Deutsche Bank has released a white paper entitled “Investing in Climate Change 2009: Necessity and Opportunity in Turbulent Times,” which asserts climate change investing can be suitable for all asset classes, including listed equities, private equity, venture capital, infrastructure and hedge funds.  Citing the $45 trillion of investment the IEA predicts will be needed in clean energy technologies by 2050 and the driving forces of government regulations, economic/market trends, and the development of new technologies, the white paper identifies four fast-growing markets likely to see increased returns and reduce expected risks in future years-

• Clean energy (power generation, cleantech infrastructure, power storage technology, and transport & sustainable biofuels);
• Environmental resource management (water, agriculture, and waste management);
• Energy and material efficiency (advanced materials, building efficiency, and power grid efficiency); and
• Environmental services (environmental protection and business services).

Investment-Side Analysis

The white paper identifies factors that should be considered in assessing the commercial breakeven point for various climate change technologies and investments, as well as considerations for assessing an industry’s or company’s adaptability in the face of updated or changed regulations.  The report suggests that investors can mitigate and hedge risk by diversifying the risk associated with the breakeven of a clean technology across carbon risk/return, energy price risk/return and regulatory risk/return.

Trends and Predictions

The Deutsche Bank paper also offers some provocative insights into recent climate change investment trends, as well as predictions for future development of climate-change-related industries. For example-

• The global market for emissions trading will soon be worth $150 billion.
• Global investment in sustainable energy outdid all previous records, with $148.4 billion of new money raised in 2007.
• Annual worldwide clean technology investment is expected to reach $450 billion by 2012 and $600 billion by 2020. The market for solar power technology is predicted to grow to $100 billion by 2013.
• There is a marked trend towards increased corporate disclosure and risk management, as most notably shown by the 385 institutional investors with a combined $57.5 trillion of assets under management joining the Carbon Disclosure Project (CDP).
• In 2007, there were nearly 500 Private Equity (PE) and Venture Capital (VC) deals (representing $13.5 billion in investment), 1,900 PE and VC investors and close to 300 mutual fund managers in the climate change space. Indicators suggest increased investor confidence in the likely commercialization of climate-change related technologies.
• The market for nanotech energy storage, as a whole, is estimated to grow from $350 million in 2007 to $7.7 billion in 2012, as a wide range of nanotechnologies impact the sector.

Carbon Pricing Likely to be the Predominant Policy Tool

The white paper notes that traditional regulatory policies, such as Renewable Portfolio Standards (RPS), the Production Tax Credit (PTC) and the Investment Tax Credit (ITC) in the United States, are the policy tools with the greatest influence on investor confidence at present.  In the long-term, however, carbon pricing policies will be the dominant market drivers, providing predictability to investors in markets where conventional fuel and energy prices are still too volatile to incentivize alternative energy investment at needed levels.  The white paper identifies the problem of “picking winners” as the core difficulty associated with increasing government-sponsored energy R & D.

For further information about this topic, please contact Akin Gump.