| |
|
|
GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
|
| |
Clean Energy Stocks - Ready for prime time with socially responsible investors?
Richard Asplund, author of "Profiting from Clean Energy: A Complete Guide to Trading Green in the Solar, Wind, Ethanol, Fuel Cell, Carbon Credit Industries, and more."
The debate will continue about the stock performance of socially responsible investing relative to
standard benchmarks. However, there is one sector in which investors can be much more confident
that their socially responsible investing will lead to strong investment performance over the long
term--the clean energy sector.
Socially responsible investing (SRI) involves screening global corporations in a full range of
industries with negative and/or positive screens to find the companies that are most attuned with
environmental, social and corporate governance goals. However, the Clean Energy sector should hold
a special status within the SRI community because the sector promotes environmental sustainability
by reducing pollution, curbing greenhouse gas emissions, improving domestic energy security, and
improving efficiency. The SRI investor can therefore invest in a sector that is not only good for
society but that also has the potential for producing strong returns over the long term.
Investment capital promotes R&D and cost competitiveness in the clean energy
industry
The capital that has been pouring into the clean energy sector provides
the industry with the capital that it needs to build world-class R&D and manufacturing operations
that in turn drive down costs and make clean energy more competitive with legacy fossil fuel
solutions. Capital has in fact been pouring into the clean energy sector. The UN Environment
Programme says that $71 billion in new investment capital flowed into the renewable energy and
energy efficiency industry in the single year of 2006, adding to $50 billion in 2005 and $28
billion in 2004. Investors have been snapping up numerous IPOs in the sector and have invested in
large secondary stock and senior debt offerings. Retail investors have poured cash into the sector
as seen by the fact that the six exchange-traded funds (ETFs) that specialize in clean energy now
have a combined market cap of $2 billion. Capital from SRI investors clearly helps the clean energy
grow and become more competitive without government support.
Stock returns were
stellar in clean energy during 2002-07
While there is a societal benefit from
investing in clean energy, an investor certainly does not want to lose money on that investment.
While past performance is not an indicator of future performance, the reality is that stock
performance in the clean energy sector in the past six years has been stellar. Melvin & Company's
Clean Energy Stock Index, which tracks 62 U.S.-listed clean energy stocks, showed an average annual
gain of 31.9% in the 6-year period of 2002-07, beating the S&P 500 index by an average of 26.5
percentage points per year and beating the Russell 2000 index by an average of 22.2 percentage
points per year.
Clean energy stocks so far in 2008 have fallen sharply due to the broad
market correction and a shake-out of excessive speculation in the sector. The Melvin Clean Energy
Stock Index was down 24.0% on a year-to-date basis as of February 29, 2008. However, this sharp
decline in the valuation of the clean energy sector may provide an attractive entry point for
investors who have not yet invested in the sector.
Objections to investing in the
clean energy sector
Despite the potential for long-term stock appreciation and
the clear environmental goals that can be promoted by investing in the Clean Energy sector, many
investors have been reluctant to dip a toe into the water of Clean Energy investing. We now
address some of those objections.
Is the clean energy stock sector large enough to
absorb large-scale investment?
Up until recently, there were too few clean energy
stocks for investors to seriously consider large-scale investments. Some large institutional
investors such as CalPERS (California Pubic Employees Retirement System) instead focused on placing
money in clean energy venture capital and private equity investments. However, the clean energy
sector in the past two years has grown up quickly and now qualifies as a legitimate institutional
investment arena. In fact, CalPERS' chief investment officer recently said in an interview on CNBC
that CalPERs now believes that the time is right to begin moving into publicly-traded clean energy
stocks. In fact, there is plenty of room to absorb that investment since the pure-play market cap
for the global clean energy industry is currently more than $250 billion. The global solar power
industry by itself currently has a market cap of about $90 billion.
Does the
clean energy sector involve mostly smaller stocks that are losing money?
There is
a perception that the clean energy sector is dominated by micro-cap stocks that are losing money.
