IF YOU worry about climate change and have some money to spare, it's natural to wonder whether investing in green energy might plump your returns while helping to stem rising temperatures. A growing number of stock mutual funds and exchange-traded funds specialise in the so-called green- or clean-energy industry.
They invest not only in the expected companies, such as generators of solar and wind power and their suppliers, but also in less obvious ones, such as makers of LED light bulbs, electric cars and automobile batteries.
Buying into one of these funds means betting on a burgeoning, if volatile, sector and pinning the green in your wallet to your hopes for a more verdant future. Demand for renewable energy is surging, according to the International Energy Agency, a non-governmental organisation based in Paris. As a result, growth in solar- and wind-powered electricity generation is far outstripping that of coal- and natural-gas-fuelled generation, the group said in its "Renewables 2017" report.
China's embrace of solar power has been the main engine for this growth, but the United States is the second-strongest market for renewables, the agency said.
After a recent report by a United Nations scientific panel calling for immediate action to stem greenhouse-gas emissions, demand for green energy may well surge further.
Even billionaire investor Warren Buffett has taken steps towards going green: MidAmerican Energy, one of the subsidiaries of his holding company, Berkshire Hathaway, is aiming to obtain 100 per cent of its electricity from wind power by 2020.
Renewables growth
"Decarbonisation is a huge and enduring trend, and it's being led by the private sector now, like Facebook going 100 per cent renewable," said Pavel S Molchanov, a senior vice-president and energy analyst with financial services company Raymond James. In August, Facebook too announced that it was striving to power its operations with renewables by the end of 2020.
But whether investors in mutual funds and ETFs have any effect on the choices being made by companies such as Facebook, and the amount of carbon dioxide in the atmosphere, is a subject of debate among investment experts and fund managers.
Mr Molchanov counts himself among the sceptics. "If a person sells a coal stock, someone is going to buy it," he said. "Will that action lead to less coal being burned? No. For someone to contribute to decarbonisation, the way they can do it is by putting solar on their rooftop."
Some managers of green-energy funds disagree, saying individual investments do help the energy transition, even if they don't lead to the shuttering of a coal-fired power plant tomorrow.
Edward B M Guinness, manager of the Guinness Atkinson Alternative Energy Fund, said that, all else being equal, more investors should mean higher stock values for renewables companies, which would make it easier for those companies and new ventures to raise money. That should translate to further investment and expansion. "Every piece of investment in the sector matters," he said.
By signalling consumer interest, investment in these companies also can create a virtuous cycle, potentially pulling in even more money, said Jeff Waller, a principal in the global climate finance group at Rocky Mountain Institute, a non-profit organisation based in Colorado. "You're demonstrating there's demand from the average investor," he said. "Pension funds and 401(k) managers will want to meet that demand. That can create a larger pool of capital focused on this market, which can only help." Jon F Hale, global head of sustainability research for Morningstar, likened an individual's green energy bets to "voting with your money". Those sorts of "votes" can embolden fund companies to offer more products and be more aggressive in supporting and even pushing for corporate environmental investments and initiatives.
Regardless of which view you take, an investment in green-energy companies can offer the chance to combine the possibility of profit with a commitment to environmental principles. It's where stock-sleuthing meets tree-hugging. (Studies by Morningstar and others have shown that including non-financial factors, such as environmental performance, in investment management need not hurt overall returns.)
The green-energy niche includes the usual mix of actively and passively managed funds - those that track indexes - and ETFs. On the active side, these range from offerings from big fund companies, such as the Fidelity Select Environment and Alternative Energy Portfolio, to the New Alternatives Fund, a little outfit that has been plugging away on Long Island since the early 1980s.
"We've always had the philosophy that the fund exists to build a green energy future," said Murray D Rosenblith, one of the portfolio managers of New Alternatives. Mr Rosenblith said he joined his co-manager, David J Schoenwald, who founded New Alternatives with his father, in the belief that the fund was contributing to the advancement of renewable energy.
"I was a peace activist and had run a charitable foundation," he said. "I wouldn't have come here if I didn't believe we were helping."
Eclectic mix
Over the five years ending Sept 28, Fidelity's fund returned an annualised average of 9.75 per cent and New Alternatives 6.73 per cent, compared with an annualised average of 13.95 per cent for the Standard & Poor's 500 index.
Passively managed green energy funds track well-known indexes as well as obscure, proprietary ones. Invesco, for example, built its ETF on the WilderHill Clean Energy index, while BlackRock's iShares division used the S&P Global Clean Energy index for its offering. The Calvert Global Energy Solutions Fund is constructed upon an index that Calvert created, said one of the fund's portfolio managers, Jade S Huang.
Calvert opted to go its own way because it judged many of the existing indexes to be too concentrated, Ms Huang said. The WilderHill index contains 39 stocks and the S&P index 29, compared with more than 150 for Calvert's index. "So we're offering a product that's more diversified but still addresses the energy crisis," she said.
No standard recipe exists for what a renewable energy fund should contain. Some funds broaden their potential pool of holdings by including a salmagundi of stocks.
Take Fidelity. Its fund can "look at any company out there trying to push for environmental change in its industry", said its manager, Kevin G Walenta. Only about half of its assets are dedicated to renewable energy and energy efficiency stocks.
The fund also contains waste-management, water and agricultural holdings. That broad remit suits Mr Walenta, who said he prefers to invest in long-standing companies and shies away from newer technologies.
Energy efficiency, in particular, is a favoured theme. "The payback period for efficiency investments gets better every year," he said. "And the companies have brand power and long histories of positive economic profits."
As an example, he pointed to Ingersoll Rand, a more-than-a-century-old manufacturer that makes efficient heating and air-conditioning systems. It has lately been one of the fund's top holdings.
Mr Hale, of Morningstar, said an investor shouldn't let concerns about climate change be all that determines the amount of an investment in renewable energy.
A green-energy fund or ETF can supplement a diversified portfolio, with, say, a 5 per cent or 10 per cent allocation, but it does not take the place of a core holding, he said. NYTIMES
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