It looks like the latest industry that has struck a chord with large institutional investors is the renewables and clean energy market. Compared to the Internet in terms of its growth potential, the green market has attracted big investors such as Goldman Sachs, Citi and JP Morgan. Goldman Sachs’ Annual Report for 2014 stated the following:
“Mass market adoption of any new, disruptive industry often takes a path of early enthusiasm followed by market rejection, volatility and ultimately, acceptance. This was true of the Internet, and evidence suggests a similar course when it comes to clean technology and renewable energy.”
Goldman Sachs is reportedly injecting $40bn in investment in the renewables market by 2021, while Citi and Berkshire Hathaway are investing $100bn in the facilitation of clean energy by 2025 and $15bn in solar and wind projects respectively.
On the surface, it seems as though investors are doing their part to help the planet, but these investment decisions are more fuelled by logic, rather than a desire to fulfill a social responsibility. The renewables market delivers high rates of return on investment and as this market matures, the risk associated with investing in it reduces. The effect the investment has on the well being of our environment is secondary. This may sound a bit self-serving, but the returns gained in this industry not only benefit the investors, but also allow us to reap the non-monetary profits provided by these investments. By financing the renewables market, investors are driving growth through reduced capital costs and an increased pool of better solutions and ideas. Capital from powerful investors is critical in this industry as it is one of the only ways the industry can achieve the level of growth needed to bring about significant change.
The funds given by investors to firms generate a very simple economic cycle that could potentially have an immense impact on future growth. Firstly, the reduced capital costs due to investment results in an increase in the number of customers. This is followed by an increase in the demand for products. Finally, high demand leads to individuals and firms decreasing their product prices. Investing in good ideas will expand the size of the industry along with influence and ease of accessibility.
The effects of investment in the renewables industry are already being noticed with the introduction of new asset classes such as green bonds and alternative energy index funds. Last year, the green bonds market grew to USD$38 billion, and, if everything goes according to plan, is estimated to be worth more than $1 trillion a year by 2020.
With continuous technological advances and flows of capital, future growth in the renewables sector looks promising, and could possibly create numerous jobs and contribute greatly to global economic growth. Only time will tell whether this market is capable of achieving these stellar predicted levels of growth or if it all sounds too good to be true.
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