In the market and government infatuation with energy, other cleantech sectors are being pushed aside. Garth Lamb looks at the implications.

With climate change now routinely described as “the great moral and economic challenge of our time”, it’s little wonder other environmental issues seem to be slipping off the radar. Debate about any environmental program or project – from waste management systems to potable water sources – is now framed through the prism of greenhouse impacts.

While strong public concern about climate change is great for companies looking to build support for clean energy technologies, there is a risk cleantech companies in non-energy sectors will be left behind as power players suck dry the limited pool of green investment dollars. Pinning all hopes for “environmental investments” on one facet also makes the cleantech sector more vulnerable to risks (both upside and downside), including from changes to political settings.

Clean energy is already considered the only aspect of cleantech in some investment circles, due to its obvious growth potential. The International Energy Agency estimates US$26 trillion will be invested by 2030 to meet the world’s growing energy needs, and while only about 10 per cent of the global spend on energy infrastructure went to renewables in 2008 (about US$155 billion), that portion is tipped to rise rapidly. UK researcher New Energy Finance argues half must go to clean power if international commitments to battling climate change are to be met.

But despite energy being where the big political and money focus is right now, it’s not the only area where society faces big challenges. There are waste streams needing treatment so they don’t pollute the environment, outdated water systems that must be augmented, building styles and materials that must be redesigned for the new millennium, more effective and efficient transport that must be introduced to cope with growing populations... the list goes on, and on.

The companies already competing in the cleantech space reflect this diversity of environmental problems and potential solutions. But an analysis of recent results shows different industry segments on very different growth trajectories.

Reading the tea leaves
All companies were impacted by the global financial crisis, with the effects of tight credit markets and the economic slow down most visible on publicly traded companies. But players in the cleantech space suffered a double-whammy as public concern – and political focus – shifted away from environmental impacts and toward apparently more pressing issues, such as unemployment.

The Australian CleanTech Index tracks some 76 publicly listed companies that generate the majority of their revenue (or expected future revenue) from defined cleantech activities. At the end of December 2009, the combined market capitalisation of all constituents was $10.5 billion, falling well off its peak of $16.3 billion back in July 2007.

In the 2006/07 financial year, the index increased 43 per cent, more than the Small Ordinaries benchmark of small companies across the broader Australian economy. In 2007/08, it fell by 16 per cent, less than the ASX200 benchmark of Australia’s largest companies. In 2008/09, however, the cleantech index plunged 39 per cent, performing worse than either benchmark.

“The story has got worse over the first half of FY10, with the recovery experienced by most of the market bypassing most of the larger cleantech stocks,” said John O’Brien, MD of Australian CleanTech (ACT), which runs the index.

“Over the first half of the 2010 fiscal year, the [index] recorded a loss of 4.9 per cent, compared with the 24.3 per cent gain by the S&P ASX200 and the 26.7 per cent gain by the S&P ASX Small Ordinaries.”

Closer analysis shows that while many small stocks in the index recovered quicker than the general market, the overall result was weighed down by several underperforming large stocks, including waste firms Sims Metal and Transpacific Industries (the two biggest companies in the index by market capitalisation).

Looking at various sub-sectors in the ACT index, waste performed poorly (down 14.5 per cent), although it was solar companies that came off worse, down 17.3 per cent. The difference here is that solar was coming off an 86.7 per cent rise in 2008/09 while waste fell 44.4 per cent in 2008/09 (and also fell 0.4 per cent in 2007/08).

Standout sub-sectors for the six months to December 2009 were the catch-all efficiency/buildings/biomaterials/energy storage/fuel cells index, up 33.8 per cent, and the biofuel index, driven up 57.5 per cent by the recovery of one company, Mission NewEnergy.

It is hard to draw too many conclusions from the index movements due to the inherent volatility of small companies with limited liquidity.

One obvious take home message, however, is there has been a huge difference between the performance of different sectors – and different companies – in this field. This highlights the reasons for not putting too much faith in just one area of the emerging market; the drivers behind success in the cleantech market will be more complex than any short-term political interest in one specific area.

Policy decisions and players
Political uncertainty around Australia’s proposed carbon pollution reduction controls negatively impacted some players hoping to make money from tighter carbon controls, while passage of Renewable Energy Target legislation gave some a boost.

The solar sub-index, for example, increased 119 per cent between January and June 2009, driven entirely by increased demand for rooftop solar PV panels resulting from policy decisions.

It is clear regulatory changes have had an immediate impact on the fledgling sector, although O’Brien argues there are more important long-term drivers to consider when assessing the overall sector’s future.

“In my view, there are four unique and significant drivers behind the global move towards clean technologies – and only one of those relies on regulatory measures,” he said.

“Firstly, cleantech solutions are being integrated into many real assets that provide core services... This ensures that any over-exuberance in investments, comparable to the IT bubble of the early 2000s, has a lower bound and tangible level.

“Secondly, the demand for these core services of energy, water and [resource efficiency] is growing due to both population growth and increasing wealth.

“Thirdly, as the world continues to use and deplete its natural resources, there is increasing pressure on communities to act sustainably. Not only is the demand increasing but the supply of resources is decreasing, so it is essential to use more innovative technology.

“Finally, and certainly not most significantly, there is the recognition of climate change and the consequent regulatory regimes, such as the RET and the CPRS. This is a separate driver from those above and, whilst it will result in additional growth in some sub-sectors, it does not underpin the cleantech sector as a whole.”

O’Brien is right that technologies that improve efficiencies, reduce waste and consequently increase profits for those who use them should be able to find their own way to market. But they aren’t going to grip the market as quickly as they could – or as quickly as society possibly needs them to – if we continue to think of cleantech as a one-trick pony. There’s more to the sector than clean energy.