Fears are mounting of a bubble in funds investing in renewable energy stocks as asset management companies rush to launch funds to tap into the environmental zeitgeist.

In the first seven months of 2007, 15.2 per cent of net inflows into equity funds across Europe, some EU4.6bn (£3.2bn, $6.5bn), went into ecological or environmental funds specialising in areas such as alternative energy, according to data from Lipper Feri, up sharply from 2.6 per cent of flows in 2006 and 0.6 per cent in 2005.


This rush of money into relatively small-scale industries such as wind and solar power has pushed valuations higher. The Power Shares Global Clean Energy Portfolio, an exchange traded fund based on the WilderHill New Energy Global Innovation Index, was trading on a historic price/earnings multiple of 40 at the end of June, against 17.2 for the S&P 500 and 11.9 for the FTSE 100.

Two of the index's leading holdings, EDF Energies Nouvelles of France and Australia's Babcock & Brown Wind Partners, trade on trailing p/e ratios above 140.