What Kind of Green Investor Are You?
Whether you call it “green,” “greentech,” or “cleantech,” analysts and investors alike believe that environmentally-friendly funds could be the next big thing. While mutual fund and exchange-traded fund managers have been marketing green investment vehicles for years, serious investors up until fairly recently tended to view such funds as niche or even novelty products that didn’t merit a prominent place in a well-diversified portfolio. That appears to be changing.
With the price of oil hovering around the $115 per barrel mark and evidence of the human causes of global warming mounting, the number of green investment vehicles has grown—as has the amount of money investors have committed to them. According to the Social Investment Forum, an industry research group, the number of socially and environmentally screened funds rose from 201 in 2005 to 260 in 2007. During that same period, total assets in these funds increased from $179 billion to nearly $202 billion.
Clearly, green investing is big business, but what does it really mean to invest green? And more importantly, is green investing just a salve for guilty consciences, or does it actually pay off for investors to park their money in green funds?
Green investing is a subcategory of socially responsible investing, a practice that came of age during the 1980s when individual and institutional investors began to divest their portfolios of companies that did business in South Africa, in a protest against that country’s apartheid regime. By 2007, socially responsible investments accounted for $2.71 trillion—nearly 11 percent—of total assets under management in the U.S. To put that number in a bit of perspective, that’s about 4.5 times bigger than the entire U.S. market for exchange-traded funds.
When picking a green investment for your portfolio, what should you look for? Green investors tend to use one of two approaches when selecting a green fund. “Deep green” investors worried about the sustainability of our fossil fuel-based energy infrastructure are partial to alternative energy funds, such as the PowerShares WilderHill Clean Energy Portfolio (PBW). This fund seeks to deliver the performance of the WilderHill Clean Energy Index, a list of 40 or so clean energy companies developed by Dr. Robert Wilder in the 1990s. Since we first profiled this fund in the June 2007 issue of the ETF Report, assets under management in PBW have grown by nearly 50 percent. The performance of this fund, however, has been less spectacular; it’s currently trading at about the same level it was last summer.
The performance of the PowerShares WilderHill Clean Energy fund illustrates some of the problems with “deep green” investing. First, these funds tend to mirror the energy markets. Wind and solar power installations—the heart of the alternative energy sector—require significant up-front investment, and power generators have historically been hesitant to make a commitment when cheaper alternatives, such as coal and natural gas, are readily available. The bottom line is that when the market for fossil fuels is low, alternative energy funds are less attractive.
To overcome the problem of high start-up costs, the federal government, along with many states, provides tax rebates and other incentives for individuals and businesses that want to make the switch to wind or solar. Like any other industry that is heavily dependent on government subsidies, the alternative energy sector’s fortunes rise and fall with the political tides. Right now, for instance, a bill that would extend vital tax credits for alternative energy producers is stuck in the Senate after passing the House earlier this year.
In contrast to the “deep green” approach, “light green” investors take a more pragmatic view of the marketplace. The goal of the light green investor is to reward companies for instituting eco-friendly practices and reducing environmental liabilities—even though those companies may themselves be polluters.
Light Green Advisors, a Seattle-based asset management firm, has made light green investing the centerpiece of their business. Together with ETF sponsor Claymore, Light Green Advisors created the EcoIndex, which analyzes the companies in the S&P 500 (excluding tobacco firms) using environmental criteria and then picks the “greenest” companies from each industry segment. According to Light Green Advisors, the EcoIndex was “the first environmental-performance-based ‘best in class’ environmental leadership index in the United States.”
Unfortunately, Claymore abandoned the ETF it had created around the EcoIndex in February, due to light trading volume and competition from other funds. But light green investors can still use the “best in class” approach to green investing by seeking out funds that invest heavily in companies that have implemented eco-friendly policies.
To many investors, “light green” may not be green enough. Before it folded, the Claymore light green ETF’s top holding was ExxonMobil, the world’s largest oil company. The University of Massachusetts’ Political Economy Research Institute ranked the world’s most profitable public oil company sixth on its “Toxic 100” list of the largest air polluters in the U.S. Although it is certainly possible to make money while doing good with green investing, it’s important to conduct your own research to make sure the product you choose is a good fit with your green investing goals.
