Impact and Cleantech: A Winning Combination
Impact investing and cleantech seem to be made for one another. The ethical attraction is obvious: impact puts capital behind businesses that generate social and environmental benefit; cleantech comes up with innovative solutions to some of the world’s most pressing problems.
Savvy impact investors spotted the synergy early on. An altruistic pedigree combined with potential profitability made cleantech a natural choice for ethical investors. Many funds; like Alpha Mundi and Chain Capital on the Maximpact platform; have already furnished their portfolios with investments in companies delivering cleantech products and services. A 2012 McKinsey’Co report projects up to $1.2 billion of investment in solar energy alone over the next decade, a chunk of which is impact capital.
Yet, recent turbulence in the market has changed the investing landscape for all kinds of industries, not least cleantech. This leaves many investors asking: Is cleantech still a good investment for impact?
GETTING THROUGH THE ROCKY PATCH
The past two or three years have been challenging for cleantech. 2012 saw industry layoffs and high profile bankruptcies including Odersun and Soltecture. US-based venture capital investment contracted for the first time in three years, a drop of 26% according to Clean Edge, a cleantech research and advisory firm. Worldwide, cleantech venture capital (VC) was down 33% from the previous year and global cleantech investments beyond VC fell 11%, partly due to lower prices for solar and wind technology exerting downward pressure on investment volumes.
There’s no denying the sector is under pressure, yet there’s a silver lining. This year Tesla, a manufacturer of luxury electric vehicles, paid off its US Department of Energy loan 9 years early and saw its share price rocket, proving that cleantech can be profitable. Cleantech stocks are creeping up again. Meanwhile, big corporates like General Electric and Siemens are busily ramping up their investments in cleantech for strategic purposes: cleantech venture deals with corporate involvement went up 12% between 2006-2011 and the trend continues.
STRONG DRIVERS
More importantly for the future, the drivers toward cleantech remain strong. Issues such as resource constraints, population growth and climate change are not going away. Governments continue to back cleantech even in these pinched times, often seeing it as a source of new jobs and an alternative means of service provision: just this year the US government eked out a surprising $12 billion dollar subsidy for wind power while teetering on the brink of the fiscal cliff.
Public opinion, too, continues to drive corporations and governments in the direction of cleantech. There’s a widespread belief that technical innovation is capable of providing the answers to global challenges. Ordinary people are putting their money where their principles are and contributing to crowdfunding initiatives to finance clean energy projects, such as those offered on the online platform, Solar Mosaic. So far, this may be a drop in the investment ocean, but these distributed financing models are widely thought to have potential; and their success is an indication of the strength of public enthusiasm for cleantech.
Clint Wilder founder of Clean Edge and co-author of two successful books about the cleantech sector, shares the view of a bright future. He has good reason: Clean Edge’s First Trust NASDAQ Green Energy exchange traded fund, QCLN, was chosen by Forbes and others as one of the year’s top two best-performing ETFs.
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“Clean Edge’s philosophy has always been that, regardless of whether you’re interested in impact or social responsibility, cleantech is a good business to be in,” Wilder explains. “These are the companies and businesses that are producing the products and services that the world needs today and is going to need more of in the future. Clean renewable energy sources, energy efficiency technologies, greener materials, clean water: these industries have the technology solutions to the big problems the world faces. We certainly support philanthropy, it goes without saying. Yet we want to emphasize that if you’re purely interested in making money, cleantech is something you should look at.”
READY TO CATCH THE THIRD WAVE?
This chimes with the view of Richard Youngman from the Cleantech Group, an industry analyst based in London, who sees a solid future for cleantech. In a recent report on the top 100 cleantech companies, he writes of a “third wave” of cleantech investing. According to Youngman, waves one and two culminated in “hundreds of cleantech companies founded, billions of dollars invested (and) optimism in abundance”: a boom, in short, but one he believes will produce lasting effects.
With wave two petering out in the wake of the economic squeeze, the third wave will be characterized, Youngman writes, by companies that can be more “capital light because the railroads, so to speak, have largely been laid; the manufacturers exist; value chains are more developed and costs are on a downward trajectory.” This could bring advantages for smaller, more focused investors. He also points to the adoption of cleantech businesses by corporates to indicate that cleantech solutions are becoming the norm; “offering a customer economic and resource efficiency will no longer be seen as different but standard.”
