The two-week global climate summit in Paris coupled with Bill Gates' efforts to lead a coalition of billionaires to invest in climate research is sparking fresh interest in clean-energy investment opportunities.
“Anything green seems to be the new trend, and it has gradually seeped into the investment world,” said Rose Swanger, principal at Advise Finance. “That's the beauty of capitalism, as long as there's the demand there will be suppliers. However, because of the novelty, investors may have to take a higher risk in investing in some of those funds.”
Mitchell Kraus, a financial planner and owner of Capital Intelligence Associates, maintains a serious emphasis on various forms of values-based investing strategies, and he stresses the need for diversification when it comes to alternative energy investments.
“Based on the Paris talks and Bill Gates' investments, it can be a good time to put money into green energy, but with any evolving technology there will be big winners and big losers,” he said.
On the example of Mr. Gates leading the formation of the Breakthrough Energy Coalition, with the goal of supporting alternative energy solutions, Mr. Kraus said it would be a mistake for the average investor to try and just follow the Microsoft-founder's money.
BETWEEN DONATION AND PROFIT
“From what I can tell, Bill Gates is doing impact investing, which is somewhere between a charitable donation and investing for a profit,” Mr. Kraus said. “He believes the money needs to go into this area to make the world a better place, but he's willing to have many, many losers to find a few winners, and most investors aren't willing to play that game.”
(More: Top 10 'green' funds)
On that note, Mr. Kraus cited Solyndra, the California-based solar-panel manufacturer that went belly-up in 2011, less than two years after receiving a $535 million loan from the federal government.
“There are going to be the Solyndras of the world,” he said. “It's a great warning sign that just because something is right for somebody like Bill Gates doesn't mean it's right for you.”
Fund-tracking firm Morningstar Inc. doesn't yet have an official category for mutual funds that invest in green energy, but it is able to screen funds that have a recognized environmental focus.
Of the 24 funds making up the group, eight have positive performance over the 12-month period ended Nov. 27.
The top-performer, with a 14.2% 12-month return, is the $304 million Brown Advisory Sustainable Growth Fund (BAFWX). The second-best performer, with a 2.3% 12-month return, is the $146.6 million Green Century Equity Fund (GCEQX).
Both funds are in the large-cap growth fund category, which had an average gain of 5.06% over the same period.
PERFORMANCE LESS IMPORTANT FOR SOME
For some financial advisers and investors, investment performance is equal or less important than the investment impact when it comes to social and environmental causes.
“I don't expect to get 15% every year, but if I can keep my clients even with the indexes and lose less in the down years, I think I'm doing my job,” said Len Cohen, owner of CF Services Group, which specializes in activist and socially responsible investing.
His passion for doing good is evident in his personal dedication to the Calvert Global Energy Solutions Fund (CGAEX), which lost more than 58% in 2008 and has yet to fully recover.
“I've lost a bunch of money in that fund, and so has my daughter,” Mr. Cohen said of the $88 million fund that is down 10.5% over the past 12 months. “I bought it as a hopeful investment, and I still hold it.”
Like a lot of believers in alternative energy, Mr. Cohen is banking on a tax on carbon emissions, which President Barack Obama has long supported but has not been able to make a reality.
“Coal is no longer a viable option,” Mr. Cohen said. “If there's ever a carbon fee, which equalizes the playing field by raising the cost of using fossil fuels, renewables will, relatively, not be as expensive.”
As witnessed in the kick-off this week of the meetings in Paris, designed around reducing carbon emissions, the general appeal is growing, even if the investment potential is still piecemeal at best.
For that reason, Adam Seitchik, chief investment officer at Arjuna Capital, encourages broad diversification in the area of alternative energy investments, including the AdvisorShares Global Echo ETF (GIVE), which holds nearly 100 securities allocated by two equity managers and a fixed-income manager.
ALL ABOUT THE FUTURE
“Investing is all about the future, but you can invest the diversified way or a more concentrated way,” he said. “Right now, Bill Gates is really talking about investing in basic research, but the commercial dollars have to be further down along the development curve.”
Until that development curve is more fully developed, some financial advisers would prefer to wait for a more appealing investment entry point.
“In theory and from an ecologically-sensitive standpoint, it all sounds great, but from a dollars-to-dollars standpoint, it's still a traders market,” said Paul Schatz, president of Heritage Capital.
He cites the Guggenheim Solar ETF (TAN) and Market Vectors Solar Energy ETF (KWT) as examples of trading vehicles in the alternative energy space that he would not invest in as long as oil is hovering around $42 a barrel.
“You can trade those ETFs, but I wouldn't put them in a portfolio as a core holding, because they represent dead money,” he said. “A lot of people say they won't invest in sin stocks, or companies that aren't environmentally friendly, but investing is about making money. If you want to be environmentally sensitive, recycle or plant a tree.”