Looking for green returns

Experts urge caution as investors flock to environmentally friendly companies

Oct 28, 2007 - Frank Norton - San Diego Union-Tribune

Green is good. At least that's the bet of an increasing number of investment fund managers, retirees and armchair stock pickers who are pouring billions into “green” stocks, and not necessarily for the love of nature.

They're chasing lucrative returns from companies that promise new ways to recycle, power automobiles and harness the wind and sun. Many have succeeded.

Some green investment funds that have been around for at least a year report double-digit gains for the past 12 months.

The KLD Global Climate 100 Index (KLDY), which tracks companies working to offset global warming or its effects, is up nearly 25 percent.

Priming the pump are rising concerns over global warming, higher energy prices and shrinking natural resources. Companies of all sizes and various products are rushing to embrace environmentally friendly practices and products – and tougher environmental laws will force further change.

“Think about it. Are we likely to see more clean energy companies or less?” asked Tommy Sikes, who runs an investment advisory firm in North Carolina. Enough of his clients started asking about green investment options that Sikes now includes a brief green talk with all new clients.

Experts caution that choosing green is riskier than mainstream investments.

Environmental technology companies tend to be smaller and are more volatile investments than larger stocks, even when pooled in a fund. Also, it's nearly impossible to determine whether a particular company, or sector, will prevail as a new business standard. Technology moves quickly, and there's often no consensus among policymakers and consumers as to which solution makes the most environmental and economic sense.

A well-thought bet, even if proved right in the long term, may bleed miserably in the short run.

And beware of hype. At least some of the rich returns seen in the green sector in recent months were driven by popularity more than innovation.

“You want to make sure you're not investing purely for the label,” said Katrin Burt, an associate with Intersouth Partners. The East Coast venture-capital firm specializes in life-science and software technology but has held back from a green investment strategy.

Many smaller investors probably don't need a niche investment strategy in the first place, said David Kathman, who covers the broader realm of socially responsible investment funds for Morningstar, which tracks investment funds.

The fact that “green has exploded” among investors has as much to do with marketing as it does underlying value in the market, Kathman said. “When there's demand for green, the industry responds with products.”

Indeed, the number of green mutual and exchange-traded funds in the United States jumped to 21 from 12 in the past two years, Morningstar reports. Assets in those funds more than doubled to about $4.1 billion as of June.

The upswing comes amid ominous predictions for global warming typified by Al Gore's documentary, “An Inconvenient Truth,” and the recent “Live Earth” concerts. The pop-culture events captured the attention of corporations and consumers, neither of which wants to be seen as indifferent to the environment.

While emotions may drive many small investors, they're not the stuff sophisticated bets are made of, said Kurt Reiman, head of thematic research at UBS Wealth Management Research and co-author of the report “Climate Change: Beyond Whether.”

“Environmental policies coming into form will radically alter companies' ability to make money,” Reiman said. “It's gone way beyond the socially responsible.”

That means many stocks from insurance to energy will rise or fall based purely on their exposure to climate and regulatory changes, regardless of their environmental practices.

The broadening of the green investor base has also fostered new shades of products that flourish beyond traditional grass roots.

The Spectra Green Fund (SPEGX), launched in January, caters to investors primarily interested in return, with environmental soundness a guiding but secondary principle. The fund is open to mining and energy concerns as long as the companies seek ways to reduce their environmental impact.

“Rather than deciding to shun entire industries and sectors, we believe that a green fund should be composed of companies that seek to address environmental issues in all areas of the economy,” the fund's distributor, Fred Alger & Co., writes in a marketing statement.

For Burt, of Intersouth, any prospective green investment should be held to basic investment standards.

“It's important that any opportunity is looked at for whether it's truly differentiated, not just whether it's green,” she said. “Is this company really a solution for a large market? If not, what's the point?”