So where's the money in climate change? Investors sense a tumultuous market in the making, if they can only hit it right. "Sometimes I feel like a fly on the wall, watching a new era unfold," says Rona Fried, editor and publisher of Progressive Investor, a six-year-old newsletter that follows the field. "We're almost past the final hurdle of 'Do we really have to change?' Yes, we do, and we're going to get there."
Wall Street's own change in climate is nothing less than astonishing. Save-the-planet investing has suddenly, well, heated up. Four major investment banks—Citigroup, Goldman Sachs, Lehman Brothers and UBS—have recently issued fat global-warming reports looking at stocks and industries likely to gain or lose. Investments in clean energy have more than doubled, to $70.9 billion worldwide, in just three years. In just six years, assets in U.S. "green" mutual funds have soared by 695 percent.
Corporations can't afford to lag. Caps on greenhouses gases will almost certainly arrive in the United States, and sooner rather than later. Last month 13 corporations joined with 52 institutional investors ($4 trillion under management) to lobby the federal government for limits on climate-changing emissions—mainly the carbon that comes from burning fossil fuels. They're just a step ahead of the hangman: 15 governors in the Northeast and West currently intend to order limits of their own. Earlier this month the Supreme Court affirmed the right of the Environmental Protection Agency to regulate auto emissions (and, by implication, emissions from power plants). President Bush said he wouldn't do it, but there will be other presidents.
Climate change is only part of the picture, says Michael Liebreich, CEO of New Energy Finance, an independent analyst of the clean-energy sector. There's depletion of global oil and gas reserves, rising fossil-fuel prices and the dangerous dependence on politically risky oil-producing countries. The energy world is headed for a dramatic transformation—from 2 percent drawn from renewable sources in 2000 to 15 percent in 2025, worldwide, says Liebreich. That's where the money lies, as well as in companies that adapt their production and transportation processes to the new carbon-limited world.
Investing in climate change isn't the same as traditional green investing. You go green by choice, to reflect your values. But there's nothing optional about global warming and what it might do to the bottom line. Greenies want mutual funds that screen out polluters, oil and mining companies, heavy chemicals, hamburger cartons and other planetary offenders. They generally hate nuclear, too, because of the toxic waste and the risk of a calamitous accident. But existing, clean-burning nuclear plants are "climate friendly," says Edward Kerschner, investment strategist at Citigroup. So are mines that improve their processes, even though they're still unclean.
If your green will be going green, you have plenty of choices. But first, two warnings: (1) When you invest in a very small segment of an industry, the price of your fund or stock will bounce like a Super Ball. You'll love the ups, but the downs will bring tears. Unless you're a trader, go for broader, well-diversified funds. (2) Clean-technology stocks and funds aren't in a bubble yet. But they're pricey and speculative, and they pretty much track the price of oil. To play that high-risk game, 5 percent of your money is enough. Some ideas:
For a diversified, buy-and-hold ETF, look at Claymore/LGA Green (GRN). It tracks an index of 225 large stocks in all the major industries—even mining and oil, where it chooses the "greenest" companies among the gray, says Jonathan Naimon, president of Light Green Advisors, which manages the index.
What's next for greenies? Water, says venture capitalist Joyce Ferris of Blue Hill Partners—conservation, distribution, purification, wastewater treatment. Traders might consider ETF PowerShares Water Resources (PHO), tracking 41 companies in the U.S. water industry.
Now we come to the nut: will good-guy companies excel? In the short run, not always. "But the longer the horizon, the more green criteria matter," says Lloyd Kurtz, senior port-folio manager at Nelson Capital. "I can't prove it," he adds. But it's worth the bet.