Every investor wants to identify attractive investment opportunities. If you are like many investors, you may also want to help protect the environment. Wouldn’t it be great if you could do both at the same time?
Maybe you can. By seeking out companies that attempt to minimize environmental damage or are developing techniques to improve energy efficiency, recycle industrial wastes and combat global climate change, investors may be able to do good for the planet while doing the right thing for their portfolios.
This strategy, called green investing, is grabbing the attention of both institutional and individual investors—thanks to rising oil prices, increased concern about greenhouse gases like carbon dioxide and regulatory incentives that are encouraging major corporations to adopt more environmentally-friendly policies and boost their own spending on clean technologies.
This trend is part of a larger movement toward socially responsible investing—screening potential investments based on both traditional financial criteria and the investor’s own moral or ethical standards. Nearly one dollar in every ten under professional management in the United States today is invested using such screens, and environmental issues are increasingly moving to the top of the list. Consider that:
- In one 2006 survey of investors, 91 percent said they favored socially responsible strategies because they wished to avoid companies they believed harm the environment.
- Two of the nation’s largest pension funds, the California Public Employee Retirement System and its educational counterpart, the California Teachers’ Retirement System, have invested more than $1 billion in environmentally screened investments.
- More than 1,200 corporations have endorsed the Global Reporting Initiative, a multinational effort to create a standard set of environmental criteria that investors and other stakeholders can use to evaluate company performance.
Increasingly, however, green investing involves more than just screening companies to identify those with acceptable environmental practices. The drive to improve energy efficiency and find alternatives to fossil fuels is creating new markets and stimulating the growth of new companies, and even new industries, to serve those markets.
Clean Edge, an environmental research firm, has estimated that annual spending on four alternative energy technologies—solar power, wind power, biofuels and fuel cells—rose almost 40 percent in 2006, from $40 billion to $55 billion. Clean Edge predicts that the market will reach $226 billion by the year 2016. Citi analysts, meanwhile, have identified dozens of companies in more than 20 industries worldwide that they expect will benefit from the effort to combat global climate change.
One key factor driving the growth of green technologies—and green investing—has been the international regulatory response to the climate-change issue. Efforts such as the 1997 Kyoto Protocol, which capped greenhouse gas emissions by certain countries, have spurred the development of markets that allow companies to buy and sell carbon credits, which give them the right to release carbon dioxide and other greenhouse gases.
Although the United States has not ratified the Kyoto Protocol, and a number of developing countries, such as China and India, are not required to limit their greenhouse emissions, the carbon-trading market has grown rapidly, particularly in the 27-nation European Union. This has created new opportunities for banks and other financial institutions and has also promoted investment in reforestation and other carbon-reduction projects in emerging economies, which can then be converted into credits.
Not surprisingly, these same trends have also prompted the investment industry to jump into green investing in a big way, offering a variety of mutual funds and other vehicles that bill themselves as “green,” either because they avoid companies they consider environmentally unfriendly, invest in firms expected to benefit from a growing environmental market, or both.
There’s no question that green investing can generate attractive investment opportunities. However, investors would be wise not to go overboard in pursuing those opportunities—by making a company’s environmental track record their sole investment standard, for example. More traditional criteria, such as price, valuation and expected earnings growth, still need to be taken into account, as does the wisdom of diversifying a portfolio by including a variety of sectors and industries.
It’s also important not to take claims of ecofriendliness at face value. Green-oriented funds use a variety of strategies to screen stocks, and these strategies can influence—and be influenced by—other factors, such as portfolio diversification.
Some funds, for example, evaluate the environmental performance of companies in absolute terms, while others do so relative to industry peers. The former practice can result in a “greener” portfolio but also a less diversified one. The latter method may enhance diversification but leave investors exposed to industries not typically considered friendly to the environment.
Today, investors have access to a wide range of environmentally sensitive investment vehicles, including funds offered by leading socially responsible fund companies such as Calvert, Domini and others. You can also draw on research from a variety of sources that will help advise you on stock selection or your choice of managers and funds. TPW
