Friday, 16 July 2010

Green Investing - Doing Right and Doing it Right

Want to put your money to work actively improving the environment? There is a wide and growing choice of public companies whose products and services provide the tools to clean up, to conserve, to improve efficiency and to reduce consumption without sacrificing performance. And, of course, as an investor you want to make money while providing that support.

What does Green investing include?
Often called Clean Technology or Environmental Sustainability, the range of Green sectors includes:
  • Renewable Energy & Fuels - generation or equipment for wind, solar, geothermal, tidal, small-scale hydro, biofuels
  • Energy Conservation - green buildings, transportation efficiency, industrial efficiency, power management, smart grid
  • Water Conservation & Purification - recovery, re-use, treatment, recycling
  • Waste Management - pollution prevention and control, re-use, recycling, energy recovery, remediation
  • Low Impact Materials and Products
For more detail on these categories, see TMX Money's S&P TSX Clean Technology Index description

Where to find companies and funds
  • S&P TSX Clean Tech Profile lists all the 127 publicly-traded Canadian companies whose business is primarily Green
  • S&P TSX Clean Tech Index narrows down the list to 20 larger companies of more than $100 million capitalization
  • US and International companies - Look at the holdings of clean tech ETFs and mutual funds
  • ETFs - There are no Canadian-traded Green ETFs unless one counts Claymore's S&P Global Water ETF. There are numerous US-traded ETFs, with a variety of companies from around the world - see Stock Encyclopedia's Ethical ETF list.
  • Mutual Funds - Try downloading the latest SRI Fund Performance table from the Social Investment Organization website. Within this general list of funds that espouse Socially Responsible Investing principles are the Green funds.
Assessing the investment
It goes without saying ... ok, let's say it, Green environmentally does not automatically mean Green financially. Investor research is required to improve chances of making money on Clean tech investments. The same bottom-up analysis of companies is required, and in the case of funds, looking at their costs and the manager's stock-picking skills. Here are some sources that may help:
Does Green investing entail lower overall stock returns?
It is difficult and perhaps too soon to tell whether this relatively new sector provides returns that are better, worse or about the same as market averages. Companies in the sector don't have long histories and are relatively small, which can mean both fast growth and greater volatility. To the extent that such firms are here to stay due to the permanence of the environmental challenge and not a fad like bowling in the 1950s and 60s, then one would expect profitability to follow the path of any other business and the stock market to value them fairly in comparison to the overall market. However, many do rely on government policies and incentives so revenue streams may be more fragile. Furthermore, the tech sector bubble taught us that an emerging, permanent, gigantic new industry like the Internet could mean speculative over-pricing.

Returns from one product, the Elements linked to the Credit Suisse Global Warming Index (symbol GWO) have considerably lagged the S&P 500 in the USA since inception in 2008 and over the past five years as simulated. The Yahoo! Finance chart below shows how the Powershares Cleantech ETF (NYSE: PZD) initially leaped ahead of the SPDR ETF tracking the S&P 500 Index (SPY) after start-up in 2006 but fell back to the same level for a time during the 2008 crisis. Another chart, not shown, would reveal that PZD has considerably lagged SPY in the past year period.

The S&P TSX Clean Tech Index has a solid dividend yield of 3.3%, which generally indicates steady profits, due to the presence of a number of profitable power generation firms like Algonquin (AQN), Boralex (BLX), Innergex (INE) and Northland (NPI.UN). The investor's usual caution and discriminating judgment will be required to separate the good stocks from the bad.

May your investing be Green in every way, perhaps even to make your friends green with envy.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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