While the primary goal of any investor is to make as much money as possible, a growing trend has emerged in recent years of a more conscientious approach to investing. In particular, renewable energy and environmentally friendly products are beginning to benefit greatly from investors who want to know that their money is going towards things that aren’t harming the world.
At the same time, these investments are proving to be far more resilient than previously thought, with recent studies showing that their returns can be as strong, if not more so, than traditional investments. As a result, financial institutions across the world are clamouring to get in on the sustainable investment bandwagon.
However, while some investment strategies within the green space can take a very narrow form – purely in European renewable energy, for example – there are a number of financial institutions spreading their investment strategies across a number of areas in a purely opportunistic way.
The types of businesses that investors are looking at seem to be ones that are enabling industrial sectors to use energy and resources more efficiently
One such firm is the newly launched London-based investment trust Menhaden Capital, which is targeting a whole swathe of clean energy related investments that it hopes will help improve the world, while delivering stable and generous returns. Having launched on the London Stock Exchange in July, Menhaden managed to raise an initial £80m to invest in a range of energy efficient businesses.
History in the making
World Finance spoke to Menhaden’s founder Ben Goldsmith about the reasons for establishing such a fund. Goldsmith’s background is one where an obsessive care for the environment is matched by a first rate financial pedigree. His father was billionaire financier Sir James Goldsmith, while his uncle was environmentalist and founder of the Ecologist magazine, Edward Goldsmith. His brother, Zac Goldsmith, is also a passionate environmentalist and a prominent British MP and potential future Mayor of London.
His 15-year career has been steeped in environmental investing, and he launched Menhaden after being inspired by one of his investment idols Jacob Rothschild, whose RIT Capital Partners pioneered a similar strategy to the one the new firm is taking now. “I have always respected Jacob Rothschild a great deal, and he invests through a vehicle called RIT Capital Partners, which is a London-listed investment trust. What that kind of vehicle does is allow you to match patient capital with an opportunistic investment style, while overlaying that with an asset class mix that can evolve over time, according to how you see the world”, said Goldsmith.
He added, “If you look at the history of RIT, there’s been times when he has had more than half of his total portfolio invested in public equity markets, and there have been times when that’s been less than 20 percent and he’s retrenched to fixed income, and both public and private credit. Being able to evolve your asset class mix over long periods of time is a huge advantage. Being able to invest off a patient capital balance sheet, without investment horizons, is a huge advantage. And also being able to be completely opportunistic in your approach.”
It is the fluid nature of the portfolio that has attracted Goldsmith, who has spent the last 13 years with investment group WHEB, which runs a selection of sustainability related investment strategies. Goldsmith decided to set up Menhaden after meeting a number of people who wanted a multi-asset approach to environmental investing. “I’ve spent 10 years fundraising for different funds that we manage at WHEB, and I’ve met lots of industrialists and investors across geographies. Very smart, successful and influential people, who see the opportunity from investing in an environmentally friendly way and wanted a product which would do this across multiple assets.”
Menhaden has appointed WHEB’s Listed Assets team to manage a concentrated portfolio of environmentally themed stocks, and has also invested in a couple of private equity funds run by WHEB Capital Partners.
The trust’s portfolio will be quite concentrated, with around 25 positions being taken. With the initial £80m it has raised, Menhaden are able to take a conviction-driven approach to their investment strategy. Around half of their positions will be in public equities, but they will also be investing their capital in yield assets like private wind, solar and hydroelectric businesses, which will typically operate within the most secure European jurisdictions. The final aspect to the portfolio will be special situations investments, likely in the form of private equity, which will be direct deals where Menhaden take the lead investor role and have a greater say in the running of the business.
Enthusiastic support
Many of the world’s key investors are taking the idea of sustainable and green investment seriously. Big institutions like Morgan Stanley and Bank of America have already bolstered their green initiatives, while many individual investors want to ensure that at least some of their portfolios are made up of sustainable holdings. For Menhaden, this is no different. While the company is very much in its early stages, it has still managed to secure backing form a number of prominent investors, including Belgian hedge fund manager Pierre Lagrange, Coller Capital’s founder Jeremy Coller, Lyndon Lea of Lion Capital, Easyjet founder Stelios Jaji-Ioannou, and New Look Group founder Tom Singh. There are also a number of industrial families tentatively backing the firm, such as the Mittal and Reuben families.
Goldsmith said, “Part of our mission for the next year or two is to build a portfolio that’s transparent, that people can really look into and understand. There’ll be no rocket science – it’ll be pretty concentrated, with around 25 positions. We want to show that we can generate great risk adjusted returns from this kind of a portfolio. Then we can diversify the shareholder base.”
The trust’s biggest backer, however, is the Italian insurance giant Assicurazioni Generali. It is these bigger institutions that are likely to really transform the market, once they start taking big stakes in sustainable investments. Once this happens, there is likely to be a tipping point for the industry.
The reason’s that bigger institutions are getting involved in sustainable investing may have initially been a public relations exercise in the aftermath of such a bad period for the financial services industry in recent years. However, now these large firms are realising that they can invest in ‘good’ stocks without compromising on strong returns. “I think the big move is that large institutional investors are trying to reduce the amount of negative impact that they do through their investments. The biggest trend in this direction is the rise of screened investing, where in some cases certain types of investments – such as fossil fuels – are screened out. Tilting portfolios for reduced environmental impact. That’s the big trend. Investors doing the right thing by saying, ‘actually, not only is reducing the environmental impact of our portfolio the right thing to do, but it also makes us more money.’