While that does describe many of the stocks in the sector, there are still numerous larger stocks
in the sector that are solidly profitable. For example, Norway-based Renewable Energy Corp (Oslo:
REC), a producer of the silicon wafers that are used to manufacture solar cells, produced $1.2
billion in revenues in 2007 and had higher profit margins than Intel. Of the 62 stocks in the
Melvin Clean Energy Index, about half are profitable and the median market cap is a sizeable $500
million.
Does the clean energy sector really have legs?
Some
investors are concerned that investing in the clean energy sector is simply a fad that will
eventually collapse like a house of cards. However, there are multiple drivers behind the clean
energy sector that are likely to propel strong growth for the sector over the next several decades.
The main driver is the need to move away from fossil fuels due to inherent problems with fossil
fuels such as pollution, greenhouse gas emissions, domestic energy security, and rising petroleum
prices as oil becomes more expensive to extract. Other key drivers for the clean energy industry
include (1) the massive demand for more electricity coming from the developing world (particularly
China and India), (2) rising electricity prices in the developed world due to rising fuel and other
input costs and the need to replace aging electrical generation and transmission assets, and (3)
the need for distributed power solutions due to grid unreliability and blackouts.
Another
key driver behind the success of the clean energy industry is the speed of technological
development. As technology improves, costs drop and the clean energy sector becomes more
competitive with legacy technologies, thus boosting demand for the new clean energy solutions. For
example, the solar photovoltaic (PV) industry struggled in the 1970s because technology was in its
earliest stages and costs were extremely high. However, the solar industry now has more than
thirty years of research under its belt, in addition to the major cross-over contributions from the
semiconductor and coating industries. The price of solar power has therefore been coming down
quickly by an average of 5% per year. In fact, a leading solar research institute, Photon
Consulting, estimates that solar PV power is already competitive without subsidies with retail
electricity prices in 5% to 10% of the developed OECD countries. Photon Consulting also forecasts
that the cost of solar PV power, excluding subsidies, will fall to 10-15 cents per kilowatt by
2010, making solar power competitive with 50% of residential demand and 10% of commercial demand in
OECD countries by as early as 2010. As technology improves and costs decline, demand for clean
energy solutions will quickly expand.
Could government support for clean energy
fizzle out?
Governments are fickle and some investors are legitimately concerned
that the sector could be left stranded should the world's governments suddenly cut back on their
support for clean energy. While the extent of government support for clean energy is clearly very
important to watch, there is little chance of any significant decline in government support in
coming years. In fact, government support is likely to increase in coming years and prove
sufficient to get clean energy to the point where most of the sub-sectors can compete on their own
without any subsidies or special support. In fact, it should be recognized that some clean energy
sectors such as power efficiency are already competitive without government support.
Americans who only watch the U.S. federal government could be excused for becoming discouraged
about government support for clean energy. The key players in the U.S. federal government,
including members of both parties, the President, and Congress, have done a mediocre job in
supporting clean energy. However, the real push for clean energy in the U.S. is coming from the
state and local level, not the federal level. As one example, 21 states plus Washington D.C. have
already implemented renewable electricity standards, according to the Union of Concerned
Scientists, which require utilities to derive a certain amount of their electricity from renewable
sources. Moreover, all the serious presidential candidates at present support a mandatory
cap-and-trade system to curtail greenhouse gas emissions, and such a plan is likely within a year
or two after a new U.S. president is inaugurated in January 2009.
The push for clean
energy is actually much stronger in Europe and other parts of the world than in the U.S. The
European Union, for example, has set a renewable energy target of 20% by 2020. Europe is the home
of the feed-in tariffs that almost single-handedly created the global wind and solar power
industries. China has also started promoting renewable energy because its citizens are literally
choking on the pollution from the many new coal-fired power plants that are popping up around the
country. Moreover, UN-sponsored talks have already begun for a new greenhouse gas emissions
program to replace the Kyoto Protocol, which expires in 2012.
In fact, the net level of
global government support for clean energy is likely to increase in coming years, not decrease.
