convinced that these schemes are good for the environment; campaigner George Monbiot has in the past described domestic solar power as “comically inefficient” and says that poorer consumers end up subsidising middle class homeowners via higher energy bills.

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