Viewpoint: Technology

Global investment in the clean tech or environmental technologies (ET) sector – that is, those technologies that improve operational performance, productivity or resource efficiency while reducing costs, inputs, energy consumption, waste or pollution across the water, waste and energy industries – has been growing steadily for some years, but 2006 was a breakthrough.

At Impax we’ve been tracking the performance of the sector since 1999 through our ET50 index. The index comprises the 50 largest “pure-play” public environmental technology companies, which we define as those with more than 50% of their earnings coming from environmental technology. This deliberately excludes some of the biggest players, such as GE and BP, as ET still comprises only a small fraction of their businesses.

The idea came out of a meeting with a Danish client who told us ET would be the next IT and asked if we could develop a fund for them. The client wanted to be able to compare the performance of the fund against the sector as a whole, so the ET50 was born.

We don’t use the ET50 to guide our investment decisions – it is simply a way to see how the sector is performing, and to identify the market leaders in different areas and the growth of companies from emerging markets. Unlike other indexes such as FTSE4Good or Dow

Jones Sustainability, the ET50 doesn’t measure CSR or social reporting; it just takes a plain, hard look at the technologies and services available and the size of the companies offering them.

As the graph to the right shows, the sector hasn’t always had the easiest time. It is now performing well, however, with solid, proven technologies filling all top 10 places. Four months after we started, fuel cells became caught up in the hype of the high-tech stock bubble, which affected the whole index. Unfortunately, they didn’t live up to expectations, and valuations crashed soon afterward.

Now there are no fuel cell manufacturers in the index. Ironically, they dropped out just as they started to make real strides towards commerciality. Similarly, the buzz surrounding biofuels hasn’t been reflected in their share price, and valuations of biofuels companies have been volatile. Two of the largest biofuels flotations of Q2 2006 – the NYSE-listed companies VeraSun and Aventine – saw their valuations decline by 39% and 44% respectively in Q3 of 2006.

As you may expect, renewable energy companies dominate the top 10 of the ET50, and the rising valuations of renewable energy firms have prompted action from a number of the bigger players.

French energy giant EDF, for example, floated its renewable energy arm EDF Energies Nouvelles for €2.5bn in November 2006, while General Electric has recently completed a deal to take up to a 22% stake in fast-growing French wind farm developer Theolia.

Overall, the Impax ET50’s weighted market value increased from €36.2bn in 2005 to €91.5bn in 2006. This growth is set to continue and, during 2007, we can expect to see more than 25% earnings growth as the norm among ET50 companies.

European companies dominate the index, accounting for 52.5% in 2006 (up from 44.9% in 2005), but Asian companies have made the largest proportional gains. They now account for 14.7% of the index compared to only 3% in 2005. In contrast, US companies have declined, making up 26.8% of the index compared to 40.5% in 2005.

The ET50 returned 35.5% in dollar terms during 2006, compared to 15.7% for its benchmark, the MSCI Small Cap Index.

Bruce Jenkyn-Jones is director of investments – listed equities at Impax Asset Management. He advises European environmental technology funds and oversees the Impax ET50 index