Tuesday, 16 June 2009

Investing in Environmental Sustainability

Want to improve the environment and make money in the process? Then investing in environmental sustainability may be for you.

What is included in environmental sustainability?
These are companies whose products and services contribute in a positive way to the environment. Definitions can vary but they generally include the following sectors:
  • Alternative and renewable energy - hydro, wind, solar, geothermal, biofuel / ethanol, energy from waste
  • Clean technology - technologies that improve efficiency and lower energy consumption in buildings and transportation, to reduce global warming and CO2 emissions - things like advanced materials, batteries, green buildings
  • Water efficiency, filtration, recycling
  • Pollution control, cleanup and waste management
How to invest?
Mutual Funds - the available range includes only one Canadian equity fund focussed on the environment, the Acuity Clean Environment Equity Fund, and a dozen or so funds with global investments (download Jantzi's Canadian SRI Investment Review 2008 and go to page 15)

ETFs - one must buy funds traded on US exchanges to find environmentally-oriented ETFs. Most of the ETFs invest globally and most of the holdings are companies of medium to large size. Go to Stock Encylopedia's Ethical Funds, amongst which the good dozen of environmental funds can be found.

Companies - to find individual companies that may suit your investment criteria, save some time by clicking through to the holdings on the websites of the various funds. You will see companies that have passed the vetting of index researchers like Jantzi and KLD. Many of those companies are from around the world and not all can be bought on US exchanges. As a result they may not be easily accessible through a Canadian online discount broker.

An interesting option for buying Canadian is the series of power utility income trusts listed on Investcom, which coincidentally offer double-digit yields on distributions at the moment (though it is good to remember those high levels could/probably will go down once the tax change to income trusts goes into effect in 2011 as discussed in this previous post).

There is a challenge in that many if not most companies and sectors are involved to a greater or lesser degree in developing or using such technologies so it may be difficult to draw a line as to whether a company qualifies. For instance, one fund (Invesco Progressive Transportation ETF, symbol: PTRP on NASDAQ) includes CN Rail amongst its holdings.

As with any investment, there are risks to consider. Smaller, less established companies tend to be more prevalent, with attendant less stability of income and greater volatility (see the dramatic rise, then fall, in the chart below from Invesco Powershares of the Global Clean Energy index underlying one of these funds). Depending on the company, the technology may be unproven commercially. Concentrating in a sector increases risk. The funds themselves are often small with less active trading, which means the difference between buying and selling prices, a cost to the investor, is often much higher than broad market funds.

Are returns lower?
Does one sacrifice investment return to be environmentally progressive? There seems not to be a definitive answer on this score. The limited time many funds have been in existence makes it unreasonable to draw a conclusion. In 2007 and 2008, the environmental investor looking at the above chart would have been very pleased in outperforming two major broad market indices but 2009 sees them right back down.

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