From the June 2008 issue of Investment Advisor • Subscribe!

A Perfect Combination

Green is the color of money and of environmental activism

The first Earth Day in 1970 made a deep and lasting impression on me, as I'm sure it did on the other 20 million Americans who took part in events in parks, on city streets, and in educational venues around the country that day. I was a freshman in high school and serendipitously on that April 22, my school had only a half-day session.

Along with a friend from my science class I hopped a bus into New York and took the subway to Union Square, which was ground zero for the event in the city.

It was a wild scene for a kid from New Jersey with people making fiery speeches, tables set up with environmental literature, and a street theatre troupe putting on a show about pollution. It was an event of the time with Pete Seeger--who I thought was pretty old, although it turns out he was younger than I am now--singing songs like "Where Have All The Flowers Gone" and "If I Had a Hammer." I lent a hand to help hoist up a 20 foot-tall tree that had been trucked in from somewhere more rural to plant in the park.

In the almost four decades since that time there has been a slow and steady change in American thinking regarding the environment, much of it spurred on by baby boomers who took part in that initial environmental consciousness-raising event.

It's not important whether you believe in the Kyoto Protocol or not; the fact is that the world has changed, your clients are changing, and you have a choice to lead the way or be perceived as behind the times. That's what this column will, over time, help you do: serve the green needs of your clients, and suggest ways for you to incorporate green principles into your practice.

My, How Things Have Changed

Let's first look at the changes that have occurred. Consider that prior to 1970, the Environmental Protection Agency didn't exist. There wasn't much of a recycling business other than for old newspaper and scrap metal. Now, the recycling of aluminum, glass, newspaper, and cardboard is the law in most communities. Lead paint was common in homes and on toys, and they didn't come from China. The bald eagle, our national symbol, was an endangered species. Air was dirty. Many rivers, lakes, and streams were unsafe for recreational pursuits like swimming or fishing.

But many things have gotten better. Here are just a few:

  • According to the National Center for Public Policy Research, between the very first Earth Day in 1970 and the one in 2005, aggregate emissions of the six principal air pollutants dropped by 25%, while energy consumption increased 42% and the number of vehicle miles traveled increased by 149%;
  • Despite government tax and emissions policies that have encouraged housewives to drive behemoth SUVs to the mall, American consumers have enthusiastically embraced the concept of the hybrid automobile;
  • Al Gore got both an Academy Award and a Nobel prize for his work to raise awareness of the potential impact of global warming;
  • On May 1, Kohlberg Kravis Roberts announced a deal with the Environmental Defense Fund "to measure and improve the environmental performance" of companies within its U.S. portfolio.

It's What the People Want

It appears that many of your clients have a desire to invest in companies with a green tint and are probably hoping you can tell them how to do it. An Allianz Global Investors study found that 49% of the 1,003 investors (each with $100,000 or more in investments) polled said that "over the next 12 months they were likely to invest in a company or mutual fund looking to provide solutions for environmental problems." Since people often give pollsters the answer that they think will leave the questioner with the most favorable impression of them and not the absolute truth, the 17% who said they had actually already made such an investment present a much more encouraging sign.

Of course when it comes to green investing, as with many other things, the devil's in the definitions. How green is green? Does doing the right thing green-wise mean I (or my clients) will need to sacrifice something else, like 100 basis points of return in a large-cap SRI fund compared to its benchmark or a lower margins for my advisory firm if I adopt green-friendly business practices?

It seems to me that two of the biggest problems facing the planet, both of which qualify as green issues, are affordable sources of renewable energy and access to adequate supplies of clean water. A few months back advisor Walter Gerasimowicz of Meditron Asset management in New York told me that he refers to water as "blue gold" and sees tremendous potential in a number of international companies involved in water treatment and desalinization.

A green approach has always been a big part of the SRI movement. Pax World Funds, based in Portsmouth, New Hampshire, launched the first SRI fund in 1971 and has continued to look for new investment opportunities that meet its stringent criteria. Its latest offering, announced on March 31, is the Pax World Global Green Fund which has the announced intention of investing in companies involved in alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management.

The Efficiency Alternative

One investment manager who sees investment potential specifically in alternative energy is Kevin Landis, chief investment officer for the Firsthand family of funds out of San Jose, California. All six of Firsthand's funds are tech-based, with the most recent launch being the Firsthand Alternative Energy Fund. Opened in late November, the fledgling fund has attracted about $3.5 million so far, according to Landis.

Landis likens the broad category of alternative energy to a wheel with various spokes such as clean coal, solar, wind, and fuel cells. Not all of those are currently commercially viable and several have significant challenges to overcome. As an investor, Landis focuses on those technologies that are already shipping and profitable. "That's basically solar, efficiency, and to a lesser extent, wind," he explains.

Solar and wind technology are easy to grasp as alternative energy sources, it's efficiency as an alternative that surprised me.

"The greenest form of alternative energy is efficiency," says Landis, "because if you can do with one power plant what would have taken you two power plants, you've just cut your emissions by 50%."

Investments in energy efficiency would include companies that make controls for lighting and HVAC systems, which can dramatically reduce a building's electric bill, and simultaneously its drain on the power grid.

"The challenge that we face as investors is that not all of these are pure plays," Landis points out. He points to wind turbines, where GE is one of the major players, as an example. While GE is a big fish in that small pond, in the scope of GE's overall business, wind turbines are not a major factor. "In my mind people who put GE in their portfolio and call it alternative energy are kind of cheating."

For Landis it's all about the future. "Over the next couple of decades alternative energy will be the big thing for changes in our society," he says. "Forget the whole discussion about peak oil, there's no question that there's not going to be peak consumption. Peak demand keeps going up. If you travel to places like China and India, you've got all these people lifted up out of poverty and they're starting to take on first-world consumption patterns, so the price of energy's going to keep going up. We have to keep coming up with discoveries on how to use it more efficiently; that's where Silicon Valley shines, in solving those tough problems. The companies that can solve those problems are going to do really, really well."

That's likely the case as well for those who invest in those companies and, I would argue, for those who recommend investing in those companies.


Managing Editor Robert F. Keane can be reached at bkeane@investmentadvisor.com.
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