In the growth of any new industry or product, there exist certain milestones. A wave of consolidation among solar power companies boosted clean technology in 2006, and political pundits have elevated renewable energy efforts to the front of public policy debate in recent months. Yet, it remains difficult to find a tipping point in cleantech, still largely a fledging industry.
One recent indication that the industry is catching on, at least with investors, is the advent of a number of equity indices that follow various cleantech sectors.
An index is a benchmark set up to track the performance of a specific set of companies. It works by following the performance and market gyrations of individual companies, and then spitting out one number that represents the entire sector. When indices begin to sprout up in significant numbers, a chicken or the egg scenario emerges: more indices provide investors with more avenues for analysis and eventual investment, and yet it takes the investor potential for firms to go through the trouble of creating the indices in the first place.
As analysts with Merrill Lynch wrote in a January 2007 report introducing a new renewable energy index, the sector is showing good growth prospects:
“As the industry matures… the value of stock picking will become more evident over time, which is where this index, in our view, provides significant value added for investors.”
The beauty of indices is that they allow investors or analysts to follow a broad segment of the industry, rather than gamble on the prospects of a single company. And with exchange traded funds, which act like index funds but trade like stocks, investors have a much safer way to invest in the emerging industry without taking on too much risk.
“[It] keeps you from having to ‘know’ the winners in this field,” said Motley Fool founder David Gardner. “What I appreciate about [ETFs] is that I don’t feel like I have to be right to make money. I can own the basket.”
With the launch of the Merrill Lynch Energy Efficiency Index and the Standard & Poor’s Global Alternative Energy Index in early August, it’s become apparent that companies now believe there is enough money in the cleantech sector to track it through indices. More than 20 indices now track cleantech and socially responsible companies, including benchmarks compiled by heavy-hitting investment banks such as Merrill Lynch, Credit Suisse, UBS, Hamilton Clark (pdf), and Jeffries.
Perhaps more importantly, a number of the indices — the WilderHill New Energy Index (NEX), the Ardour Global Index (AGIGL), the Cleantech Index (CTIUS), and the NASDAQ Clean Edge U.S. Index (CLEN) — have exchange traded funds that now track their performance. PowerShares and First Trust manage these first ETFs, though others are sure to follow.
By placing their money in these ETFs, investors can support the sector’s publicly-traded companies with capital that can then be used to build capacity. It is the involvement of these investors in ETFs that is ultimately driving this sector.
“The growing recognition among retail and institutional investors that the challenges of climate change and water scarcity also have significant impacts on their investments is obviously driving this momentum,” Alexander Barkawi, managing director of the SAM Indexes, said earlier this year in an interview with the website Socialfunds.com.
In addition to gauging investor interest, indices also provide a snapshot of the sector. In April of this year, Bruce Jenkyn-Jones of Impax Asset Management told CNBC that Asian companies now make up nearly 15% of his global index, the ET50, after consisting of only 3% in 2005. While it’s important to know how his index chooses the companies that compile it, it’s a testament to the gains made by Asian cleantech companies.
Other indices have sub-sectors that show the types of companies that are leading the way in cleantech at the moment. The Hamilton Clark EnergyTech index has about 70 companies in the index broken down into five sub-categories: power generation, power quality, controls and storage; clean technologies; energy efficiency, information and optimization; renewable energy, and exploration and production technologies.
Jeffries, like many other index creators, also maintains sub-indices that follow energy generation, energy storage and industrial biotechnology. Still others follow water utilization. Each strategy gives a picture of how a particular firm understands the larger industry.
As more firms get involved and compile indices, and future ETFs develop to track them, the winners and losers of cleantech will become apparent. Until then, keep an eye on the performance of the existing indices and watch as the fortunes of cleantech companies rise and fall.
Dakin Campbell is a contributing writer at ScribeMedia.org. He can be reached at cleantech [dot] energy [at] gmail [dot] com.
