Green energy funds: risky, but here to stay

The escalating costs of fossil fuels, fears about climate change and stricter environmental legislation have created a "fertile environment" for innovation and investment in the environmental technology sector, says Geoff Nairn in the FT. Investor interest in the UK has attracted a wealth of foreign companies to seek listings in London.

For fund investors, there are now a number of specialist funds to choose from, including Impax Environmental Markets, Jupiter Ecology and the Merrill Lynch New Energy Technology investment trust. Triodos Group, a Dutch ethical bank which has been financing energy projects for 25 years, recently launched Triodos Renewables, a fund for private investors focused on the UK renewables sector, which is highly concentrated on wind technology.

While the ethics of these companies and funds may be appealing, the risk/reward ratio may not be. The small, entrepreneurial companies that populate this sector are by their nature highly vulnerable to setbacks because they are often developing new technologies in untried markets.

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Merrill Lynch's fund, which has risen by more than 86% in the past year, but collapsed in value just two years ago, demonstrates this volatility. Impax Environmental Markets, an investment trust that invests in small and mid-cap firms, has outperformed the FTSE All-Share index since its launch in 2002, but this performance may not last. As Ian Simm, managing director of Impax Asset Management, points out, the investment trust tries to balance alternative energy with more established water and waste management technologies to mitigate the risk.

On a positive note, it looks as though the sector is very much here to stay. The spate of recent Aim listings shows the choice for investors is widening and Government legislation is looking favourable. And, says Charles Batchelor in the FT, even some of the genuinely alternative technologies are becoming more mainstream such as wind farms.

These can be an excellent investment, says Bernard Lambilliotte, chief investment officer at Ecofin, the financial group that runs Econfin Water and Power Opportunities, an investment trust whose shares have more than doubled over the past 12 months. There are risks when you have bought the land and are seeking a licence to operate, but once it's built and you are plugged into a grid, it's low risk, and should provide a rate of return in the low to mid-teens.