The three main fossil fuels of coal, oil and natural gas provide over 80% of the world’s primary energy. The generation of power from renewable resources will be a key contributor in achieving global emission reduction targets. The International Energy Agency (IEA) expects to see aggregate global energy demand to double in the next two decades from current levels as the population increases, new consumers in the developing world acquire electronic products, and the growth in computing consumption rises. This surge in demand coincides with a global drive towards lower carbon generation sources. The low carbon energy production industry captures this opportunity.

The industry includes companies which supply to, or are involved in generating power from renewable resources such as wind and solar, and which emit little or no carbon compared to existing methods using fossil fuels. Renewable energy production is only a part of the solution for transitioning towards a low carbon environment but historically it has been the most common and accessible investment theme.

Renewable energy production technologies include:

• Solar power as
  • solar thermal: for direct heating of buildings or water;
  • solar photovoltaic (PV): using panels to convert sunlight into electricity
• Wind: onshore and offshore, where the wind is steadier and stronger than on land, but more expensive to use
• Hydroelectricity, geothermal (using the earth’s heat), and marine (use of wave and tidal power) to generate electricity
• Bio-energy, which covers many forms such as second generation biofuel production

Excluded from the list are other funds, nuclear generation, natural gas, and mining companies. The latter two are not renewable sources of energy. And whilst nuclear power generation has a role to play in the move towards a low carbon environment, an investment decision to include it in a portfolio is highly specific to each investor; therefore it has been excluded from the index.

More expensive energy, along with concerns about its availability and environmental impact, has renewed interest in finding more efficient ways to use it. “The cheapest source of energy is the energy never used”. A recent McKinsey Global Institute report estimates that gains in energy efficiency alone could halve projected growth in energy demand and would involve exploiting $170 billion of investment opportunities annually from now to 2020. The IEA estimates that half of targeted emissions reductions will come from energy efficiency, and that one third of the world's energy needs in 2050 could be reduced by more energy efficient buildings, industrial processes and transportation. In the US alone McKinsey estimates that an investment of $520bn would cut non-transportation energy by 23 per cent of projected energy demand, saving their economy more than $1,200bn. And in the UK, the introduction of a new regulation, the Carbon Reduction Commitment, from next year will encourage the owners of commercial premises to make buildings much more efficient.

Energy efficiency and management companies provide new technologies that enable energy conservation and efficiency services and products such building insulation, sophisticated temperature monitoring and control, efficient lighting, energy storage and batteries, e.g. for hybrid and electric vehicles.

Successfully transitioning to a low carbon environment also requires core infrastructure for the transmission and distribution of electricity to be significantly upgraded and made more flexible. Existing ageing infrastructure is a legacy from a period when energy was relatively cheap and plentiful. Smart technologies are needed to integrate renewable and clean energy technologies into the network and to enable better management of electricity demand and consumption.

Companies in this segment are involved in the installation and development of power infrastructure and smart grids with sophisticated systems for managing power supply and demand efficiently, as well as the provision of smart metres and sensors.

Finally the ability to store energy will feature strongly in the use of many technologies going forward. Energy storage is required to power next generation hybrid or electric vehicles, or to extend appliance functionality. It can also improve the reliability of intermittent renewable resources, making them more competitive with traditional fossil fuel based generation.

This sector is very broad, and companies are categorised into the following sub-sectors:

• Building efficiency
• Industrial efficiency
• Transport efficiency
• Fuel cells
• Energy storage

Water shortage and quality is a key issue for the world. 2.4 billion people, over one third of the world’s population, live in water stressed countries suffering from a lack of clean, non-polluted water and by 2025 the number is expected to rise to two thirds42. The global water market today is estimated to be worth around $500 billion annually water treatment is a rapidly-growing sector for investment opportunities.

Less than 3% of the world’s available water is fresh, and 70% of this is frozen. Fresh water consumption worldwide has more than doubled since World War II and the increasing demand has seen the arrival of new technologies including ‘smart irrigation’ and leak detection systems to reduce waste and consumption. Any technology that promotes the efficiency of water use for domestic, agricultural or industrial production purposes is highly valued.

Waste and Pollution Control: Limits on the ability to use landfill and increasingly tight restrictions on the discharge of waste and waste by products into water systems and the atmosphere are driving increasing levels of investment in waste infrastructure and technology. With the depletion of existing metals and minerals, the demand for recycled resources is expected to rise, relieving some pressure on the environment. Waste management technology advancements, including the storage and treatment of hazardous substances, and technologies focused on the conversion of waste to energy also provide investment opportunities. Example applications include landfill methane capture, composting and anaerobic digestion, the conversion of waste to energy, waste water management and the sorting and recycling of materials.

Although a nascent market, there will be more significant opportunities for low carbon financing as carbon regulation becomes implemented on a global scale.