THE CHANGING ENVIRONMENT
28/05/08

by Simon Padley

Water, Alternative Energy and Climate Change are investment themes set to change the funds management landscape, writes Simon Padley, Head of Distribution at Liontamer (the Australian arm of European based KBC Asset Management).

International research has shown that almost one in six people in the world do not have access to water, and that almost one in three people do not have access to clean water. The water crisis is the result of a combination of climate change, over-use of land, problems with the water infrastructure and inefficient management of water supplies.

Water supplies are becoming depleted. This is partly due to increasing industrialisation and population growth. On top of this, stocks are being polluted by seepage of salt, fertilisers and pesticides. Changing land use also plays an important role: buildings are being constructed on flood plains, rivers canalised and pastures drained. Worldwide, the greatest population growth is in dry areas, not only in developing countries but even in the United States, where cities such as Las Vegas and Houston are attracting more people than cities like New York.

Water is a basic commodity. Because of the factors referred to above, it is becoming increasingly expensive to draw, treat and provide water. There is still a long way to go before water can be supplied in a more environmentally friendly way and at a price that is economically viable, and this implies the risk of violating the basic right of access to water.

Although problems with water are often associated with developing countries, the water crisis seems to be one that affects the entire world. For instance, in Europe the countries along the Atlantic coast are being affected by drought, while intensive tourism is threatening water supplies in the Mediterranean region. Salination is a threat to irrigable farming in the US, and the high level of water pollution can no longer be ignored. In Australia, a naturally dry continent, the salt content in the soil is a threat to agricultural activities. And Japan, in spite of its very high rainfall, is having to contend with very serious water pollution.

The water crisis is evident not only in facts but also in figures. North America and Japan head the field, with daily water consumption of 350 litres per head. Europe is second, with daily consumption of 200 litres, a marked contrast with the daily consumption of between 10 and 20 litres in sub-Saharan Africa. These figures seem relatively high until we consider the virtual water content of some products: 200 litres of water are needed to produce one 200 ml glass of milk, and it takes 40 litres of water to produce one 30 gm slice of bread and 135 litres of water to produce one egg weighing 40 grams. Last but not least, it takes no less than 2400 litres of water to make one 50 gm hamburger.

All of this means that even developed countries accept that we need to be more careful with water, and that it is essential to return as much water as possible to nature to maintain the natural ecosystem. Indeed, the cost of repairing damaged ecosystems is ten to a hundred times greater than the cost of protecting such systems.

Water must be seen for the valuable commodity that it is, and a balance must be found between water supplies and water consumption. Attitudes to water will change radically. The extension of existing international treaties, including the UN Convention on Water Courses and The European Framework Directive on Water may contribute to this. Many adjustments and repairs to the infrastructure network are needed. In London, the amount of water lost each day because of obsolete water pipes is the equivalent of 300 Olympic-sized swimming pools. Agriculture needs to focus on using water efficiently and reducing water pollution. Farming subsidies are frequently counterproductive in terms of water efficiency, because these measures do not pass on the actual cost of the water to the farmer.

This is not just a structural growth sector. It is also very extensive, covering the provision of water and also builders of infrastructure, manufacturers of desalination equipment, filters, pumps and other specialist equipment.

High oil prices, a boost for renewable energy

It is estimated that global energy consumption in 2030 will be two and a half times greater than in 1980. Despite the fact that oil will very probably remain the most important source of energy until 2030, the share of oil in the overall energy mix is declining.

The doom scenario of exhausted oil fields resulted in the development of renewable forms of energy as far back as the 1980s. Today's permanently high oil price makes it possible for new alternative technologies, subsidised or not, to play a competitive role on the energy market. This has led to more variety in the present energy mix, and the dependence on a single dominant source of energy – oil – is decreasing.

According to the World Energy Outlook 2006 report, 20 000 billion dollars will need to be invested in the next 25 years to satisfy the global thirst for energy. In addition to rising demand for energy, today's obsolete infrastructure will inevitably result in fresh investment in energy. On top of this, countries wish to become less dependent on imported energy in order to adequately safeguard their energy supplies. Lastly, the increasing focus on climate change also plays an important role. Alternative technologies are characterised by their aspirations to be more sustainable and environmentally friendly.

