President Obama's plan for the U.S. to derive 10% of its electricity from renewable sources by 2012, as well as his pledge to reduce greenhouse gas emissions by 80% by 2050, should be a boon to companies that provide climate-change solutions. It could also be good for socially responsible mutual funds, which for decades have invested in companies with strong environmental records and sustainable business practices. "Obama is making big noises about alternative energy, and that's really friendly for socially responsible investors," says David Kathman, an analyst who tracks socially responsible funds at Morningstar (MORN). (The Obamas reportedly own the Vanguard FTSE Social Index Fund (VFTSX), which is passively managed.) BusinessWeek asked three well-established socially responsible fund managers to pick companies poised to benefit from Obama's climate-change agenda.
Amy Domini, founder and CEO of Domini Social Investments
Domini, who opened the Domini Social Equity Fund (DSEFX) in 1991, says that although oil prices have fallen, the world is facing a long-term energy crunch. She's a fan of companies that are finding solutions for high energy costs, such as Honda Motor (HMC). The Japanese carmaker is considered the "greenest" in the auto industry, she says, since it has reduced the nitrous oxide emissions of its fleet by 78.2% since 2000. A cost-cutting plan has forced the company to delay the expansion of several new plants. But Honda isn't skimping on its hybrid plans, which Domini says are the key to its long-term health.
"There is no doubt this is a difficult environment for automakers&mdash given overcapacity, supply glut, and weak consumers," Domini says. "Honda remains committed to its core tenet of creating fuel-efficient products that reduce our environmental footprint and has been able to introduce its advanced environmental technologies." Those include Honda's FCX Clarity fuel cell vehicle as well as its new Insight hybrid car. In addition, 12% of Honda's sales come from its motorcycle business, which tends to be more recession-resistant, and that's "nice from an environmental-footprint standpoint," Domini adds.
Although alternative-energy companies such as wind farms or solar cells are the "low-hanging fruit" in the green sector, they are still smart plays with investment potential, Domini says. Two of her favorite holdings in the Domini European PacAsia Social Equity Fund are Hafslund (HNA.BE), based in Norway, which manufactures solar and hydropower equipment, and Vestas Wind Systems (VWS.CO) of Denmark, which makes wind power generation equipment.
Ingrid Dyott, co-manager, Neuberger Berman Socially Responsive Fund
Neuberger Berman's $800 million portfolio (NSBRX) invests in fewer than 40 stocks. (In comparison, Domini's flagship portfolio has 400 while the European PacAsia fund holds 177 names.) A recent addition to the fund is Praxair (PX), an industrial gas company. "Praxair is helping its customers reduce emissions and drive energy efficiency," Dyott says. It's also pushing innovation in "sleepy industries" such as refining and wastewater treatment. Praxair is expected to deliver a five-year annualized growth rate of 12%, vs. 9% for its peers, according to Thomson Financial.
Dyott also sees opportunities in infrastructure plays such as the energy grid, which needs an estimated $50 billion overhaul. She likes National Grid (NGG), a gas and electric transmission systems operator, which gets financial incentives from regulators to improve its environmental footprint.
Daniel Beneat, portfolio manager of equities, Calvert Investments
Beneat sees the best investing potential in renewable energy. He is bullish on the long-term outlook for energy giant FPL Group (FPL), which generates 40% of U.S. wind capacity and is also the largest generator of solar thermal power in the world. Another pick is Johnson Controls (JCI), which "has keenly positioned itself at the forefront of energy efficient technologies—ranging from plug-in hybrid vehicle batteries to smart HVAC systems to green buildings controls," Beneat says.
General Electric (GE), which never made it into Calvert's traditional social funds because of its nuclear and defense operations, is getting a second chance in newer Calvert portfolios, because its broad business units include wind and solar technologies. GE is also emerging as a policy leader in the climate change arena. "There is a remarkable and irreversible mainstreaming of the sustainability agenda in Corporate America," Beneat says.