Is green the new black?

Opinion

Hey there, time traveller!
This article was published 17/04/2010 (5647 days ago), so information in it may no longer be current.

The environment may be in the spotlight next week when we celebrate Earth Day on Thursday, but when in comes to investing, Mother Nature often sits in the back seat.

Green investment is often a tough sell for people who are concerned about the environment on the one hand and worried about their retirement or children’s education on the other.

Socially responsible investment (SRI) mutual funds have proved that good corporate governance, social justice and the environment do not preclude profitability. Most SRI funds perform almost as well as — even sometimes better than — their non-SRI counterparts.

But many SRI funds are not purely green investments. They mainly include some cleantech companies, engaged in wind power or other renewable energies or hold larger corporations practising energy efficiency.

Yet an SRI Canadian equity mutual fund doesn’t look all that much different from a non-SRI Canadian equity mutual fund. They both invest in big, stable Canadian companies.

Investing in clean-technology companies is a much riskier venture. That’s because in North America, renewable energy and other green industries are still largely in their fledgling stage, says investment adviser Sucheta Rajagopal with Hampton Securities in Toronto.

"Once you start looking at the small-cap space, you’ll find that cleantech and renewable companies are no different than buying junior mining companies," says the certified financial planner who specializes in green investing.

"There’s always a possibility that the company will go bankrupt."

But interest in green investment — particularly clean technologies — is on the rise. While a number of indices follow clean-technology stocks in the United States such as the Cleantech Index (CTIUS), which has traded on the American Stock Exchange since 2006, Canada is a much smaller investment market, and until recently we had no index tracking green technology.

In late March, however, the S&P TSX launched the Clean Technology Index, which includes 21 Canadian companies specializing in environmentally friendly technology.

Among the listed companies are hydrogen-cell manufacturer Ballard Power Systems and Cascades Inc., which produces products made from recycled paper.

Cheryl Crowe, an SRI specialist with Assiniboine Credit Union, says the index is an indication of increased demand from investors for green options on which to place their money.

The cleantech sector has been attracting more venture capital than ever before in North America.

"According to the Cleantech Group in San Francisco, the first quarter in 2010 saw a record number of clean-technology venture deals totalling $1.9 billion across 180 companies," she says.

While the cheap cost of money, a result of low interest rates, has helped venture capital flow into cleantech, government regulation is also becoming a major driver of investor interest in the field.

"The regulatory environment has a huge impact on which of these areas are the most successful," Rajagopal says.

In Europe, where governments have aggressively moved to curb greenhouse-gas emissions, the cleantech industry is already well developed, and investors looking for more stable returns on their investment can find larger, more established companies like Vestas, a Danish wind-turbine manufacturer.

Investors can get exposure to this company and other European cleantech firms by purchasing the Market Vectors Global Alternative Energy exchange-traded fund (ETF), which trades on the New York Stock Exchange, she says.

ETFs are an ideal choice for investors looking for a cost-efficient and diversified way to invest in the sector, she says.

No cleantech ETFs trade on the Canadian markets, so investors wanting to purchase these products need to look to U.S. markets.

Considering the value of the loonie versus the greenback, some might shy away from looking south of the border, but they shouldn’t, Rajagopal says.

"You have to think about the fact that this isn’t something you’re going to buy and flip," she says, adding the effect of currency fluctuations on portfolios should be muted over longer periods.

"You’re buying and holding the investment because you’re thinking these companies are the IBMs and General Motors of the future."

Still, Canadians can choose from a number of mutual funds focusing on the cleantech sector, such as the Acuity Clean Environment Fund, Crowe says.

While the funds are diversified, they are still somewhat risky, so people should invest in several companies, at least for the foreseeable future. When markets go upside-down, venture-capital-heavy sectors like cleantech tend to be the most negatively affected. Funds help investors spread around the risk, but they should not invest more than five to 10 per cent of their portfolios in cleantech, Crowe says.

Despite the risks, investors should not overlook cleantech because some companies within the sector that may be small today will turn out to be the market titans of tomorrow, says Rona Fried, editor of the U.S.-based Progressive Investor, a monthly green-investment advice newsletter.

"Now is a good time to look at investing, because, unfortunately, cleantech as a whole has not kept up with the rest of the stock market, and most investors should understand that they need to buy low instead of high," she says. "This is a time to buy because everything is down."

The downturn has certainly hurt the sector as it has other investment areas composed of smaller companies dependent on freely flowing money for investment. But even before the crash, the regulatory climate in the United States was not conducive to cleantech investment.

"That’s because we had a conservative, oil-oriented president for eight years who refused to take us into the future," Fried says, referring to former U.S. president George W. Bush. "Now we have a president who is committed to taking us forward and now have historic levels of funding to research and development."

With health-care reform off his plate, many predict U.S. President Barack Obama will move on to his election promise to fashion the United States into a cleantech leader.

And while green investment may seem like a long-term investment today, Fried says the industry could become profitable sooner than expected because most of the technology like wind, solar and even electric power for automobiles is already proven.

"What we’ve been saying for 20 years is that if people would just get behind this and start moving, it would happen faster than anybody would expect," she says. "The problem has always been fossil-fuel industries have been subsidized at very high levels whereas renewable energy has not."

With the U.S. economy waning, many Americans — including those in government — now see green technologies as a way out of the financial mess they currently face.

"Now the tables are turning a bit, and we’re seeing that we are falling behind economically because we haven’t been putting more money into these technologies," Fried says. "People are finally getting the point and these technologies are really ready to explode."

And when America leads, the rest of the world, including Canada, often follows.

giganticsmile@gmail.com