MORE ATTRACTIONS OF CLEANTECH
Youngman’s words point to one attraction of the sector for impact investors: its increasing maturity and size. The sheer volume and variety of cleantech opportunities now on the market is impressive. Maximpact’s portal provides a cross section of deals from kitchen table startups to sophisticated investment vehicles combining groups of cleantech companies. Areas of focus range widely from renewable energy systems to new materials designed to clean up oil spills. Given so much choice, impact investors can find the deal that meets their precise financial and non-financial needs. (See our articles Shine On, Pyrum Innovations and Cleantech Cleans Up for more details or login to Maximpact.com.)
Choice and profitability are two reasons why impact investors should look to the cleantech sector, but it has other advantages. One is that it is borderless: new technologies lend themselves to bringing change on an international basis, an appealing quality for impact investors with a global focus. Another is that new technologies can act as social levellers: all parts of society can benefit from them; and the poor and underserved may be the greatest beneficiaries of all. Cleantech products and services naturally touch many different parts of the altruistic agenda, too: health, environmental preservation, poverty alleviation. This means they can be neatly aligned with other impact programs designed to bring benefit.
All these qualities help cleantech fit the bill for many impact investors. With impact sector development still hampered by lack of deal-flow, investing in clean tech could make a huge difference to the amount of capital placed strategically in businesses that create positive change.
CLEANTECH NEEDS YOU
A less examined part of the equation is how cleantech can benefit from the involvement of impact investors. The recent rise in cleantech’s fortunes is a positive sign, but the sector remains volatile, vulnerable to insufficient investment and fluctuations in government commitment. For every triumphant Tesla there are many smaller, less developed cleantech companies struggling to stay viable. For them, getting through the build-up phase can be tricky. It often requires longer-term investor commitment; commitment they are finding harder to come by in the current marketplace.
Impact could be a vital new source of capital for cleantech businesses, especially those whose products have applications in developing economies and with low-income customers. In their article, Closing the Pioneer Gap, authors Dichter, Katz, Koh and Kramchandani point out the need for targeted early- and mid-stage capital (along with more realistic expectations of returns) to foster the early growth of businesses that deliver social and environmental benefit in the places that need it most. Driven by a blend of social mission and financial pragmatism, impact investing could provide cleantech businesses with the right kind of capital during the crucial development stages.
GUIDING THE CHANGE
Impact also has a potential role in fostering and guiding the deployment of clean technology solutions in emerging economies. While such economies were ignored by business for decades, philanthropic organizations have long been active there, serving impoverished populations, for example, or protecting eco-systems.
Today, emerging economies are seen as growth markets. They already form a focus for cleantech businesses looking for customers and new sources of financing. Yet many companies are hampered in their efforts to enter emerging markets by lack of local knowledge; knowledge that impact investors with a local track record may be able to provide.
In addition to capital, impact investors can bring the benefit of their experience working with specific governments, populations and geographies; as well as a sharp focus on desired social and environmental outcomes. Cleantech may have the power to transform lives and change the fate of the planet but it will do so only if the technology is deployed where it’s needed most. The involvement of impact can help cleantech partners identify new applications for technologies and establish effective strategies for deployment; for example making use of cleantech products in existing programs. Admittedly, not all impact investors will want this level of engagement with their investees, but collaboration has the potential to focus the positive impact of cleantech on the parts of society where it can make the most difference.
All things considered, cleantech is still a good investment for impact investors. In fact it may make more sense than ever. Indications are that the sector is experiencing a shakeout rather than a meltdown. Overheated investing in some areas, especially solar, may have cooled off, but new areas of activity are coming to the fore. Cleantech companies are refocusing on emerging markets and deployment of existing technologies. Meanwhile the retreat of VC leaves smaller cleantech companies seeking new sources of capital and strategic partnerships. All this is good news for impact investors who have much to gain from the success of cleantech both financially and in altruistic terms.