Green Investing Is Paying Off

Stock markets from New York to London are finally recovering. Appetite for risk is returning. And recent improved corporate results have buoyed hopes that the global economy is on the mend. Investors looking to get back into the market are in search of safe growth opportunities—and for many, eco-friendly investments are becoming more attractive as U.S. President Barack Obama and other world leaders put increased emphasis on tackling global warming.

So-called "ethical investing" may have posted tepid returns in the past, but the push into alternative energy and other carbon dioxide-reducing technologies is already paying off. In the first seven months of 2009, "green" mutual funds such as the Winslow Green Growth Fund (WGGFX) and the Calvert Global Alternative Energy Fund (CAEIX) have outperformed the Standard & Poor's 500-stock index by a factor of 3 to 1. Other investments, such as eco-focused exchange-traded funds (ETFs)—instruments that track specific indices, including ones dedicated to green-friendly companies—are also reporting double-digit gains since the start of the year.

With policymakers supporting further steps to reduce global greenhouse gases, analysts reckon green investing should offer stable medium- to long-term returns. And because investors fled the sector last year when the worst of the downturn hit, many companies, such as Denmark's Vestas (VWS.CO)—the world's largest wind-turbine manufacturer—or Tempe (Ariz.)-based First Solar (FSLR), remain relatively undervalued compared to more established energy names. U.S.-based mutual funds and ETFs also offer American investors access to world-leading European clean technology companies that often aren't traded on U.S. bourses.

"Green energy stocks are staying strong and are forecasted to grow even more this year," says Alina Bakhareva, renewable energy research manager at consulting firm Frost & Sullivan in London. "People see an opportunity to get assets at low prices."

Cleantech Incentives The growing appetite for eco-friendly stocks comes as policymakers spend big to jump-start domestic economies and cut carbon emissions. Under the $787 billion U.S. stimulus package, President Obama has set aside almost $80 billion for renewable energy and clean technology incentives. That includes tax breaks to meet mandatory targets for green energy generation, which utilities must reach by next decade. Billions of dollars for cleantech research and development are also available through the Energy Dept. to improve America's energy efficiency. Similar steps are being taken in Europe, which currently paces the world in fighting climate change, and in Asia, where emerging giant China already has set ambitious green energy goals.

Politicians may be focused on saving the planet, but savvy investors—even those who favor eco-friendly assets for ethical reasons—demand quality returns. That's one reason analysts are especially inclined toward green energy companies with steady cash flows, diversified business models, and government subsidies. Among them are Spain's Iberdrola Renovables (IBR.F) and Portugal's EDP Renováveis (EDPR.LS), which are well capitalized and have plans to expand aggressively in the U.S. Another popular issue is Arizona's First Solar, whose share price has risen 8% so far this year, vs. a 5% rise for the Dow Jones industrial average over the same time.

For investors seeking lower risk, a number of green-focused mutual funds have sprouted up to meet demand, with diversified portfolios spread across different technologies and geographical regions. Investment researcher Morningstar (MORN) cautions that such funds have varying criteria for eco-investments, so investors should read the fine print before handing over their money. Some invest, for instance, in blue chip companies such as IBM (IBM) and Citigroup (C) that have committed to reducing their carbon footprints. Others focus squarely on green energy firms or on other eco-friendly sectors such as energy efficiency or water purification.

Defensive Energy Plays One such investment vehicle is the New York-based New Alternatives Fund (NALFX), which has at least 25% of its portfolio in green energy companies. The fund's value has grown 27% in 2009, compared with the S&P 500's 10% gain. Murray Rosenblith, a director in the fund, says companies that focus on energy conservation could represent good investment opportunities as government policy shifts toward energy efficiency. More defensive plays, such as utilities with green investments or operations in natural gas—which is cleaner than other fossil fuels—also will help weather the current market volatility. "You need to be a little more defensive and look for stable dividends," he says.

Above-average performance by green investments bodes well for long-term investors, but short-term fluctuations could still play a factor. Ben Yearsley, an investment manager at financial-service provider Hargreaves Lansdown (HRGV.L) in Britain, cautions that the sector, which is dominated by small companies, has benefited from a rally in small- and midcap stocks. That may not last as investors turn their attention to larger companies.

Yet, Yearsley adds, the impetus behind eco-investments looks here to stay. "The trend is towards a cleaner economy," he says. "Investor interest for green energy and clean technology companies will continue to grow."

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