Yes, it's easy to get sick of all this hype about the environmental movement. An Inconvenient Truth (whether you agree with its conclusions or not) won an Oscar; hottie celebs are driving hybrid automobiles; the press gushes about eco-related topics; well, the whole climate change argument is getting rather hysterical. Setting that aside, companies and investors are increasingly focused on becoming greener. Even if you do not buy into the doomsday scenario, there is still good reason to regard the new environmental movement as a sector for profit — especially given the fears about dependence on foreign oil, existing and forthcoming environmental legislation from a Democrat-controlled Congress and the Supreme Court's early April ruling to allow state and federal agencies to mandate caps on greenhouse gas emissions. So, let's just be cynical for a moment: Green is a new economic industry of its own, one where there is profit to be made — or, in the future, an area where there will be untold liability for companies deemed to be polluters.
Environmentally negligent companies, says Matthew Patsky, a portfolio manager for Winslow Green Growth Fund, may face off-balance sheet liabilities such as fines, cleanup expenses and remediation. Those liabilities can stem from a variety of violations, from pollution to putting workers' health at risk. W.R. Grace, for example, had to pay $54.5 million to remove asbestos-contaminated soil from Libby, Mont., a town where the company owns a mine; Alcoa — which recently joined more than 60 other major corporations in signing a petition to the U.S. government demanding a 60 to 90 percent reduction in greenhouse gas emissions by 2050 — has had to pay millions in fines and habitat conservation expenses as a result of violating the Clean Air Act. On the other hand, “We think being green reduces risk and enhances potential returns,” Patsky says.
What's more, “green companies have a lot of wind at their backs right now, which sounds like a pun given that wind power is getting so big, but it's true,” Patsky says. “There's a lot of growth and momentum in areas around environmental solutions.” Case in point: Recently, on the same day Procter & Gamble announced that it will reduce the amount of packaging used for its laundry detergent to make it greener, there was a bill before the Senate to slash gasoline use, thereby driving — sorry — greater demand for hybrid cars. (Alas, how to square that with the recent, contradictory verbiage from lawmakers about lowering the price of gasoline, which would have the exact opposite effect?)
“There is an incredible coalition from far left to far right that we have to do something — even if the left is driven by concern for global warming and the right is driven by concern for energy security, just about everyone is in agreement that the green issue is a winning issue,” Patsky says.
Regulations from the local level to the state and federal levels are changing to reflect that. “As the topic of climate change becomes more mainstream and both political parties become more environmentally conscious,” says Garvin Jabusch, a portfolio manager for the Sierra Club Stock Fund, “companies ahead of the environmental curve won't get run over by regulations when they come up.”
Interest may ebb and flow: “It runs somewhat hot and cold depending on energy prices,” says Eric Bjorgen of the Leuthold Group, which created a Green Wave index focused on, as the firm says, “companies offering products, services and technologies aimed at providing a cleaner environment.” The group includes 11 mid-cap and 15 small-cap companies, representing $44 billion in market cap; in 2006, the group posted a return 18 percent. “But these days even when energy prices go down, [environmentally focused] companies keep chugging along and they are gathering groundswell support. Because consumers are now invested in this, we think the theme will do well.”
And regulations will likely keep on coming, even if they make things more expensive for companies in the near term. “You can extend the bullish environmental story to Washington right now,” Bjorgen says. “You'll see legislation coming out over the next few years that will benefit green companies.”
Green, Light
A simple way to make a profit from the growing green movement is to avoid companies with environmental black marks on their records and, conversely, give strong consideration to major corporations that stick to green corporate policies. “We exclude any company in any industry that's harmful to the environment,” the Sierra Club Stock Fund's Jabusch says. That means oil drilling, mining, coal and tobacco are out. The Sierra Club Stock Fund also won't invest in high-density farming, cattle raising “or anything really resource intensive.” (For an opposing view on this, see page 64.)
Beyond ruling out environmental offenders, investors can “look for companies that are the best performers within their industry with respect to things like emissions, pollution and waste,” Jabusch suggests. “We also like companies that are taking steps to mitigate their environmental impact — for example, choosing locations close to public transit or in revitalized downtown areas instead of sprawling suburban lots.”
Among the publicly traded large-cap companies the Sierra Club calls the most environmentally responsible are Bank of America, Google, Dell and Hewlett-Packard. Yes, Dell and HP make things out of plastic — but they've both implemented extensive recycling programs and implemented green design initiatives. HP has also redesigned its packaging to reduce waste dramatically.
Risk and Reward
Most investment categories carry inherent risk, and green investing is no exception. The risk goes up, of course, if you're hoping to get in early on a new technology that you hope will pop, or “swinging for the fences, going for the fastest growing opportunity,” says Jabusch, like, say, a renewable crop that's more environmentally friendly than corn for making ethanol. “Can it scale up? If yes, it's a home run — it could be a game-changer in the U.S. If not, it's a loss.”
A GREENER SHADE OF FUND
These funds all count environmental concerns as important investment criteria.
Green Century Equity Fund
Ticker: GCEQX
Description: Long-term focused; invest 80% of assets in the Domini Social Equity Trust
Date of inception: 1995
Expense ratio: 1.50%
Loads: No load
12-month return: 12.8%
3-year annualized return: 8.8%
5-year annualized return: 6.1%
Standard deviation (3 years): 8.07
Sharpe ratio: 0.63
New Alternatives Fund
Ticker: NALFX
Description: Invests in companies with long-term potential, with about 25% of investments in alternative energy
Date of inception: 1982
Expense ratio: 1.28%
Loads: Front end
12-month return: 22.2%
3-year annualized return: 23.6%
5-year annualized return: 11.1%
Standard deviation (3 years): 11.59
Sharpe ratio: 1.59
Portfolio 21
Ticker: PORTX
Description: Long-term focused investor in domestic and foreign companies that meet certain environmental criteria
Date of inception: 1999
Expense ratio: 1.50%
Loads: No load
12-month return: 21.0%
3-year annualized return: 18.7%
5-year annualized return: 13.4%
Standard deviation (3 years): 10.38
Sharpe ratio: 1.36
PowerShares WilderHill Clean Energy Portfolio
Ticker: PBW
Description: ETF that tracks the WilderHill Clean Energy Index
Date of inception: 2005
Expense ratio: 0.71%
Loads: No load
12-month return: 13.6%
3-year annualized return: N/A
5-year annualized return: N/A
Standard deviation (3 years): N/A
Sharpe ratio: N/A
Sierra Club Stock Fund
Ticker: SCFSX
Description: Large-cap fund investing in environmentally responsible companies
Date of inception: 1998
Expense ratio: 1.69%
Loads: No load
12-month return: 9.7%
3-year annualized return: 10.8%
5-year annualized return: 7.2%
Standard deviation (3 years): 10.26
Sharpe ratio: 0.69
Winslow Green Growth Fund
Ticker: WGGFX
Description: Focuses on environmentally responsible small and medium cap companies
Date of inception: 2001
Expense ratio: 1.45%
Loads: No load
12-month return: -4.7%
3-year annualized return: 13.5%
5-year annualized return: 11.9%
Standard deviation (3 years): 22.99
Sharpe ratio: 0.51
Source: Morningstar data through May 31.
