I’m sure that every generation of Americans has faced a crisis that gave them good reason to embrace Thomas Paine’s revolutionary quotation of 1776. In the financial world, it’s certainly true that these are the times that try men’s souls, and women’s too. Investments in companies that were once considered the bedrock of the American economy have declined in value to levels that a year ago would have been inconceivable.
At this point the last thing that most sane investors want to do is increase their exposure to any kind of risk, even if taking that risk may eventually result in the creation of something positive. That got me to wondering about what kind of an impact the current investment market will have on the long-term future of sustainable and green investing.
In a bear market, when the client’s risk profile says it’s time to sell, the advisor should be selling, whatever the investment, including alternative energy companies.
Rob Lutts, president and CIO of Cabot Money Management in Salem, Massachusetts (see Planner Profile), has long had a bias toward growth stocks and up until recently was quite bullish on alternative energy. When the price of oil started to drop, however, things started to come apart on the alternative energy front. Lutts notes that over the long term, prospects are considerably different for alternatives when oil is at $50 a barrel rather than $100 or more. “I still believe we’re in a longer-term bullish environment for energy, but given this global slowdown and recession, you can’t really stay fully exposed to alternative energy,” he says. “You can still stay in energy, and alternative energy–wind and solar–are great investment opportunities, but it’s just the wrong period of time right now.
“You can’t hold a stock that goes from $60 down to $5 and still tell your clients you’re a good manager,” he says of his decision to abandon alternative energy, for now. “You have to get out and you have to protect capital. You have to say, ‘I’ll come back at the next cycle.’ And there is going to be another cycle for that group. I’m convinced of that.”
When that cycle comes around, I’m sure that there are going to be investors willing to take the plunge into alternative energy and other green or sustainable investments. The big problem for many of these investors, and their advisors, is knowing just how to put that admirable goal into action.
Many Ways to Go Green
John LaPann is president and chief investment officer of Federal Street Advisors, a Boston-based firm he describes as investment consultants to institutional-sized families and individuals, and mid-sized foundations. His firm doesn’t manage money so much as help their clients with investment planning and finding the right managers to put those plans into action. I met LaPann through a panel he moderated called “Adventures in Venture Capital, Private Equity, and other Market-Rate Investments.” The panel took place at the day-long The New New Economy: Investing with a Climate Change Lens During Challenging Times conference, sponsored by Rockefeller Philanthropy Advisors, in New York on November 20. The day-long event addressed such issues as the role of positive and negative screening in portfolio construction, active ownership strategies, and the role of data and disclosure, as well as a keynote address by Al Gore.
I spoke to LaPann because I’ve been trying to get a handle on just how someone who wants to put a green bias into their investing strategy–and put their money behind sustainable technologies and industries that are going to make the world a better place–would actually go about doing so. When we spoke in early December, he estimated that Federal Street was advising on assets that had fallen to about $3.5 billion for 74 clients.
Ultra-high-net-worth clients, such as those that LaPann advises, have access to private equity deals with an entry price far too rich for most investors, but such investments aren’t the only way into the game. “I think that the private equity opportunities are enabling the growth of exciting new technologies, but that doesn’t mean that there aren’t plenty of existing companies, publicly traded, that aren’t working on interesting technologies as well,” he says.
Among his clients, both foundations and families, he said there has always been an interest in mission-related investing, where the investor provides the seed money that allows the creation of a commercially viable product that helps further a particular goal.
“A lot of those opportunities exist on the venture capital and private equity sides,” LaPann admits, “But that doesn’t mean that there aren’t publicly traded companies that aren’t exploiting some of the opportunities developed by the venture capital guys. At this point, because they’re publicly traded you’re participating along with them.”
For advisors and their clients who are interested in pursuing green goals through their investing, LaPann notes there’s really no substitute for doing your homework. “You can go to [mutual] funds that specialize in green investing, but what’s satisfying for a lot of investors is to do their own homework and decide what’s important to them,” he says.
Among his own clients, LaPann says he’s seen a universal attraction to companies that are focusing on developing energy-efficiency improvements to products and systems that are currently in use. They can see the commercial applications,” he explains. “Many of these technologies are questions of simple engineering, and there’s a common sense element to it. So it’s the combination of commercial viability and common sense that makes those kinds of investments most attractive.”
During LaPann’s session at the climate change investment conference, Diana Propper de Callejon, general partner with Expansion Capital Partners, LLC, a clean technology venture capital firm, said she is looking for clean tech investments that will deliver in the short term and sees that coming from energy efficiency. “It delivers faster results and costs less,” she said. “It really is the low-hanging fruit for climate change [investing].”
Propper also suggested that these entrepreneurial clean tech firms are going to need professional management from enterprises like GE, 3M, or some of the more successful Silicon Valley firms to realize their full potential.
Another step that Propper sees as essential when it comes to alternative energy in the U.S. is the establishment, at the federal level, of national standards. “We need to take the long-term view,” she said, “and not continue to try and address it with incentives and regulations with short horizons.”
Making a Difference Through Proxies
A different area where LaPann says his clients have attempted to bring a green lens to their investments is by working with money managers who are active in proxy voting. “Often those managers or groups of those managers will raise green issues for a corporation, not necessarily that they’re going to push for a vote at the annual meeting, but just to raise the issue and get into a discussion. Many times management is receptive to that,” LaPann says. “That’s a way of using your capital to bring about change without making a direct investment in the energy area.”
Another often overlooked green-related investment consideration is what LaPann calls the “non-financially quantifiable environmental impact,” of companies. He asks: “Is there a cost that’s being generated by the company that does not show up in their financials? Is there a cost for a future cleanup, a cost for harm to the environment? We’re trying to figure out ways we can bring that kind of a perspective to helping our clients make investment decisions, but it’s a very complex area.”
Although investors in just about everything are skittish right now, LaPann is optimistic about the future for green investing. “What’s interesting for me, and we’ve been in business for 18 years, is that, whatever you call it, social investing has evolved. It started with screening, but now it’s really progressed to where clients want to use their capital to make profitable investments that further their mission. That’s a big progression in a short period of time and it’s a big progression in the right direction.”