5 Things to Consider When Investing in Green

photo: Miao & Roland

Throughout the world, the growing demand for energy is set to accelerate over the next 20 years. Not only will this challenge efforts to abate climate change trends, but it will also impose significant costs on the global economy, businesses and consumers. All this during an era of already high oil and gas prices and uncertainty over the security of energy. Despite these conditions, however, certain types of businesses are seeing a major opportunity to harness energy growth while also offering attractive returns to investors. These opportunities exist mainly in the “cleantech” sector, with companies whose core business is in the development and deployment of green technologies.

Even if you think of yourself as a conservative investor, you may want to add cleantech exposure to your portfolio. Here are a few of the factors to consider:

1. Is the company committed to a variety of cleantech themes?

While the cleantech sector includes many subsets (solar panel manufacturing, biofuel production, etc), it remains unclear which technologies will emerge as solutions. The strongest contenders, however, are uniquely positioned to satisfy four requirements. First, is the energy source easily accessible and renewable? Is the company able to produce, supply and store energy? Is this company’s technology making a significant contribution to energy efficiency, waste reduction and water management? And finally, is the company using low impact materials and products? By fulfilling these criteria, a cleantech company is better positioned to make a strong commercial case in favor of active investment.

2. Is the company providing a value-added solution?

The cleantech sector can sometimes sound like a monotone of the same ideas: The revised solar cell, the next-generation biofuel or the cheaper wind turbine. Rather than putting your money on iterations of existing technologies, pay attention to whether a company is providing creative, cost-effective solutions that have gained some market traction. Today, cleantech entrepreneurs are turning carbon into fuel, sucking mercury out of the air, and running cars on compressed air. It may pay to look above the solar panels and beyond the windmills.

Image from Lydur Skulason, via Wikimedia Commons

3. Is the company on a cleantech index?

Generally, a cleantech index is useful to gauge whether global environmental trends are impacting capital markets. Interested investors are able to reference a cleantech index to assess how a perceived surge in the demand is trending. Today, numerous cleantech indices exist (the S&P/TSX Clean Technology Index, the ACT Australian Cleantech Index and The Cleantech Index® are just a few) — by tracking them, cleantech investors are able to gain insight and feedback on this new and somewhat uncertain sector.

4. What about mainstream activity?

To be safe, investors looking to bolster their cleantech portfolio may want to focus on large, established companies that are actively investing in a variety of cleantech technologies themselves. Google was the second most active cleantech investor in 2008 and is working with GE to develop a U.S.-wide electricity Smart Grid. Intel has been investing in solar, battery and energy storage companies, and has been advised to move into lithium-ion battery production. DuPont is working with BP on advanced biofuel production and earlier this year, Walmart announced plans to double its already sizable solar program in California. As usual, take “green” media campaigns with a dose of skepticism while recognizing that many companies with a global reach are sending strong signals as they pursue cleantech investments and the resulting profits.

5. In it for the long haul?

Often, cleantech shares are known as “growth stocks” and are expected to grow in value at a higher rate than the average market. Many times, growth stocks won’t come with a dividend payment because the entire focus of the stock is in growing its net worth. Most of these companies need numerous rounds of venture capital to build plants, hire workers and fuel innovation. For these reasons, cleantech investing is riskier than with other products, as a positive return may come years after an initial investment. Minimizing this risk involves a long-term financial investment that will look toward the future, slowly moving stocks from higher risk to lower risk.

In his 2010 TED speech on energy, Bill Gates noted that technology takes 20 years to develop and implement, then another 20 to catch on. Add to this the notion that great technology is different than a worthwhile product, thus making deployment more costly than management often anticipates. As one professor of mine used to say, “Who makes money? The very sophisticated and the very, very patient.”

Cleantech benefits from being part of the energy market – the largest market in the world – while simultaneously having many different aspects to the business. Furthermore, the drivers of change are here to stay: higher fuel costs, security of supply and mostly increasing demand. At current rates of consumption, global demand for energy is expected to double to 30 terawatts by 2050, up from 15 terawatts today. To put that in to context, 30 terawatts is the amount needed to power 30 billion American homes. With this, it becomes clear that a push towards cleantech investments is less reminiscent of a feel-good bubble and rather a necessary leap towards long-term gains.

Still, the cleantech label encompasses many competing technologies, and serious questions still linger over the impeding market distortions, taxing, subsidizing, and regulating of this sector. As such, it’s still too early to assess which clean technologies will emerge as the big winners. However, the current trajectory of legislation, funding and corporate support is creating a significant incentive to invest in the early stages of a growing opportunity.