Investing in the clean energy sector

Michael Burrett examines what investors need to consider before taking the plunge into the clean energy sector.

 Clean energy sector

Gone are the days when an investment is purely a finance focused decision. Whether it is long term, short term, a bond, a loan, for equity or shares, investments have evolved – particularly in the last decade – to encapsulate so much more than a balance sheet.

There is a real need now within the investment community to understand the impact and consequences of those investments, both ethically and sustainably. You do not have to look far to see individuals boycotting particular institutions because their investors have ethical viewpoints that they disagree with: look at George Clooney’s boycott of the Dorchester Collection because of the legal changes in Brunei made by their investors, the government of that country.

Related: How to relax and learn to love sustainable investing

Understanding the people that you are investing in and their values, the country in which you are investing in and their laws and human rights record, and the impact on the planet that the investment will make has become a core part of investment discussions. In many cases, it would be considered bad practice not to have those discussions as part of early interest reviews.

And now investors are seeking to go even further beyond this to consider whether investing in clean energy is the ultimate positive investment: good for the planet; and good for returns.

In most cases, due to clean energy’s status as an emerging market, the investment opportunities are very early stage, with designs and technical engineers ready to take their ideas to the next stage. However, there are different risks and concerns involved with the emerging clean energy sector, and some investors may not have considered their full ramifications.

These risks are not completely impossible to overcome, but they must be fully considered and understood for investors to move forward with confidence. In the main, they fall into three categories: technical; legal; and financial.

Technical risks

At its most basic level: will the clean energy technology do what it says on the tin?

This may appear to be a facile question, but due to the nature of the industry, many investors are invited to pledge finance at very early stages of the design work, potentially before a commercially viable prototype has been developed. This can and should raise questions about whether the technical progress that has already been made is sufficient to warrant investment at the level which is being requested.

Having a pool of experts that specialise in clean energy is vital to draw from to ensure that you get a balanced viewpoint about whether the investment opportunity before you has a high likelihood on delivering on the technical promises that the company will be making.

As with any investment, there is always a chance the business will fold due to a technical issue. That is part of the risk of investing – but you should be sure within yourself, in discussion with experts in the field, that at the stage in which you invest, there is a high and reasonable chance that the technology will deliver on its promises.

Legal risks

Although any investment should be secure and above board legally, the clean energy industry is a particularly interesting place to be investing your finances for two reasons.

Firstly, because depending on where the company open for investment is based, you will need to uncover any legal complications that the government may have against the implementation of the clean energy solution when it reaches the deployment stage.

Solutions such as dam energy converters and wind farms are impacted by legislation about where they can be established. In some countries there are heavy restrictions due to areas of outstanding natural beauty or damage to the wildlife around them.

Secondly, some clean energy innovations are controversial. Many investors would baulk at investing in something that generates anger or frustration from local groups, and so understanding whether there is any opposition to the deployment of the clean energy technology is vital before you consider it as a serious option for your portfolio.

Financial risk

Although the financial element is no longer the only consideration when thinking about investments, it would be foolish to ignore it altogether.

Will the clean energy investment opportunity you are considering bring you a return? When? What is the risk involvement? Are there break clauses at certain parts of the development? What are your options to be bought out?

Related: Energy storage investments have delivered the highest returns of all clean tech investments since the turn of the millennium

It is all too easy to be dazzled by technology and the opportunity to invest in something that you believe in, whether it is because of the positive sustainable impact or because you have shared values with the business. But you must ensure that you are not blinded by these aspects, and focus on securing investments that make solid business sense.

While many of us want to leave positive legacies in the environment for future generations, there must be a positive financial return to enable you to continue investing.

The sector is evolving

We are seeing a rise in investors, whether individuals, groups, or syndicates, who specialise in green investments, and they have a much better understanding of the market than anyone did even five years ago.

As technologies continue to evolve and improve, we can better predict the success rate of clean energy investment opportunities. With better regulations and standardisations within governments, we can be more sure about predicting the deployment of clean energy technologies.

If you are interested in investing in clean energy, ensure you are confident that the technical, legal, and financial risks are fully addressed.

Michael Burrett is director of Embley Energy, developer of an innovative wave energy converter.

Also see: Two Sustainable Investment Funds to Watch – Our independent panel examines the latest funds and what they have to offer investors.

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