From the February 2008 issue of Boomer Market Advisor • Subscribe!

The dollars and sense of going green

Traditionally, the term "environmental awareness" brought hippie idealists to mind, living communally, growing organic food and existing off the grid, so to speak. It may be a stereotype of years past, but environmental consciousness is back in a big way. And it isn't just boomers reliving their younger days or college students sowing their idealistic oats.

"Green investment," says Nicolas Huber, "sounds like a long-hair investment scheme."

But it's hardly the case, he says. The lead portfolio manager of the DWS Scudder's Climate Change Fund (www.dws-scudder.com) explains that international corporations, financial powerhouses and mutual fund managers have all come to realize that investing green is a popular, and profitable, endeavor.

The shift is due in large part to the expansion of green's definition. In some parts of the socially responsible investing model, there are filters in place to exclude certain companies or entire sectors. But far fewer filters exist for green funds. Fund managers and investors realize that certain oil companies, car makers, energy companies, waste management corporations and many more businesses in formerly forbidden industries are doing what they can to go green.

"The thinking has changed and the research is better," says Keley Petersen, a wealth manager at Contango Capital Advisors Inc. (www.contangoadvisors.com) in Berkeley, Calif. "[Fund managers, advisors, analysts] go into more detail and ask, 'Are there oil companies doing proactive sustainability work? Are they not fighting EPA guidelines? Is there anyone working for higher environmental standards?' There is now opportunity in supposedly dirty sectors."

Advisors and consumers who still look at green/environmentally conscious investing as pie-in-the-sky idealism could be missing out on the next wave of profitable investment choices.

Changing of the green

"If you want economic growth in the future, you need alternatives," Huber says. "That is the starting point for a fund like [ours]."

The DWS CCF prospectus says it's looking for companies "engaged in activities related to climate change," which generally means companies that are "engaged in businesses whose growth is supported by increased environmental regulation, or which are developing and implementing ways of adapting to climate change, reducing environmental pollution, reducing or managing climate impact or increasing energy efficiency."

"We are looking for big opportunities," Huber says. "Who is helping these companies get clean and green?"

The question leads Huber and his portfolio-managing brethren to dig deep into each sector and find companies in the fourth or fifth derivative of an industry, businesses that are creating new technology and providing green services. Huber uses LED lamps as an example. Funds can buy LED lamp producers, but they also can buy companies that produce the machinery that produces the bulbs. Companies that are creating ways to make cars lighter -- thereby improving gas mileage and reducing energy costs -- are prime candidates for green investment funds. The Winslow Green Growth Fund (www.winslowgreen.com) recently purchased shares of Basin Water, a designer and builder of systems for treating contaminated ground water, and Casella Waste Systems, a company with technology that recycles diverse waste streams without having to separate the materials. According to its Web site (www.spectrafund.com), the Spectra Green Fund thinks companies that address environmental issues economy-wide are prime candidates for purchase. Examples it points to are companies that manage chemical plants' polluted run-off and companies that are figuring out how to generate more electricity without increasing carbon emissions.

The point these fund managers make is that green funds don't just hold positions in organic farms, hemp clothing companies, Starbuck's and companies that don't test their products on animals. The companies in green portfolios today are the businesses that are on the cutting edge of environmentally friendly technology, products and actions -- companies that are creating insulation that allows buildings to hold in more energy and companies that are developing material that will make power lines more efficient so they bleed less electricity.

Here to stay

Unlike many slogans that accompanied environmental movements in the past, green investing appears to be a long-term proposition. The stepped-up fund focus on broader inclusion instead of blanket exclusion is another sign that green portfolios are in it for the long haul. With industry heavyweights jumping onboard, green is a definite go, say industry professionals.

"[Green] is getting more mainstream," Huber says. "More and more investment houses are looking into this." He cites Morgan Stanley and Lehman Brothers as examples.

Petersen agrees. "We're seeing it filter into the traditional mindset. More traditional firms like Goldman Sachs are making moves to alternative energy [and other funds]. Investment firms realize that green isn't just for granola crunchers anymore."

On the Spectra Funds Web site, Christopher Walsh, vice president and portfolio manager of Spectra Green Fund, says this: "I don't think it's temporary. I think companies are integrating green practices into their infrastructure. For example, as the cost of energy rises, many companies will be building green buildings, knowing that the upfront cost may be 15 percent to 20 percent higher, but that they'll have as much as 30 percent lower operating costs year in and year out for the next 20 years."

This is perhaps where green investing may make its biggest mark; in convincing companies that haven't already done so to integrate green thinking into their planning and practices.

Baby boomer clients may not be aware of the shift in thinking. Many vote with their conscience by placing investment dollars where they think it can make a difference, but many boomers are pragmatic about their future, well, and want their money to grow. The opportunities that exist within new green funds can help an advisor reassure, and gain business from, boomer clients.

"Since many companies with green business themes are also the more visionary firms," he says, "we believe that the more attentive a company is to environmental issues, the better it will do in terms of new markets, efficient use of capital and earnings growth."

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