How Big Is The Environment?
By
Victor Bivell
Eco Investor,
August 2005 Edition
How big is
the environmental economy? By most global measures, the answer is huge,
and growing fast. So much so that over the past decade Governments, business
and consumers have come to see consideration of the environment and the
benefits it can provide as a mainstream economic activity.
What
began in the public’s awareness some 40 years ago as concern about smog,
Coca-Cola cans in the street, mercury in fish and the woodchipping of
majestic old trees has exploded into a global analysis of every facet
of human activity and how each activity can be made safer or more efficient.
This rapid growth in environmental awareness has created a need for new
and improved products and services and with it a large and ever-growing
range of options for investors of all types.
If
there is anyone who still continues to see the environment and its economic
activities as marginal or small in scale, they are likely doing so under
one or several misconceptions.
One
misconception is that of only looking at individual sectors within the
environmental economy and seeing them as a small part of their total market.
An example is solar power, which at present is a very small part of the
massive global energy market.
Another
misconception is not accounting for those sectors of the market that are
so successful that they are taken for granted. An example is insulation,
which is now present in most Western homes.
A
third misconception and perhaps the most telling is not fully appreciating
the very wide range of industries and products that are impacted by environmental
issues and are open to improvement through better environmental practises
or technologies.
These
are almost too many to list, but any list will show that there are now
markets for environmentally sound products and services across the entire
economy. While the idea of investing in the environment is not new, the
past decade has seen a serious increase in the number and quality of opportunities
for investing in economic activities with an environmental angle.
The
cross-sector application of environmental efficiencies is a driver of
this growth, with products and services with environmental benefits in
demand from all parts of the economy.
If
we look at only those activities that traditionally have been seen as
part of the environmental sector: renewable energy, energy efficiency,
recycling, waste management, organic farming and eco-tourism, for example,
we see that these few sectors alone impact virtually all the major industries:
food, water, housing, transport, industrial manufacturing, consumer goods,
technology, retailing, tourism and health, among a long list.
For
investors who want to actively look after the environment as well as for
those motivated by investment returns alone, this is an exciting list.
Each of these sectors is a major component of the world economy, an established
market with many thousands of companies competing for massive cash flows.
From
a business point of view, the ambition of environmental companies to compete
in these markets and win significant market share is 100 per cent correct.
Far from being marginal, environmental companies are playing in the biggest
business games on the planet.
From
a turnover point of view, perhaps the biggest is the energy sector. How
big is the world energy market? The International Energy Outlook Report
2004 says “Total world consumption of marketed energy is expected to expand
by 54 per cent, from 404 quadrillion British Thermal Units (BTU) in 2001
to 623 quadrillion BTU in 2025.”
For
those who are not sure, a quadrillion is one thousand trillion, while
a BTU is equivalent to 1,055 joules or 252 calories.
Oil
is the world’s leading commercial energy source, followed by coal and
natural gas, which is expected to soon overtake coal; renewables are fourth
and nuclear power fifth.
What
is the value of all this energy? Whatever it is, its volatility alone
is greater than the Gross Domestic Products of many countries, as shown
by the recent spike in oil prices.
Of
these world fuels, gas is the least environmentally damaging of the fossil
fuels while hydro-electricity is the largest of the renewable energies.
The other renewable energies such as solar, wind, ocean, geothermal and
bio-fuels have a place, but at present not a large one - in relative terms
they are small fish in a very big pond.
Importantly,
they are now established players in the game and their market share and
total revenues are commensurate with their technological efficiency and
price competitiveness. Both of these variables are trending favourably,
and in the absence of a breakthrough product or technology what we are
seeing is success gained mainly through many small and medium sized enterprises
making inroads into or creating niche markets, with new opportunities
created as the technologies improve.
Another
example of the wide economic impact of the environmental economy is the
re-use of materials. There are now markets for the recycling of most basic
materials, particularly water, metals, paper, plastics, timber, oils and
organic waste. These support an enormous variety of commercial products.
The
recycling of a number of these materials already offers numerous investment
opportunities, and many of these companies are stock exchange listed and
regular dividend payers.
Like
the energy sector, the recycling of materials lends itself to many SMEs
operating in a variety of markets. But size is possible, as shown by Australia’s
own Sims group with its recent announcement of a merger with New York’s
Hugo Neu that will create the biggest scrap metal recycler in the world
with a capitalization of around $1.7 billion.
Environmental
technology is another major provider of benefits across the economy. Via
breakthrough technologies and incremental improvements, new technology
can affect any device that consumes, stores or distributes energy, providing
a potential market from among all the petrol, electricity, gas and other
energy driven devices created by man.
While
the dream of a blockbuster product through reinventing the internal combustion
engine, for example, is still alive, most of the technologies that are
successful offer incremental improvement and prosper in niche markets.
The
services sector is also a substantial part of the environmental economy.
Environmental services is an area that is sometimes forgotten but it is
vital, for example, to successful engineering and architectural practice,
making it an indispensable part of the building and construction industry.
Food and health are other major sectors where environmental services can
be critical, while eco-tourism is growing.
With
their application across the entire economy, environmentally based products
and services are able to prosper in existing markets and create new markets,
making the environment a driver of new company formation and business
growth.
The
Australian financial markets are already deep enough to offer investment
opportunities, listed and unlisted, in a wide range of environmental activities.
The growth of the environmental economy means the creation of new investment
opportunities is also on a long term growth path.
So,
how big is the environment? - it’s everywhere.
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