Source: Ernst & Young
Published: Friday, October 17, 2008

As climate change moves up the corporate agenda, cleantech investment is reaching record levels according to Ernst & Young. Climate change challenges are creating opportunities for next generation technologies as companies seek to respond to stakeholder expectations, current and anticipated regulation, and rising energy costs. In addition, climate-smart companies view this as an opportunity to make them more innovative, efficient and competitive.

As part of a series of research on climate change transformation, an Ernst & Young study of 150 global companies found that 90% of those surveyed were undertaking climate change initiatives, with disclosed financial commitments totaling US$276 billion over the next ten years. Another Ernst & Young study¹ revealed that 35% of corporate venture capital programs will increase their investments in cleantech companies next year and 44% within the next five years, supporting the finding that corporations are accelerating their climate change response. A third Ernst & Young study² showed that 51% of institutional investors globally always or sometimes consider a company’s climate change response when considering investment in a new issue.

This accelerated corporate response to climate change is reflected in global venture capital investment trends. Ernst & Young’s Venture Insights® reveal that as a proportion of global venture capital investment, cleantech has grown rapidly - up from just 1.6% of total investment in 2003 to 11% in 2008. And in terms of value, global venture capital investment in cleantech is set to significantly exceed the record US$3 billion invested last year, having already reached US$2.2 billion in the first six months of 2008.

Gil Forer, Global Director, Cleantech, IPO and Venture Capital Initiatives at Ernst & Young commented: “The climate change challenge is global and requires a transformation of infrastructure and practices that crosses industries and supply chains. We need not only to accelerate levels of investment in innovative clean technologies, but also to promote partnership and collaboration among multinational corporations, emerging cleantech growth companies, governments and other stakeholders.

According to Ernst & Young’s Venture Insights®, the US accounted for the majority of venture capital investment during 2007 and the first half of 2008, raising US$2.5 billion and US$1.6 billion respectively. Europe, the second largest market, raised US$443 million and US$353 million over the same period. China increased from US$30 million in 2007 to $84 million in the first half of 2008. And Israeli cleantech investment also accelerated rapidly, up from US$4 million in 2006 to US$134 million in the first half of 2008 (largely on the back of a US$115m solar energy company mega-deal).

As of 30 June 2008, there were 549 private venture capital backed cleantech companies globally with US$8.9 billion in venture capital. The US is the largest region with 301 venture-backed cleantech companies that have received cumulative investment of US$7.29 billion, weighted towards solar and biofuel companies. Similarly, Europe (203 companies), China (25) and Israel (16) are weighted towards solar manufacturing in terms of capital invested. China is emerging as a world leader in solar with four companies that have received cumulative investment of US$56 million.

Silicon Valley is by far the biggest global hotbed in terms of cleantech activity, comprising 74 private venture-backed cleantech companies with a total of US$2.2 billion invested to date. The UK is in number two position in terms of number of cleantech companies, with 48, but only fourth in terms of capital invested (US$426 million). Conversely, Southern California is in fourth place in terms of companies (on par with Germany at 34) but in second place in terms of capital invested (US$1.1 billion). This comparison of venture capital hotbeds reveals that US cleantech companies are more highly capitalized than their counterparts elsewhere.

Beyond venture capital
Cleantech indices have significantly outperformed the broader market in recent years and in 2007 institutional investors allocated US$23 billion in funds to cleantech equity investments. Cleantech private equity investments totaled US$50 billion in 2007. Global cleantech M&A activity surged by 46% in terms of number of transactions and 140% in terms of transaction value from 2006 to 2007. Likewise, during the same period, cleantech IPO transactions grew by 24% and capital raised by 98%. While there have been relatively fewer transactions in 2008 due to global capital market conditions, the value of M&A and IPO deals concluded in just the first six months of 2008 exceeded the levels of the full year 2005.

Gil Forer concludes: “Cleantech has passed an important investment tipping point. Demand for cleantech solutions is increasing due to higher energy and resource costs, regulatory requirements and the desire for corporations to pursue climate change related market opportunities. This, combined with the attraction of talent and investment to the sector and resulting accelerated technological change, has created a self-reinforcing dynamic of innovation and company creation, which is vital for any successful response to the climate change challenge. Cleantech is here to stay.”