June 28, 2010
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
Green investments are good for the wallet. That's the conclusion of some financial advisors, who are saying that the technologies that underscore such endeavors will become increasingly accepted and part of everyday life.
Allocating capital to those businesses with an eye to cleaning the environment or releasing fewer emissions had once been considered "feel-good" operations. Now, though, it has become an integral strategy among many money managers. The goal is not just to make a difference but to also earn respectable returns.
While corporate altruism has its cynics, the reality is that businesses must now appeal to a broad range of constituencies. By being good citizens, they are endearing themselves to their own corporate families and to the communities where they serve. In turn, they are validating their corporate images and adding value to their enterprises.
"What we regard as 'alternative' today will one day be one of the primary sources of energy around the globe," says Richard Bookbinder, managing member of TerraVerde Capital Partners. "This sets the stage for investors to not only do something good for the environment, but good for their portfolios."
The firm surveyed 56 investment advisors that manage between $50 million and $1 billion. It said that 55 percent of them put their individual and institutional clients' money into wind and solar investments as well as carbon strategies and clean technologies. It is also reporting that 36 percent of the respondents say such investments are unworthy (20 percent) or unproven (16 percent) and thus pose too much risk.
Utilities are also part of this debate. All are under pressure by the various stakeholders to reduce their emissions and especially those that may be tied to global warming. To that end, some must abide by renewable portfolio standards that require them to make investments in alternative energy sources.
The evolution is occurring because activists, regulators and investors have united to make companies live up to higher standards. Major U.S. firms that include Wal-Mart, General Electric and Dow Chemical have championed the cause of sustainability. The efforts, they collectively say, are not just environmentally beneficially but also economically prosperous. GE, for example, says that its "ecomagination" campaign is lucrative.
"Large numbers of people are putting their money where their mouth is and doing their bit to create a sustainable future," says Penny Shepherd chief executive of the Sustainable Investment and Finance Association in the United Kingdom. "Green and ethical investments provide a great way to make money and make a difference."
Delivering Returns
The notion of socially-responsible investing is not universally supported. Critics say that the private sector's main role is to earn profits so that it can continue to employ workers who will spend their money in the communities where they live. By optimizing this effort, businesses are fulfilling their obligation to society -- creating wealth that government can then tax and use as it sees fit.
Supporters disagree, however, noting that corporations must serve equally all of their stakeholders. By spreading goodwill to their customers, employees, vendors, neighbors and shareholders, companies will do better over the long haul.
The concern with solely focusing on profits, of course, is that businesses will lose sight of the bigger picture and suffer the plight of Enron, et al. By incorporating a broader perspective into the fabric of their cultures, enterprises can help insulate themselves from bad decisions. The shift today is to multi-task among the different stakeholders, albeit community outreach efforts are often unfocused and haphazard.
The link between any socially-minded investment and the corresponding rate of return is difficult to gauge. Too many variables are at play: They include the relevance and quality of the actual enterprise along with those public policies in effect that would help propel those products or services forward.
Nevertheless, analytics firm MSCI says that the prominence of such funds is growing exponentially. In 1990 it launched a socially-aware index that it has says has transformed the field from that of a niche operation to what has become a $6.7 trillion global market. It says that over the past 20 years its KLD400 index has outperformed the S&P 500.
"This fact would have surprised many observers in 1990, and it bears repeating today: a portfolio that's constructed using environmental, social and governance ratings can, over the long term, deliver competitive risk-adjusted returns," says Thomas Kuh, managing director of KLD Indexes.
Among the utilities that the firm likes are Spain's Endesa and Iberdrola as well as Australia's AGL. That's because they are properly disclosing their potential carbon exposure. The group, in fact, adds that investors must know the potential carbon risks for any business and whether it may have hidden liabilities.
Utilities that don't manage those risks by exploring alternative energy sources or by investing in technology to reduce emissions could incur regulatory penalties that would be passed on to consumers. To that end, MSCI says that investors and lenders have the leverage to steer utilities toward cleaner fuel sources.
The point that shareholder activists make is that such pursuits are not just good for the environment. They are also good for the bottom line. And over time, green investment strategies will gain traction and move corporate world increasingly in that direction.
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