Looking for green returns
Experts urge caution as investors
flock to environmentally friendly companies
Oct 28, 2007 - Frank Norton - San
Green is good. At least that's the bet of an increasing
number of investment fund managers, retirees and armchair
stock pickers who are pouring billions into “green”
stocks, and not necessarily for the love of nature.
They're chasing lucrative returns from companies
that promise new ways to recycle, power automobiles
and harness the wind and sun. Many have succeeded.
Some green investment funds that have been around
for at least a year report double-digit gains for
the past 12 months.
The KLD Global Climate 100 Index (KLDY), which tracks
companies working to offset global warming or its
effects, is up nearly 25 percent.
Priming the pump are rising concerns over global
warming, higher energy prices and shrinking natural
resources. Companies of all sizes and various products
are rushing to embrace environmentally friendly practices
and products – and tougher environmental laws will
force further change.
“Think about it. Are we likely to see more clean
energy companies or less?” asked Tommy Sikes, who
runs an investment advisory firm in North Carolina.
Enough of his clients started asking about green investment
options that Sikes now includes a brief green talk
with all new clients.
Experts caution that choosing green is riskier than
Environmental technology companies tend to be smaller
and are more volatile investments than larger stocks,
even when pooled in a fund. Also, it's nearly impossible
to determine whether a particular company, or sector,
will prevail as a new business standard. Technology
moves quickly, and there's often no consensus among
policymakers and consumers as to which solution makes
the most environmental and economic sense.
A well-thought bet, even if proved right in the long
term, may bleed miserably in the short run.
And beware of hype. At least some of the rich returns
seen in the green sector in recent months were driven
by popularity more than innovation.
“You want to make sure you're not investing purely
for the label,” said Katrin Burt, an associate with
Intersouth Partners. The East Coast venture-capital
firm specializes in life-science and software technology
but has held back from a green investment strategy.
Many smaller investors probably don't need a niche
investment strategy in the first place, said David
Kathman, who covers the broader realm of socially
responsible investment funds for Morningstar, which
tracks investment funds.
The fact that “green has exploded” among investors
has as much to do with marketing as it does underlying
value in the market, Kathman said. “When there's demand
for green, the industry responds with products.”
Indeed, the number of green mutual and exchange-traded
funds in the United States jumped to 21 from 12 in
the past two years, Morningstar reports. Assets in
those funds more than doubled to about $4.1 billion
as of June.
The upswing comes amid ominous predictions for global
warming typified by Al Gore's documentary, “An Inconvenient
Truth,” and the recent “Live Earth” concerts. The
pop-culture events captured the attention of corporations
and consumers, neither of which wants to be seen as
indifferent to the environment.
While emotions may drive many small investors, they're
not the stuff sophisticated bets are made of, said
Kurt Reiman, head of thematic research at UBS Wealth
Management Research and co-author of the report “Climate
Change: Beyond Whether.”
“Environmental policies coming into form will radically
alter companies' ability to make money,” Reiman said.
“It's gone way beyond the socially responsible.”
That means many stocks from insurance to energy
will rise or fall based purely on their exposure to
climate and regulatory changes, regardless of their
The broadening of the green investor base has also
fostered new shades of products that flourish beyond
traditional grass roots.
The Spectra Green Fund (SPEGX), launched in January,
caters to investors primarily interested in return,
with environmental soundness a guiding but secondary
principle. The fund is open to mining and energy concerns
as long as the companies seek ways to reduce their
“Rather than deciding to shun entire industries and
sectors, we believe that a green fund should be composed
of companies that seek to address environmental issues
in all areas of the economy,” the fund's distributor,
Fred Alger & Co., writes in a marketing statement.
For Burt, of Intersouth, any prospective green investment
should be held to basic investment standards.
“It's important that any opportunity is looked at
for whether it's truly differentiated, not just whether
it's green,” she said. “Is this company really a solution
for a large market? If not, what's the point?”