One of the hottest fields in industry today is cleantech, the environmental technologies industry. And when investment in hard assets soars, financial investors also look for ways to join the bandwagon. This trend has given rise to the creation of mutual funds and exchange-traded funds (ETFs), which specialize in investment in this field. The ETFs track sector indices, the most prominent of which is the Cleantech Index (CTIUS), developed by international cleantech research and networking services group Cleantech Group.
The index is composed of 76 global cleantech companies which have to meet a series of criteria, such as a minimum market cap of $200 million, and a daily turnover of at least $200,000, with at least half of their revenue generated by cleantech business.
Among the companies listed on the index are global giants which also operate in the cleantech sector such as German engineering group Siemens AG (NYSE: SI; XETRA: SIE), Swiss engineering company ABB Group (NYSE: ABB), and US solar energy company First Solar Inc. (Nasdaq: FLSR). Also traded on the index is Israeli geothermal energy company Ormat Industries (TASE: ORMT), which has a weighting of 1.57%. The index is tracked by a number of ETFs, and in Israel one can invest in it through the KSM Cleantech Index Certificate (KSCUS.IS).
Companies that represent the cleantech trend at its best
The man behind this index is Rafael Coven, managing partner and index manager of Cleantech Indices LLC. Coven has a track record of 21 years in entrepreneurship, management, consulting, analysis and investment in companies such as Philips and Siemens. In all, he has been involved in investments totaling $700 million, much of it in cleantech companies. "This is my professional life, and the field really excites me," he says of himself. In an interview with "Globes" he explains how the index was built, and how one goes about choosing companies in so vibrant and innovative a field, in which it is singularly difficult to predict which technologies will produce results, and sets out his forecast for the sector.
The first, and perhaps the most fascinating question as far as building an index like this is concerned, is how companies are chosen. Giant corporations will not necessarily deliver the high value for investors that could be hidden in dream companies. Small start-ups, on the other hand, are liable to fail to live up to expectations and leave investors empty handed.
"Our task is to follow the growth and success of the world's leading cleantech companies, in other words to highlight for investors which of the sector's companies are worth investing in," says Coven. "To this end, we look for the strongest companies of all, which represent the trend at its best."
Globes: What sort of screening do you do?
"If you look at companies in industry you will find that not all of them are successful and promising, and some of them will never make a profit. But the leaders are those that survive, post rapid growth in this dynamic market, and can drive the changes in it.
"Let's make an analogy. If you look back 20 years, there were many hardware makers then, but today there are just four or five leaders. Had you invested in many of the companies around then, you would have lost money. This analogy is also true of many sectors, such as the automobile market in the UK. But demand for these products has increased many times over; in other words, the scarcity of companies is not the result of a lack in demand."
The index has 76 companies. That's quite a lot.
"Simply picking up company shares at random isn't serious. The idea is to find companies that represent the growth on a global basis, and which represent all sectors - not just solar energy and water, but also composite materials, wind energy, and anything that works in industry. It's a vast field, and we have an advantage in our ability to pick the best companies in each field."
This ability is based on the resources of Cleantech Group, which developed the index. The company engages in research, helps companies find suitable manpower and also connects corporations with suitable cleantech products.
"Our research capabilities help us locate companies," Coven explains. "Most of the companies are well established and I don't need to gamble on them, but some are young and it is important to us to find out what sort of potential they have."
Sometimes, there can be a number of companies with potential. How do you know which one to choose?
"There aren't many companies in the world that meet our criteria. There are a lot of companies in the field that are quite similar to one another, and we want to differentiate, so we look very carefully at the company's business strategy, the quality of its management, and its intellectual assets. Will the product amount to a commodity only? We won't invest in companies like these.
"It is important for us to see the companies' positioning in industry. Are they growing because they really are making new products and leading the market, or is it solely through company acquisitions? I've been asked, for example, why General Electric, which is into cleantech in a big way, hasn't been included in our index, but it doesn't meet some of our criteria, because its water and clean energy businesses, for example, only yield 10-15% of its revenue. For us, if you don't have enough cleantech, it's mainly noise."
The world is your market
Ormat is also listed on the index. What, do you feel, are its advantages and disadvantages?
"Ormat is a superb company. It does have problems, however, in hiring for example, since they have to compete over every engineer they take on with Exxon, Shell, and other giants - and that's a major problem. Headhunting isn't easy. It's a sector that requires brilliant engineers, and they're very expensive. Everyone is competing over the same talent, and there isn't enough of it, especially in the US.
"Generally, the biggest problem in cleantech is human capital - management, technicians, and engineers. These people will never have a problem finding work, even in a situation of high unemployment. You try finding a technician in the US to repair your air conditioner - I wish you luck."
One cannot ignore the dream factor in cleantech. What will come out of it 20 years from now?
"In 20 years time there may not even be a cleantech industry, just a plain industry. It could even become the most profitable field. Water and energy are becoming that expensive that many traditional companies will make the conversion to cleantech.
"And you also have to understand that cleantech is a field that focuses also on generating economic growth, and not just putting an end to pollution. Novozymes (a cleantech company traded on the Danish stock exchange, M.A.) is a good example of this. Their background was in producing enzymes for food and biological products, but they're now using the enzymes as a substitute for chemicals in the production of bio-fuel, and the production of food, without entailing the use of animal products. What they're doing today is far more environmentally friendly.
"Or take, for example, the US company Corning. Traditionally, it produced glass, and it switched to producing ceramics for filters used to control emissions from trucks. I expect that we'll see a lot of companies which don't engage in cleantech today joining this field in the future. Philips, for instance, acquired the best LED (light-emitting diode - a highly economical and long lasting light technology, M.A.) companies in the world, because this is a product that generates savings in electricity."
Does this mean that cleantech will not be a segment, but rather, an integral part of a certain industry?
"Companies that generate a lot of pollution and need considerable energy for their operations, won't survive. We are still right at the start of the game, the opening minute in terms of what the future holds. The water problems in Israel and, in a totally different sense, the giants China and India are a tremendous catalyst for the production of water technologies throughout the world. Israel really is a world leader in cleantech. There is a lot of room for investment in China and India, and very often, the people investing there are Israeli.
"I think that the world is your market, and you could be one of the world's top three countries. You have brilliant people and a shortage of water and energy."
Which other countries, aside from Israel, could be leaders?
"The US, Canada, Western Europe and maybe Singapore as well, are the real sources of solutions and technologies. At the moment, the technologies are coming from Europe, the US, Canada, and Israel. The first things are you need are the ability and the infrastructure to commercialize the skills and technologies, and I hope Israel will produce thousands more companies like Ormat."
As an industry, it all sounds very promising. But can the index also deliver results for investors as a financial product?
"The performance of our index has been quite impressive," Coven enthuses, in an unsurprising display of admiration for his own handiwork. "We have a considerable lead over rival indices, and our performance is much better than that of the Nasdaq and the S&P. Our index focuses very strongly on quality companies, and an entire trend, and that should generate more returns than risks."
Published by Globes [online], Israel business news - www.globes-online.com - on October 6, 2008
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