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Winds of change

Clean energy funds have had a rough ride in the markets,
but for patient investors looking for bot

Travel to the most easterly point of the English coast and you will find Gulliver, the UK's largest wind turbine, responsible for creating 2.75MW of electricity, enough to supply over 1,500 homes each year. On the other side of the Atlantic, in New York's East River, turbines use the force of the tides to generate energy for businesses across the city. Meanwhile, in Kenya, factories are turning out millions of solar-powered products to meet domestic and industrial power demands. All over the globe, scientists and companies are busy creating new technologies that have the potential capacity to feed the world's insatiable appetite for energy.

As the world's population has grown, so too has its demand for power - at a rate so fast we can barely keep up. Fossil fuels are no longer deemed the sole answer. Difficult and expensive to extract, their impact on the environment and human lives is often disastrous: in the Niger delta alone, five decades of oil spills has had a devastating effect on local habitats, contaminating drinking water and farming land and requiring $1bn to rectify,
according to the UN.

At the same time, scientists are warning that the use of fossil fuels is changing our climate in a way that has huge implications for society. Under intense pressure to curb carbon emissions, governments are refocusing legislation in favour of renewable energy companies, and while in many cases more stringent commitments are still required, fundamental shifts in energy use are taking place. In the UK, for example, although there is still a long way to go to meet the target of 15 per cent of energy from renewable sources, the deployment of clean technologies is growing - in particular offshore wind, which had augmented by 75 per cent on 2009, according to the Department of Energy and Climate Change.

The investment market is adapting accordingly. Whereas one or two decades ago clean energy was a small sector offering few opportunities, today it is a very different story and investors have a number of options available to them, be it funds focused specifically on clean energy or a mix of environmental themes, or direct investment into clean energy infrastructure and assets, such as turbines, smart glass and energy efficient semi-conductors used in high voltage applications and lighting devices such as LEDs.

The geographical scope has grown considerably also. Countries around the world are fighting for pole position in what is a growing and progressively competitive field. Global investment in the G20's clean energy sector reached record levels in 2010 - up by 30 per cent in 2009 to $243bn, according to Who's Winning the Clean Energy Race, a 2011 report from Pew Environment Group. The UK is hoping to boost its standing with the launch of the world's first Green Investment Bank, which the Department for Business Innovation and Skills says will be key in "addressing market failures unlocking significant new private investment into green infrastructure projects."

Opportunities to invest within less developed countries are on the increase too. While in the nineties there was limited scope within emerging markets, today a third of options fall into this category.

Not all plain sailing

Yet despite all the positive noises, clean energy funds have not been immune to the troubles experienced by the rest of the stock market. Up until 2008 they had performed well, but when the stock market went into panic mode after the collapse of the Lehman Brothers and fund managers sold shares in "risky" companies to take more cautious positions, the value of these funds took a dramatic fall. As a result, in many cases clean energy "severely underperformed equity markets and have been extremely difficult to make money in", according to Mark Hoskins, founder of, a website focused on environmental and ethical investment trends.

The recovery has been - indeed still is - long and slow. There are several reasons for this, says Hoskins. In many cases, it has been the result of over-valuation - a "green bubble" in 2007 placing too high an expectation on companies. As climate change policy momentum and economic activity both slowed, this bubble started to deflate.

Then there has been increased competition from China, which has embarked on a massive five-year renewable-energy strategy. The impact of this has been to drive down prices, thus resulting in decreased profits and even bankruptcy for some western companies.

A reduction in the number of feed-in tariffs available has also had an impact. Feed-in tariffs (FiTs), a policy mechanism used by governments around the world to spur take-up of clean energy, have been responsible for 75 per cent of solar deployments and 45 per cent of wind projects globally, according to the Renewable Energy Lab at the US Department of Energy. Valued at $75bn in 2010, they offer valuable subsidies to companies and individuals. However, as the west introduces austerity measures many are coming to an end. In the UK, for example, following concerns that there might not be quite enough money in the budget to cover FiT payments, the government is assessing its policy. Currently, anyone investing in renewable power such as small-scale solar or wind, before April 2012, will be paid for the electricity they generate - a contract that is guaranteed for 25 years and index-linked. Post this date, however, and the government won't be quite so generous - if at all. This means infrastructure projects may struggle to get finance as investments look less attractive.

Finally, the increased interest in natural gas has also hindered the value of clean energy, and is likely to continue to do so as carbon policy tightens and more countries turn to it as a source of energy. In America, for example, the focus on shale gas has driven down its price, and as long as it remains cheap, the profitability of renewables is reduced. In the UK too, as supplies are discovered and gas plants built, it is likely to divert investment away from carbon-free, clean energy sources.

The only way is up?

Despite this negativity, there are glimmers of hope within the clean energy market. With oil and coal resources reputed to be depleting, combined with the increasingly urgent demand for power, the development of new energy sources is a critical priority and could ultimately see the markets picking up.

