By NeXt Up!

Posted: 11.17.09 | Tagged: energy-saving, money, savings

What is green investing?
Green investing encompasses sustainable technologies that could reduce the dependence on fossil fuels and utilize less polluting, more energy efficient means.

Initially, the idea of alternative technologies began with attempts to develop environmentally friendly and non-polluting sources of power generation, with lower carbon emissions. The problem: the power generated from such alternatives sources of energy is generally more expensive than those generated from traditional sources, so firms involved in alternative sources of energy found it difficult to make money. The investment decisions in such ventures were longer term and were based on environmental and social consciousness, in addition to economic fundamentals.

Thanks to higher oil prices in recent years and additional subsidies from government and other organizations, alternative sources of energy have become more competitive with the traditional ones. Consequently, the investment opportunities in the green sector have become more attractive to even investors with a short-time horizon.

Investment opportunities do exist in wind power, solar — photovoltaic and thermal, biofuels and others. Emerging technologies include nano-technology enabled materials, carbon capture and sequestration, battery technology, smart grid, energy efficiency and lighting. While the common goal behind development of all of them is reduction of carbon emission, the approaches differ vastly from each other in their scale, application and stage of development.

Are there different shades of green?
Absolutely. Remember that just because the energy usage is emission-free does not mean that it is created without ecological consequences. For instance, power generated by hydrogen fuel cell is emission free, but generations of hydrogen might be from dirty coal (or may be a much cleaner nuclear source). Similarly, corn-based biofuels may have lower emission than fossil fuels but creating the corn clears forestlands, sowes crops and synthesizes into biofuels. All these add to the overall carbon footprint. In some instances, we may end up creating more carbon than just burning a fossil based version. Some bio-fuels, such as those from sugarcane and agricultural waste tend to have a more favourable carbon footprint.

How does oil affect the company you are investing in?
The entire green food chain is priced off oil and natural gas, the two largest sources of energy in the US and most parts of the world. Together they account for 32% of total electricity production in the US. Solar panels account for less than 0.5%.

The higher the prices of traditional energy sources, the more attractive alternative energy becomes. A sharp drop (as we have seen in the last several months) in traditional energy prices may be good news for the consumer. but it is not welcome news for oil or natural gas companies, and it is disastrous for green investors.

If prices for natural gas and oil tank, the Exxons of the world may not like it, but they can still weather the storm with the war chest they have built up during boom years.

However, the new green kid on the block, who is barely profitable, can go into red - no pun intended. Most of the green firms do not have the staying power to withstand prolonged low energy prices.

Is there any way to anticipate the demand for green investing?
In recent years entrepreneurs, innovators and investors have ocused on lowering the demand and boosting the supply of clean energy as a way to fight pollution control and conserve the environment.
New technologies, materials and appliances that reduce the energy consumption by using it in more optimal way are being developed. Such products range from insulation products (energy efficient walls, low emissivity coatings to compact fluorescent lamps). There are attempts to capture carbon dioxide and store it, thereby keeping it out of the atmosphere.

What about exchanged traded funds or indexed funds?
For many investors, one option is a low cost exchange traded fund (ETF) or an index fund. An ETF is a security that replicates returns on an index or a portfolio of assets, but trades like a stock on an exchange. Index funds are low cost mutual funds that are created to replicate the performance of a group of companies. There are numerous sector based ETFs and indexfunds available that provide excellent diversification at low cost.

An investor in a company takes company specific risks (and benefits). An ETF or an index fund benefits from the industry growth-regardless of the winners or loses in the industry.

The return from investments in clean energy stocks tends to be more volatile than return on investments in conventional sector stocks. Why? Clean energy stocks gain more than conventional stocks when markets are up, and make larger losses when markets are falling.

So, greentech investment is still in early stages of development—offering both risks and rewards for the investors who do their homework.

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