This government push should be sufficient to get most of the clean energy sub-sectors to a
competitive state with legacy solutions before government support starts to fade, at which point
clean technology can take off on its own without government help
Do all the clean
energy sub-sectors present an attractive investment?
The term "clean energy"
refers to a collection of very different sub-sectors that have completely different growth
prospects, drivers, profit models, and investment prospects. Clean energy typically includes
renewable energy generation solutions (solar, wind, geothermal, fuel cells), in addition to power
efficiency solutions and advanced battery solutions such as lithium-ion batteries for plug-in
hybrid and all-electric vehicles.
It is very important to differentiate among these
various sub-sectors from an investment standpoint. For example, the prospects appear excellent in
our view for clean energy sub-sectors such as solar, wind, power efficiency, and hybrid batteries.
However, investors should be much more cautious on other sectors such as ethanol and fuel cells for
transportation. The corn-based ethanol sector, for example, presents a poor investment
proposition, in our opinion, because of its profit-margin dependence on corn prices (which have
more than doubled in the past two years) and also because ethanol in our view will only be a
temporary transportation solution until cleaner transportation technologies such as hybrid and
all-electric vehicles take over.
Even within attractive sectors, investors must be very
careful to choose attractive companies that will survive and prosper over the long-haul. In that
regard, investors in our view should focus on the larger clean energy players that have the best
technology and R&D and that will be best-positioned to roll out mass production and drive prices
lower in coming years. Those are the companies that will be best-positioned to capture the massive
demand for clean energy solutions that is likely to emerge over the next several decades.
The long-term investment outlook for clean energy is bright
The clean
energy sector has already seen some extremely volatile stock market activity, including bubbles and
busts. The fuel cell sector has soared briefly on several occasions in the past six years but is
currently trading at one-third of the value seen as recently as July 2006. Solar stocks rallied by
more than eight-fold from 2004 through late 2007, but have recently sold off sharply and are down
39% year-to-date (through February 29, 2008). Despite that correction, solar stocks are still up
29% year-on-year and have shown an average annual gain of 49% over the past five years.
The volatility in clean energy stocks makes it a sector where it is very important in our view
to choose reasonable entry points and stick to a longer-term investment strategy. In fact, now may
be an attractive time for investing in certain sub-sectors of the clean energy industry (e.g.,
solar, wind, power efficiency) given the sharp correction seen so far in 2008. Regarding the
investment horizon, our view is that the clean energy industry is a sector where a long-term
investment horizon can prove beneficial, allowing an investor not to panic about the volatility in
the sector. While there will certainly be ups and downs along the way, we believe that an
investment in the clean energy sector is likely to produce very attractive investment returns over
a 5+ year time frame, also carrying with it the benefit of investing capital in an industry that
offers major societal benefits for socially responsible investors.
Article by Richard
Asplund is the Equity Research Director at Melvin & Company, an institutional brokerage firm based
in Chicago, and is the author of the new book available at online bookstores entitled, "Profiting
from Clean Energy: A Complete Guide to Trading Green in the Solar, Wind, Ethanol, Fuel Cell,
Carbon Credit Industries, and more."
For more information on the book go to
http://www.ProfitingFromCleanEnergy.com
Contact him at- richard.asplund@oir.com
|
|
|
Home | Archives
| Sponsors |
Links | Calendar
| Contact Us |
Advertising
| SRI News
MISSION
STATEMENT
The GreenMoney Journal encour-ages and promotes the awareness of socially
& environmentally responsible business, investing and consumer
resources in publications & online.
Our goal is to educate and empower individuals and businesses to make
informed financial decisions through aligning their personal, corporate
and financial principles.
“Responsibility from the Supermarket to the Stockmarket.”
The material presented in this news letter is for educational and
informa-tional purposes only. The GreenMoney Journal does not endorse
or recommend firms, products, funds or advertisers.
GreenMoney is a registered trademark.
Copyright 1995-2010 by the
GreenMoneyJournal ®
Green Money is a Registrated Trademark
of The GreenMoney Journal / Cliff Feigenbaum
|
|
|
|
