Industry News

Hot for green investing

David Berman, Financial Post
Published: Monday, February 19, 2007

Investors looking to profit from the global warming bandwagon are buying into anything with 'solar' or 'wind' in its name.

Be honest: amid all the recent consternation over melting icecaps, starving polar bears and vicious storms, you've wondered how you can make a little money off this whole global warming thing.

You're not alone: Climate change has become the hot investment theme this year, and a number of financial institutions -- including some of the world's top investment banks -- have put their best brains on the case.

After all, warmer temperatures are going to change the way many companies do business. More important, the world's reaction to climate change, in the form of new laws and subsidies, is going to create winners and losers in your portfolio.

"General Electric Co. is often touted as a green company because it manufactures wind turbines, even though its energy division represents just 10% of its US$163-billion in annual revenues."

"For firms, climate change, like globalization, technical change and population ageing, is likely to be another powerful force that inexorably shapes the economic environment," said John Llewellyn, senior economic policy advisor at Lehman Brothers, in his recent 143-page report on the subject.

"While climate change may well be a slow-moving force, asset prices will on occasion move sharply, when new evidence reaches the market or policies are changed."
Already, some investors are stampeding into companies with "solar" or "wind" in their names, driving share prices up to record highs long before the Gulf Stream slows enough to embalm the U.K. in a sheet of ice.

For example, the little-known Photon Photovoltaic Stock Index (or PPVX) -- currently composed of 30 solar-related stocks from around the world, including three from Canada -- has soared 23% so far this year, according to Germany-based Oeko-Invest. Trina Solar Ltd., a Chinese company that makes solar components such as wafers, ingots and modules, is up a stunning 103%.

The prospect of scoring triple-digit returns in just seven weeks certainly makes green investing look like a worthwhile pursuit. Recent rallies aside, though, adopting climate change as an investing theme is no simple matter, largely because these are early days: it is still too soon to put an upside value on promising environment-friendly solutions or a downside value on prominent polluters.

That is, no one knows yet how much greenhouse gases -- or carbon emissions, which receive most of the blame for global warming -- will be worth when emission limits are imposed on certain sectors of the economy.

In the United States, the creation of a cap-and-trade system is building momentum, with support from key politicians such as John McCain and Barack Obama making it look like all but a done deal.

This system establishes limits on greenhouse gas emissions, and then forces companies to either cut their emissions or buy offsetting credits from other companies. Until trading begins, the credit price is a mystery.

"There is one thing that is critically lacking, and that is a price on carbon emissions," said Jeffrey Rubin, chief strategist and chief economist at CIBC World Markets. "Everything is extremely tentative without knowing that."

For example, if carbon is priced at just US$2 a tonne, big-name emitters won't be heavily penalized and offsetting technology such as wind or solar power won't be seen as viable alternatives. As a result, stocks in alternative energy companies could sag, while the stocks of carbon-belching utilities and miners could hold up. On the other hand, if carbon is priced at, say, US$50 a tonne, greenhouse gas emitters will suffer major financial consequences and alternative energy companies will get the spotlight.

Mr. Rubin produced a report last week that highlighted sectors that would be hardest hit by a steep carbon price. These included coal-fired utilities, oilsands producers and metal refiners -- but the report steered clear of making any bullish or bearish calls.

"We're ranking who's more or less vulnerable, but we're not giving any indication of the order of magnitude because we don't know what the price of carbon is going to be," Mr. Rubin said.

Other reports on climate-change investing have taken a scattershot approach, encompassing just about any company that takes a conscientious view of the environment or does something to lessen human impact upon it.

Citigroup's list of "climatic consequences companies," which was released last month, contains no less than 74 different names from seven sectors and 18 countries.
It also has a number of notable caveats, including the fact that the stocks mentioned have not been weighed on non-trivial factors such as valuation, earnings, balance sheet health or liquidity.

"Accordingly, when making decisions, investors should view thematic analysis as only one input," said Edward Kerschner, Citigroup's chief investment officer, in his introduction.

Some of the companies mentioned are sprawling conglomerates, whose environment- friendly products represent just a fraction of their overall revenues.

General Electric Co. is often touted as a green company because it has emerged as a major manufacturer of wind turbines, even though its entire energy division represents just 10% of the company's US$163-billion in annual revenues.

In other words, it would probably take a global wind-power revolution to do anything more than ruffle GE's share price. Citigroup also gave the nod to Philips Electronics NV, the Netherlands- based electronics company, because it manufactures energy-efficient light bulbs. However, lighting represents just 16% of the company's overall revenues.
The two Canadian companies on the list might come as a surprise for being not exactly synonymous with green. Magna International Inc. made the list, which is a bit odd given that the auto-parts company relies upon a thriving automobile sector. (Citigroup argues that Magna's lightweight materials will lower car emissions.) The other entry is Potash Corp. of Saskatchewan, ostensibly because its products are used in grain cultivation.
Meanwhile, Lehman Brothers and UBS have mostly avoided the mention of actual companies in their reports in favour of concentrating on broader themes: To what extent is a particular company exposed to regulatory changes related to climate change? And how green-thinking are the company's top executives and to what extent are they staying ahead of their peers in adapting to climate change?

For example, Lehman Brothers believes European carmakers could get whacked, given that they are high-profile carbon emitters and in the first line of attack among green-leaning European governments. Same goes for the global aviation industry and companies that produce thermal coal and steel. Banks don't emit much carbon, but could be affected by a decline in economic activity.

Naturally, the opportunities include companies that supply equipment for nuclear, wind and hydro power (and, to a lesser extent, solar power). And if you believe climate change could turn the planet inside out, pharmaceutical companies with cures for rising respiratory diseases and water-borne pathogens could be in hot demand.
But the more interesting developments will come from indexes that track various baskets of environment-friendly stocks, giving investors the chance to make a diversified bet on climate change.

Besides the specialized PPVX, there are essentially two mainstream indexes that track companies deemed to be on the cutting edge of climate change, either by focusing on renewable resources or developing alternative fuel technologies.

The Wilder Hill Clean Energy Index consists of 42 different stocks, spread among eight different sectors. Top weighted stocks include Zoltek Cos., MEMC Electronic Materials Inc., First Solar Inc., Sun Power Corp. and Cypress Semiconductor Corp. The best part about the index is that there is an exchange- traded fund that tracks it. The Power Shares Wilder Hill Clean Energy Portfolio has had a rocky ride since its inception two years ago, but has been outperforming the S&P 500 so far this year, with a 6.3% return.
The other is the KLD Global Climate 100 index, launched by KLD Research & Analystics Inc. in 2005. It contains 100 large-cap diversified companies such as Johnson & Johnson (a big user of renewable energy) and Toyota Motor Corp. (which dominates the hybrid car market), along with small-cap companies such as Japan Wind Development Co., Beacon Power Corp. and Azure Dynamics Corp. It is not a tradeable index outside of Japan right now, but KLD is working on this shortcoming.

"Our priority is to find companies that we think are bringing along the technologies, practices and polices that are going to work in a carbon-constrained world," said Andrew Brengle, senior research analyst at KLD.
"And we think that the financials will follow."

Indeed, climate change is becoming more and more accepted as a reality, but the opportunities for investors are just getting going.

dberman@nationalpost.com