Investors should now be examining with their wealth managers what investment opportunities this may create and how they can be implemented. The impact of climate change is set to alter the global economy over the next few years. As a result there is an expectation that low carbon technologies will benefit and grow providing attractive and long term investment opportunities for HNWIs. At present, approximately 8% of the Ð540 billion linked to HNWI assets across Europe accounts for sustainable investments, according to Eurosif, the European industry body for responsible and sustainable investment. With a growing number of HNWIs considering sustainable investment as a core part of their portfolio, this figure is estimated to double to Ð1 trillion by 2012.
A decade ago very few environmental technology investment opportunities were available other than those from a small number of pioneers specialising in this area, such as Impax Asset Management. Today both institutional and retail investors have a wide range of environmental and climate change investment options available to them. This growth comes at a time of change for HNWIs, with new net inflows to sustainable investment coming from existing wealth owners and increasingly from new entrant wealth owners; particularly among the younger generation. In a Eurosif survey, 76% of family offices and HNWIs stated sustainable investment would increase with the generational transfer of family wealth. Essentially the combination of both growing financial products and allocations from this investor category makes for an exciting future for sustainable investment.
Until now, thematic funds exposed to this area have tended to focus on pure play environmental technology companies, which have a majority of their business in one or more environmental technology areas. These have primarily been in the private equity, venture capital or small cap investments. However, there has been little in the way of products and services which enable investors to identify and access the larger listed equities that have a significant clean technology business.
Today, with industry innovation and investor demand, interest in this area is no longer limited to smaller cap pure play environmental technology companies. Investment opportunities are now emerging from larger companies adapting their businesses to include activities in emerging sectors such as energy efficiency, water, infrastructure and pollution and waste control. Not only are these companies looking to address climate change but also the interrelated wider environmental threats facing global society. For example, Siemens now generates about 39% of its revenue through energy efficiency and other environmental technologies.
As more capital and interest develops within this space, a major hurdle has been how to identify or classify the activities of companies active in environmental markets on a global scale. The FTSE Group has developed a taxonomy for these emerging low carbon sectors and services. This can be used by investors to accurately identify analyse and measure the performance of homogenous groups of environmental technology and service businesses. The new Environmental Markets Classification System is used to create the FTSE Environmental Opportunities Index Series, which includes both sector and regional sub-indices. The increased transparency of the performance of these sectors will enhance the ability for investors to implement climate change related investment strategies.
As interest in environmental markets continues to develop, investors including HNWIs will seek transparent but increasingly sophisticated investment approaches. This will challenge the market to develop a range of investment tools to reflect this growth and meet the needs of a variety of investment strategies. At the same time, global investors will have a key role to play in decarbonising economies and rewarding companies that adopt sustainable and responsible business practices.
