How To Be a “Green” Investor

photo: Miao & Roland

Many individual investors are starting to look for ways to make a positive impact on the environment while still being able to save and invest for retirement. Protect Mother Earth and improve your net worth at the same time: seems like a no brainer, right?

Green companies offer a lot of potential given the amount of attention, focus and funding (i.e. infrastructure spending) they are sure to receive over the coming years. The tricky part is finding those green investments that are going to not only support those companies who are trying to make a difference by operating in an environmentally friendly way, but also provide a decent return in your 401(k) or IRA.

Where do you start? First, let’s define what we mean by “green” companies, and then we’ll dive into how you can find and invest in them.

What Does “Green” Mean?

In the corporate world, “green” usually means one of two things: green operations or green business. The term “green operations” indicated that the company is trying to carry on its current operations in a more sustainable way: by using less energy, producing less waste, and so on. Green business means the company is involved in producing products that will help in the fight against climate change and the destruction of the environment: such as producing wind turbines, solar panels, and so on.

Identifying green-business companies to invest in is typically much easier than identifying green-operations companies because it is obvious whether a company is involved in green business, while determining if a company is really employing green-operations techniques is not so obvious. But if you know where to look, finding companies you would want to invest in is actually quite simple.

The easiest way to find green companies is to let the professionals do it for you. Investment professionals have compiled thorough, vetted lists of green companies and have made them available in green stock indexes and green exchange-traded funds (ETFs).

Green Indexes

Wall Street likes to track market movement using simple stock indexes. Every night on the evening news you hear about the S&P 500 and the Dow Jones Industrial Average. But did you know there are stock indexes for green stocks too?

One stock index that tracks green stocks is the WilderHill Clean Energy Index (ECO). According to Encinitas, Calif.-based WilderShares, the index focuses on “businesses that stand to benefit substantially from a societal transition toward use of cleaner energy and conservation. Stocks and sectors within the Index are based on their significance for clean energy, technological influence, and relevance to preventing pollution in the first place.”

As you can see, the ECO index tracks green-business stocks. Among the stocks in the index, as listed on the NYSE website, are Rubicon Technology Inc., an electronics material provider that manufactures and sells materials used in light-emitting diodes (LEDs); solar panel producer Canadian Solar Inc., Universal Display Corp., which develops OLED technology used in flat panel displays, lighting and organic electronics, and semiconductor manufacturer Applied Materials.

Looking through the stocks in this list should give you a good jump start with particular companies you can investigate. You can also look at the industries of which these stocks are a part to identify other companies that are working in similar fields.

Green Exchange-Traded Funds (ETFs)

You can also find lists of green stocks by looking at the holdings of green ETFs. On a regular basis, ETF managers release prospectuses that outline the methodology used to construct the ETF, as well as its fees, past performance and top holdings. We are most interested in the last part–although you should also take a look at the fund’s methodology to ensure you agree with the reasons the stocks were chosen. We want to know in which companies the fund managers are putting their money.

Here’s an example: Van Eck Global recently created the Environmental Services ETF (EVX).  The EVX is the nation’s first ETF focused on environmental services. According to the fund’s online prospectus and fact sheet, EVX has holdings in waste management and recycling company Republic Services Inc., environmental services provider Veolia Environnement, Houston-based Waste Management Inc., and medical waste disposal company Stericycle Inc. The list continues, but you get the picture.

If you want to do a little detective work on your own, you may want to consider looking at the holdings of the following ETFs:

• Claymore Global Solar Energy ETF (TAN)
• Claymore/LGA Green ETF (GRN)
• First Trust ISE Global Wind Energy Index Fund (FAN)
• First Trust NASDAQ Clean Edge Green Energy ETF (QCLN)
• Market Vectors Global Alternative Energy ETF (GEX)
• PowerShares Cleantech Portfolio ETF (PZD)
• PowerShares Global Clean Energy Portfolio ETF (PBD)
• PowerShares Global Nuclear Energy Portfolio ETF (PKN)
• PowerShares Global Progressive Transportation Portfolio (PTRP)
• PowerShares Global Wind Energy Portfolio (PWND)
• PowerShares Nasdaq OMX Clean Edge Global Wind Energy ETF (PWND)
• PowerShares WilderHill Clean Energy Portfolio ETF (PBW)
• PowerShares WilderHill Progressive Energy Portfolio ETF (PUW)
• Van Eck Market Vectors Global Alternative Energy ETF (GEX)
• Van Eck Market Vectors Nuclear Energy ETF (NLR)

Whether you decide to invest in the ETFs or individual stocks – and whether you do it for personal or economic reasons – the perils are the same. Companies can falter, industry groups can wane and investors can be fickle. In other words, though the green sector is a great place to find ideas and potential investments, these ideas and investments are not a slam dunk and require the same amount of due diligence that you would apply to any other. Diversify your holdings, understand what you own and, especially, keep a close eye on your green investments. The field is young, competitors and legislation are forming rapidly and change happens quickly.

Article Provided by Learning Markets.

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