In today’s extremely tough and uncertain economic environment, the battle against climate change is getting fewer inches of column space. Inevitably, the most immediate crises dominate headlines. However, this economic environment is providing momentum for an important trend within the climate change investment space: energy efficiency.

Energy efficiency should deliver returns through the cycle

The scientific evidence for climate change and its impact on the world are beyond reasonable doubt; governments around the world increasingly accept this. But with fiscal discipline the priority, governments are less able to subsidize green initiatives, and companies want investments that offer an immediate return on capital.

Energy efficiency as an investment theme covers a multitude of technologies from lighting to electricity networks to transport. What the business models have in common is that they dominate the cost curve for ways to reduce energy consumption and carbon emissions. And the payback is clear and quick.

McKinsey’s carbon abatement curve (see below) clearly shows the dominance of energy efficiency returns (left-hand side) over the costs of clean energy production (right-hand side). Technologies below the line have a positive payback, or negative overall cost.

Consequently, fearful consumers, cautious companies and cash-strapped governments are driving structural growth in these technologies. What’s more, while fearful markets dislike anything cyclical for investors seeking growth in a defensive environment, energy efficiency industrials, materials and consumer products should deliver good returns through the cycle.

Driving change in the auto sector

By way of example, the auto sector offers many compelling energy efficiency investment opportunities. Increasingly aggressive regulation of vehicle emissions and fuel consumption will propel rapid deployment of new technologies. In November, European Union legislation will require all tires to be labelled according to their fuel efficiency (tire resistance consumes 20% of fuel today), wet braking and external noise. Japan introduced similar regulation in 2011, and the United States and South Korea are expected to follow shortly. Companies that have made significant efforts to reduce rolling resistance and promote green tires are set to benefit.

Staying in the auto sector, more fuel-efficient engines are increasingly an important growth driver. Demand for turbocharged engines—which allow more air into the combustion chamber, thereby allowing more power to be produced for a given engine size—is being driven by the same regulation. In 2008, just 2% of U.S. vehicles were equipped with turbochargers. By 2011, almost 10% had turbochargers, and by 2017 it is forecast that almost a quarter of U.S. vehicles will be equipped. With an estimated 35% saving on fuel, combined with high pump prices putting pressure on consumers, we expect manufacturers of turbochargers to benefit.

Taking share from energy efficient housing

Elsewhere, low carbon or energy efficient housing is an increasingly successful company strategy. In 2007, there was little in the way of housing-related companies that had based their strategy on low-energy housing. In 2012, that has changed, with a number of house-builders clearly outperforming their markets through a focus on best-in-class products.

Consumer awareness has moved to the point where additional investment in products to achieve low energy use and integrated renewable generation is able to be priced in to the value of the home, as well as drive brand and product awareness. The savings to consumers are significant. According to one company in the sector, the potential savings from energy efficient housing range from $1,770 in the first year to $84,208 over 30 years. Housing companies tapping into this trend are already taking share within their respective markets as a result of clever early positioning of their housing product portfolios.