“Investing now while the expectation for renewables is low may have the potential to generate high returns over the long-term," says Bruce Jenkyn-Jones from Impax Asset Management, which specialises in environmental funds. "What you have to believe is that it will continue to be more competitive. Much depends on the stock market, but we expect policy measures and subsidies to increase clean energy's contribution to the energy mix, so could therefore anticipate growth of up to twice the rate of GDP."

In the meantime, investors may find a more stable return by investing directly in products such as wind farms directly, he suggests. "It is a business and investment proposition that is more like a bond in that it's a stable return not impacted by the volatility of the markets as long as you have the right contract structure."

While issues around planning permissions can at times hinder development of projects, the returns are often attractive. Triodos Renewables, a UK-based company founded by Triodos Bank, is one such example. It owns and operates seven wind farms and one hydroelectric project as well as holding investments in several renewable energy companies. It is basing projections on 9 to 10 per cent long term returns, according to its managing director James Vaccaro. In addition, its provision of the carbon value of individual investments has resulted in increased interest from those people concerned about their environmental footprint.

More than money

This potential for clean energy to offer social as well as financial returns is another string to its bow. And we're not just talking about the obvious environmental benefits of carbon-neutral or low carbon energy sources. There is much more to it than that, in particular the opportunity to alleviate poverty around the world.

“Developing countries are a significant market," says Penny Shepherd, chief executive of UKSIF, the sustainable investment and finance association. "By providing access to clean energy in these countries you are stimulating economic development.

“Whereas fossil fuel energy was the driver of the industrial revolution in the West, renewable energy has the potential to be similarly enabling for other parts of the world."

There is certainly no shortage of demand. In 2009 it was estimated 1.9 billion people had no access to electricity, 95 per cent of who live in Sub-Saharan Africa and rural Asia. Connecting people to the grid is a challenge - not only because of the often long distances involved, but because it is "cumbersome, expensive and logistically difficult due to the equipment required and activities that need to take place, such as changes in voltage between the grid and people's homes," explains Smita Nakhooda, a Climate Change, Environment and Forests Research Fellow at the Overseas Development Institute.

Governments around the world have recognised these challenges and as such are putting in place many regulations and policies to make investment in micro-grids and clean technologies more viable, both financially and logistically.

This belief that clean energy has the potential to "revolutionise" economies would, therefore, imply that it also offers tremendous opportunities which can be exploited by investors.

Take for example, the often overlooked possibility of using "reverse transfer technology" - a way of working which sees new ideas being tested in countries such as Morocco, before being released onto the open market. This is something that offers several advantages, says Ben Sommer of Meteor Asset Management.

“Whereas typically technologies are developed in Europe and the United States first, and only exported to the developing world once the price has dropped, it makes good economical sense to do it the other way round. Not only is it cheaper to test in places such as Africa but the local communities benefit from energy production throughout the duration of the project. This creates jobs, and has a positive impact on their productivity and economy. At the same time, such schemes can eligible for carbon credits so the investor benefits also."

Sri Lanka is another country that has a growing clean energy market. It is implementing a number of programmes and technologies that aim to connect more of its 21 million population to the grid. One such project currently gaining traction aims to generate electricity through the use of Gliricidia, a fast-growing plant that is available in abundance all over the country. In doing so, not only can energy be produced cheaply and effectively via small-scale local power plants, but thousands of families can earn income through both the farming of Gliricidia and the business opportunities presented as a result of having access to power.

Elsewhere, other investment houses and clean energy companies have spotted similar opportunities. Eight19, an offshoot of Cambridge University, is developing a new generation of solar cell that will enable people in Kenya to access electricity via their mobile phones, while the World Bank and the International Finance Corporation are helping develop commercial off-grid lighting markets across the whole of Sub-Saharan Africa.

Even charities are getting in on the action. GVEP International, a nonprofit that provides technical assistance and support to energy businesses in Latin America and Sub-Saharan Africa, has recently partnered with AlphaMundi, a Swiss-based fund manager, to develop a unique investment fund that will provide capital to micro-enterprises and SMEs working in the renewable energy space.

“It is first and foremost about financial return but it will also have a heavy emphasis on the social return," explains Peter George, the manager for energy finance at GVEP. "Initially it will only be available to high net worth individuals and institutional investors, but over time we want to work with banks to develop retail distribution platforms.

“We've taken this direction because there is a real need for dedicated funds that are investing in renewable energy in these countries. There is a lot of interest and it is something we consider to be a high growth area."

Further indication of the potential of environmental and ethical investments has also been highlighted by recent news that the BT Pension Fund, worth £36bn, is currently testing a number of "green" funds. These include a £100m investment in a FTSE carbon-tilted passive equity index, a £315m allocation to renewable energy infrastructure and £75m to a clean technology fund of funds. Reducing exposure to carbon risk was stated as one of the drivers for this change of strategy, and if successful more investments will be moved into this area.

Clean energy is not an easy market, however, and investors must not lose sight of that fact. New technologies, developments within fossil fuels, natural gas and nuclear power, government policy, even changes in the weather, can all impact on the value of clean energy markets. Yet those people willing to sit tight and play the long game may find that as economic and environmental development around the world gathers pace, so too does the profitability of their investments. How long that wait will be though is anyone's guess.

Photo: Getty Images
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.