“The types of businesses that investors are looking at seem to be ones that are enabling industrial sectors to use energy and resources more efficiently”, added Goldsmith. By investing in businesses that are able to provide industries with a solution to their efficiency problems, those companies are helping to dramatically bring down costs. That in turn will make whole industries much more efficient and ultimately profitable.
Energy’s tipping point
One of the key themes affecting the global energy market is the dramatic fall in the price of oil over the last year (see Fig. 1). With OPEC leader Saudi Arabia keeping production at high levels, it has been speculated that the country recognises that the days of oil’s dominance are coming to an end and that renewables – led by solar – are set to take over. Around this backdrop of falling prices has been a steady increase in investment in both renewable energy and technologies designed to boost energy efficiency.
Goldsmith believes that this is only going to continue, and that unlike resources, an increase in demand will only bring down the price of these technologies. “I think it’s fascinating that even though resource prices – and in particular oil prices – have declined significantly, the wave of investment in both the efficient use of resources and alternatives to fossil fuels has only grown and been magnified. I think that’s because the whole trend towards efficiency and renewables has become unstoppable.
“The technology just gets cheaper and better. That’s the beauty of technology – the higher demand for the technology, the lower the price. Whereas with resources, typically the higher demand, the higher the price. I think we have reached a tipping point, and it’s partly about technology and innovation, and the rise of cheap, effective technology”, he continued.
From an investor’s point of view, price volatility is always something to be wary of. Resource prices have been increasingly unpredictable in recent years, and for businesses seeking to budget for the future, it makes more sense if they know what their energy costs are going to be. Therefore, renewable energy tends to be more attractive to them now, said Goldsmith. “Commodity prices are volatile, and while prices may have come down over the last few months, they’re also all over the place.
“So if you’re a CEO or a finance director who buys a lot of raw materials or energy, those volatile prices keep you awake at night. You can achieve stability and improve the resilience of your business against that volatility by becoming much more efficient and by investing in more predictable alternatives.”
While renewables are certainly seeing greater interest from investors, they are still relatively hampered by the reluctance of governments to offer the industry the sort of generous subsidies afforded to fossil fuels and nuclear. Indeed, in the US, renewable subsidies were scaled back after a number of bigger firms, like solar power business Solyndra, went bust. Across Europe, governments have chosen not to renew clean energy subsidies, as they’ve had to tighten their fiscal belts.
Levelling the playing field
By contrast, the oil, coal and nuclear industries still receive extremely generous subsidies in order to keep them running. According to Goldsmith, it is this discrepancy that needs to be addressed if there was really to be a level playing field in the global energy markets. “Everyone bangs on about subsidies for renewable energy, without acknowledging the fact that the nuclear industry has benefitted from vast and ever-increasing subsidies for 70 years now. 97 percent of the budget of the UK’s Department for Energy and Climate Change is spent cleaning up the mess created by the nuclear energy industry. And this also applies for fossil fuels, where there are vast tax breaks and subsidies. I think that we need a level playing field.”
Instead of offering long-term subsidies to such industries, governments should instead be focusing on allowing early-stage technologies to take off and invest in further innovation. “I’m instinctively opposed to long-term subsidy for any industry, and I believe subsidies should be there to support R&D and to kick-start new industries for a short period of time. In energy, I would support the phasing out of subsidies for renewables, but we’ve got to see a concurrent phasing out for subsidies for fossil fuels and nuclear too”, said Goldsmith. Remarkably, there seems to be a growing consensus on both ends of the political spectrum for subsidies to be scrapped and energy markets to have to fend for themselves. He mentions the establishment of the Green Tea Party in America, which is an offshoot of the right wing Tea Party group of the Republican Party that wants the state scaled back dramatically. “They’re big on this. They don’t believe government should be dishing out tax payers’ money to vast energy interests – fossil fuels or nuclear.”
This organisation has found common ground with another from the opposite end of the political spectrum, the left-leaning environmental lobbying group the Sierra Club. “On that topic, you have the Green Tea Party arm in arm with the left-leaning Sierra Club. They’re highly supportive of the decentralisation of power generation that solar brings, which is by its very nature distributed.”
Whereas more conservative members of the political establishment have traditionally not been enthusiastic backers of renewable energy in the US, Goldsmith feels that the industry is one that they should be inherently supportive of. “It’s a profoundly conservative idea that farmers, small communities, and individual homeowners can generate power from their rooftops and sell it to the grid. It’s in direct contrast to a centralised, government supported, monopolistic model that we have today.”
According to Goldsmith the energy industry is going to undergo profound changes. With those changes, there will be significant opportunities for investors to make considerable amounts of money. He points to the solar industry as being at the forefront of this energy revolution. “I think we’re going through a solar revolution and you can’t overstate just how exciting it is, the rise of solar power and the complete crash in the price of solar panels.
“And it just keeps on falling. I recently met the CEO of Canadian Solar, who told me that he believed they could continue reducing the cost of solar panels at their manufacturing facility by 10 percent a year. The list of places where solar is the cheapest electricity option is growing every year, and I think that’s one of the most exciting trends in energy today. Solar is winning the day.”
He also believes that the electrification of the transport industry will come far sooner than many predict, and it is “years, not decades, away”. And there will continue to be a push by many industries to boost their efficiency in both energy and raw materials. For investors in this space, all of these trends are presenting plenty of opportunities.
For Goldsmith and Menhaden, the ambition is to be both ahead of the curve, and to become the “reference investor” for the sector. “We’d like to be the first people to get the call from a smart team looking to build, for example, a hydroelectric damn in Vietnam or a portfolio of solar assets in Central America, or creating a new private equity fund in San Francisco. We want to be the first phone call to make when people have a great idea. We want to back world-class people across this space, across the world.”
