The survey is restricted to the "traditional" environmental sector: companies that work with industry and local authorities to reduce their impact on the environment. Key members of this sector are the large water companies, businesses specialising in waste management and recycling and environmental technology companies which monitor and clean up various forms of pollution. The traditional environmental sector is very much tied up with the public sector, in that regulations will often determine the extent of market opportunities and the development of the sector. In the water and waste industry, the public sector is also often involved as a customer and even a competitor. The sector is generally capital intensive and technologically orientated.
The same growth story also applies to what can be called the "green pioneers". These are companies in various areas of economic activity with a very different approach to environmental issues to their industry norms. Most pioneer industries represent niches within a broader industry (organic farming within agriculture, renewable energy in the power sector, ecotourism in the travel industry). Prospects for growth appear very good for many of the green pioneers: demand exceeds supply in organic agriculture; the EU is committing itself to substantial increases in renewable energy and the industry is expanding globally 15 to 25% each year; eco-tourism is the fastest growing market segment of a high growth growing industry. A word of caution though: the green pioneers can be vulnerable as niche players - once they have developed a market, mainstream competitors can move in and take it over.
1.2. Historic Performance: Disappointment
In spite of its excellent potential, the sector has often performed poorly to date, particularly in terms of the equity markets. To illustrate: the value of Clerical Medical's Evergreen Fund has grown by 37% in the five years to May 1997, while the UK's FTSE 100 Index advanced by 67%. The fund was notably limited to a strict interpretation of companies in the environmental sector, rather than the broader approach of its more successful competitors.
There is a similar picture at the corporate level: the share price of CFF in France fell by more than 75% in the early 1990s because its iron and aluminium recycling activities were hit by low commodity prices for metals. Bimec in the UK found that a decline in the environmental engineering market, after a period of over-expansion meant there were no financial resources to face a recession. It went bankrupt in 1993. Kenetech, a US wind energy company (one of the few listed renewable energy companies) was seen as an exciting growth stock, but over-expansion and a collapse in the US wind energy market lead to bankruptcy. Such examples are extreme, and clearly there are many success stories. Nonetheless they cast a deep shadow over the sector from the perspective of financial institutions, highlighting the risks involved and making it easy for sceptical financial institutions to focus elsewhere.
2. Specific Problems in Environmental Sector Companies
Normally, a high growth (in terms of a sector's proportion of GNP) would be expected to produce good investment returns. The fact that in many cases the environment sector has failed to do so suggest the existence of significant problems. Experience elsewhere suggests these are likely be in areas such as excessive competition, poor management or unpredictable changes (e.g. in technology or legislation). More specific analysis identifies six key problems in the environmental sector, and indicates possible responses.
i: Vulnerability to policy developments
Problem: Many companies in the sector are particularly linked to public policy. Unpredictable policy development means that companies can fail to fulfil their potential through no fault of their own and particularly penalises progressive companies seeking to anticipate such development. Even when policy is developed, the long delay between the announcement of legislation and its effective enforcement creates uncertainty.
Response: Those involved in the public policy process need to be fully aware of the consequences of their actions. In particular, policy "over-reach" is to be avoided. Adequate communication of the effects of legal changes is needed, along with their consistent and timely implementation.
ii: 'Eye on two balls'
Problem: Many companies in the sector may be driven partly by environmental goals - the desire to "save the planet". While in theory entrepreneurs should recognise that their financial success is essential if they are to achieve their environmental goals, in practice conflicts often appear to arise with the demands of financial performance. This may mean failure to bring in key business expertise or unrealistic over-expansion.
Response: Identify opportunities to train and educate environmental entrepreneurs in good business practice and working with the financial markets.
iii: Public perception
Problem: The environment is a emotional subject and hyped up expectations, allied with "fads" (by investors, consumers, media and the companies themselves) lead to backlashes when exaggerated expectations are not met. Indeed, certain companies have traded on image rather than genuine environmental performance.
Response: Information and education, especially for companies and the financial sector. Engaging the media so that the appropriate message is disseminated in a pragmatic and orderly manner.
iv: Eco-efficiency and changing business practices
Problem: Many environmental companies have based their business on handling industry's waste. However, industry is now pursuing eco-efficiency and actively seeking to reduce waste, eliminating key markets for the environmental sector. (Conversely, end-of-pipe waste management systems are not outmoded in a day, so markets move at an unpredictable rate.)
Response: Encourage the sector to move upstream and understand its customers' priorities; educate financiers about the potential of eco-efficiency and potential for waste reduction.
v: Front-line
Problem: The high profile presence of the sector and close relationship with the environment can be a dubious business benefit. More is often expected of environmental companies. Regulators often target them, rather than the upstream perpetuators of environmental damage (as in the case of Anglian Water and Severn Trent in the UK, who have had to spend some £900m on lowering nitrate and pesticide levels in drinking water originating from industrial agriculture). Consequences include diversion of management's time, additional operating and capital expenditure, and concern over potential liabilities.
Response: Development of appropriate policy mechanisms which do not allow such companies to become a "sink" for environment concern - ensure they can implement the "polluter pays principle" too. Education of the public, the media, regulators and markets, and long term approach by investors.
vi: The centrality of public finance
Problem: Many environmental companies may depend on public finance, especially small and medium sized enterprises e.g. for research grants. While useful, such finds are not without drawbacks. Companies may have difficulty learning about the availability of these sources of finance as well as problems in applying for them. Successful applicants can become dependent on such sources of grant money, which often stops before companies are ready to attract private capital - a process termed the "the valley of |