As Australia inches towards a deal on a carbon price, and a package of measures that will promote renewables and energy efficiency, Australian investors both big and small will finally have to grapple with the concept of green investment. They are likely to find it’s a tricky business.

These may be the industries of the future, but a quick glance at the NEX, the global clean energy index that is down 8 per cent just for the month of June, or even Australia’s own Cleantech index, down 60 per cent since late 2007, reveals a sorry tale.

The cleantech/climate sector is still beholden, like no other, to political whim; and, as an emerging industry, is still subject to the highs and lows of technology discovery. To complicate matters further, it is also exposed to the massive intervention of the Chinese economic machine, which doesn’t much care about listed stock prices, as long as it ends up with the lion’s share of a market.

A recent review of “climate themed” stocks by HSBC has highlighted the massive diversion of performance in cleantech stocks globally, and the influence that the Fukushima nuclear crisis has had on some sectors.

Global banking group HSBC says its global climate benchmark outperformed global equities (as measured by the MSCI) by 0.8 per cent in 2010/11 up to the point of the Fukushima disaster in late March. Since then, the position has been reversed. And by early June, the climate benchmark had returned minus 1.8 per cent in the year to date, compared to a 2.7 per cent gain for all equities.

Europe, however, remained strong, returning 10.4 per cent in the year to date, having attracted more than 40 per cent of the $35 billion that global asset managers pushed into the industry. North America stuttered and returned a small deficit as its public policy waxed and waned, while the Asia Pacific plunged more than 20 per cent over the year, crunched by Fukushima, overcapacity and plunging margins.

The graphs below give an insight into which sectors have been hot, and which have not. It’s interesting to note how the respective sub-sectors respond to government policy.

In Europe, which was positive overall thanks to its relatively strong carbon pricing and renewable policies, the best sectors were pollution controls, diversified renewables (thanks to some large-scale M&A), emerging technologies such as geothermal, wave and hydro power, energy storage, solar and integrated power (thanks to rising energy prices). Nuclear was one of the few negatives.

The North American returns reflected the indifference of federal policy, with the exception of transport fuels, mostly likely due to the now rescinded subsidies for ethanol. Nuclear and industrial efficiency were the big losers.

Asia-Pacific told a different story. The only positive returns came from the emerging renewables, which were up more than 10 per cent, and mature renewables, which made a small gain. Integrated power slumped 45 per cent, a reflection of how Chinese power producers in particular are getting burned by rising coal prices and an inability to pass on those costs to customers.

And what next? HSBC suggests the low price/earnings ratios and upward revisions to earnings per share forecasts makes the Asia-Pacific market particularly attractive. Forecast EPS growth in 2012 for climate-related companies in the region have been lifted to 25.8 per cent from 21.2 per cent in March, with consensus EPS growth forecasts for low-carbon technologies now at 31 per cent growth in 2012.

This, says HSBC, is being pushed by policy changes at local government levels, and the extraordinary targets set by China for cutting carbon emissions per unit of GDP and for installing hydro, wind and solar capacity.

Tim Buckley, an investment manager with ArkX, an Australian firm that specialises in international clean energy stocks, says the Chinese market in particular may be hard to read for those used to dealing with mature and well established industries.

He notes that many Chinese stocks are being clobbered by excess capacity. “The Chinese manufacturers are scaling up, but because they are not yet getting the volume payback in Europe and the US, prices are being driven down,” he says. The flip-side is that those price falls will likely benefit China as it seeks to fill its mandated targets for wind and solar.

“The Chinese and the Asian companies are looking to the longer term,” Buckley says. “Can equity markets appropriately value companies focused on long-term goals rather than the short term? It’s hard to double capacity without a significant contraction of margins. But the Chinese government doesn’t care. It wants to dominate the world market. China has played a very astute game.”

That has one positive spin-off for the likes of Australia, particularly in the solar PV market. Buckley notes that solar module prices have dropped 25 per cent already in 2011. (LED and wind prices are also falling). “Last year’s move in Australian PV prices was mostly about the exchange rate. This year, module prices have already dropped 25 per cent. Power prices are going up 20 per cent year on year. Grid parity is coming closer and any study on grid parity down six months ago is already out of date.”

Just as a rather bleak aside, HSBC’s report does not include Australia because no Australian stock is deemed worthy of inclusion in its index. Indeed, Australian cleantech stocks are 60 per cent below their levels of late 2007, after an 8 per cent fall in May and a 17 per cent fall in the past 12 months – driven by a lack of policy incentives and uncertainty about the future of a carbon price and the renewable energy market.

Australian Cleantech noted that the worst performers in May were Dyesol, Sylex Systems, Infigen Energy, Water Resources Group, Transpacific Industries, Sims Metal Management, CBD Energy, Redflow, Geodynamics and Coffey Environments. Only 13 out of 81 stocks posted positive returns, including Carbon Conscious, Orbital Corporation, Advanced Energy Systems and Eden Energy.