Zeus: If it's not commercial, it's not sustainable

By David Callaway, Callaway Climate Insights

A publicly-traded UK investment trust finds profit and purpose in energy efficiency.

SAN FRANCISCO (Callaway Climate Insights) — If it’s not commercial, it’s not sustainable, Jonathan Maxwell likes to say.

A financial entrepreneur in the growing business of efficient energy, Maxwell creates value from wasted heat and gas. From steel mills in Indiana to olive presses in Spain and the lighting of 800 Banco Santander buildings in the UK, Maxwell’s Sustainable Development Capital Ltd. in London is one of the pioneers in financing projects that save energy by making more creative use of it.

As the drive among companies in the UK and U.S. to adapt green strategies has spiked in the past 12 to 18 months, it’s revealed special opportunities in the efficient energy space, which is larger than the renewable energy businesses of solar and wind, but can have high costs and regulatory barriers to entry.

In late 2018, Maxwell launched the SDCL Energy Efficiency Income Trust (LSE:SEIT), which is the only one of its kind on the London Stock Exchange and whose market value has tripled to 333 million pounds ($407.5 million) in the past year (including a recent, Covid-driven downturn).

More than 40% of the world’s energy is used in buildings, but more than half of that energy can be lost or wasted in poor transmission and distribution systems. And more once it’s in the building. Those losses account for about a third of global greenhouse gas emissions, more than any other sector. Efficient energy is the business of using that lost energy, such as heat generated from electricity, instead of wasting it.

Investors targeting energy efficiency and renewable projects supported almost 500 green bonds last year worldwide, many in Asia, according to CNBC, and more than a dozen environmental, social and governance (ESG) funds currently offer exposure to the energy efficiency business.

Maxwell said he first noticed the opportunities while running infrastructure projects for HSBC Plc 15 years ago. He left to focus on environmental infrastructure and start SDCL in 2007, and to date has committed more than 750 million pounds in capital to projects around the world.

“It’s become an incredibly interesting place to focus for value,” Maxwell said in a phone interview from lockdown in London.

The International Energy Agency estimates that the global market for energy efficient projects is more than $300 billion. Maxwell said the UK market alone is about 20 billion to 30 billion pounds a year, with high-energy places like hospitals, telecom companies and other data centers among the biggest users.

After five years of consulting and advising clients on energy strategies, Maxwell and his team decided in 2012 to start investing themselves. Currently, they are in 26 projects, including a combined heat and power plant (CHP) to run London’s St. Bart’s Hospital. He said the trust has been acquisitive, and has placed shares three times in the past year.

Their latest investment involves a portfolio of five projects in Indiana, including two steel mills. Steel production is one of the biggest pollutants in manufacturing, so the ability to reduce waste and reuse the energy gives the mills valuable renewable energy credits. While the portfolio generates 298 megawatts of energy, because of the savings on waste and renewable energy, it receives credits of 536 megawatts of solar power, Maxwell said.

One megawatt will produce enough electricity to power about 650 homes.

As financial asset managers invest more money in climate change strategies and innovations in coming years, Maxwell said the efficient energy market will continue to be among the best opportunities for investors because it is such a specialized space. One area he really likes will be investments in projects designed to help us adapt to rising temperatures around the world.

“You’re going to see really interesting opportunities in the cooling side of the equation,” Maxwell said, predicting a billion new air conditioners in the next five years will be needed in buildings.

Also, efficient buildings can be a first line of defense against grid outages, which are increasingly feared as cyber terrorism increases and natural disasters such as wildfires become more frequent and widespread.

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