Renewable energy takes various guises. Wind energy, biofuels and solar energy offer the widest range of applications at present, but research into the use of hydrogen, geothermal heat, carbon storage, etc. continues apace.

Within the solar energy sector, all the stages in the value chain are considered, ranging from the production of silicon through production of wafers, cells and modules to integrated systems. The main applications are found in two different fields. Firstly, electricity can be generated by converting light from the sun via photovoltaic cells. Secondly, heat can be generated by solar boilers and the like. Japan, Germany and the United States are the market leaders in the solar energy sector. There is considerable government support for solar energy in these countries.

Wind energy has become four times more cost effective in the past ten years, partly due to the possibility of constructing larger turbines. Germany and the United States are also the market leaders in this sector, but Spain is also an important player. There is expected to be a boom in offshore wind farms, because onshore sites are becoming scarce. Despite the higher investment costs, offshore wind farms have a number of advantages over onshore farms. Firstly, they are less unsightly and cause less noise pollution. The number of full load hours – i.e. the number of hours that a wind turbine turns in relation to the total number of hours in a year – is also higher. Lastly, the average capacity of an offshore turbine (2.1 MW) is greater than that of the average onshore turbine (1.3 MW).

In the biomass sector, the most important products are bio-ethanol, derived from the fermentation and distillation of sugars from crops such as sugar cane and sugar beet, and biodiesel, derived from the chemical transformation of plant or animal fats. In addition to these two biofuels, biogas is attracting increased attention. The major advantage of biogas compared to bio-ethanol and biodiesel is that the entire plant, rather than just the fruit, can be used in the anaerobic fermentation or thermochemical gasification of organic materials. As well as these conventional biofuels, the second generation of biofuels is also being developed. This technology endeavours to use ligno-cellulose to produce ethanol. Although there has already been some progress in this field, this technology has not yet been developed on a commercial scale.

The world of tomorrow

Climate change is not a new concept. Throughout history the climate has been subject to change, and this will continue to apply in the future. This begs the question as to why there is such widespread concern, because people have always managed to adapt to climate change. That could be seen as quite a logical view, except that it completely overlooks the time frame involved. In the past, climate change was a very slow process, but it appears that the climate is now changing faster than ever before.

The fact that a sudden change in climate does indeed pose major problems can be deduced from the importance of the climate. Indeed, the type of climate determines the amount of solar energy and rain that reaches the earth, and the vegetation that can grow. So any change in the climate has far-reaching consequences.

On the one hand, volcanic and solar activity is cited as causes of climate change. On the other hand, the human factor plays a determining role. The change in the composition of the atmosphere is one of the major factors here. This change is frequently linked to the greenhouse effect, the natural process that contributes to global and atmospheric warming. The negative impact of climate change lies in the fact that the greenhouse effect is exacerbated by the increase in greenhouse gases, resulting in warming outside the normal limits and possibly giving rise to negative consequences such as extreme weather. In order to minimise global warming, the amount of greenhouse gases will have to be drastically reduced.

Although there is no simple answer to climate change, there is a consensus that measures and investments announced by governments and the corporate sector must focus mainly on cutting CO2 emissions. The measures are aimed primarily at cutting CO2 emissions from fossil fuels by reducing demand for carbon-intensive products, increasing energy efficiency and switching to low carbon technologies.

In this sector, the main companies are those that focus on clean energy, comprising renewable energy and cleaner energy technologies, trading CO2 emission rights and energy efficiency Promising companies are also to be found in the fields of recycling, waste processing, new materials and water.

Liontamer Investments Ltd launched the KBC Global Water Fund in Australia in Nov 2007. The fund’s investments are managed via its parent company KBC Asset Management. The existing KBC Water fund has over $2 billion under management and a 7 year track record. Liontamer hopes to introduce two further funds during 2008 – Alternative Energy and Climate Change, to complete the Eco Series.

The Product Disclosure Statement for the KBC Global Water Fund is available upon request to Liontamer Investments Ltd. This should be considered in full before deciding whether to acquire or dispose of an interest in the fund. The views expressed are opinion only and should not be construed as investment advice.