By David Sher
Recent debates on the potential efficacy of the ‘Green New Deal’ proposed by Representative Alexandria Ocasio-Cortez (D, N.Y.) and other members of Congress raise one central question for the financial advice industry: Do typical green mutual funds and ETFs actually deliver a direct and positive environmental impact?
It’s not an idle question. Legacy-conscious baby boomers, members of Gen X who have had their own children in recent years and issues-focused millennial investors are increasingly demanding investment strategies that can not only help achieve their personal financial goals, but also directly support major societal goals, such as reducing carbon emissions.
As environmentally motivated clients become more results-oriented in the wake of escalating headlines about climate change, financial advisors and the firms that support them need to be prepared to address client concerns as to whether adding their money to the billions of dollars that have flowed to large-cap funds and ETFs that claim to be ‘green’ achieve these goals.
Green Funds: Good Intentions, Low Impact
The basic problem with most green funds and ETFs is that client investments in these vehicles don’t translate directly into carbon reduction or create green jobs. In fact, many of these funds are concessionary in that they merely exclude non-green sectors rather than investing in truly impactful things such as renewable energy projects.
Indeed, many such funds hold only small positions in wind or solar power developers or other green employers, with their largest allocations going to companies whose business practices may be deemed environmentally friendly, but have a minimal effect on the elimination of carbon emissions.
Purchasing funds or other vehicles that practice ‘negative screening’ (i.e., those that exclude oil and gas investments or other similar, narrow categories of stocks) may give investors peace of mind by withholding support from high-emissions industries, but this approach also drives very little real progress toward broader green goals.
Time for a Green New Deal for Green Investing
So how can financial advisors steer environmentally-conscious clients in an increasingly social mission-focused landscape toward investments that will generate real, positive impacts for the environment?
Invest Directly in Project Developers. One alternative is to invest directly in renewable energy project developers. Firms such as Sempra Energy have established expertise in building large-scale, clean energy projects in both domestic and international markets, generating electricity via wind turbine farms, solar facilities and other renewable means, then selling it to local and regional utilities.
For retail investors, this approach offers the appeal of directly supporting companies that are working to expand renewable energy capacity all over the world. The potential downside is that many of these companies face substantial risks when developing new projects, since there is always the possibility that a project may not ultimately get built or meet expectations (similar to the ‘dry-hole’ risk faced by developers in oil and gas drilling).
In addition, since retail clients can only access these companies through the secondary markets, their investments will likely have minimal impact on each company’s efforts to develop new projects.
As an alternative, some private equity funds finance renewable energy projects through direct investments in developers. This model offers a more straightforward path toward making a positive environmental impact, but also carries the same substantial risks as publicly listed companies and may only be available to institutional or ultra-high-net-worth investors.
Invest in Renewable Energy Manufacturers. Clients may also be able to drive greater impact by investing in the technology and equipment side of the clean energy industry. For retail investors, the most prominent way to access this market is through publicly traded manufacturers of solar panels and systems such as First Solar or wind turbine manufacturers such as Vestas.
As many advisors know, however, these investments also carry a risk profile that may not appeal to some investors. Solar panel and system manufacturers, in particular, have been hit by years of severe price compression, pressuring margins and raising concerns of market saturation. Unfortunately, with the limited number of pure-play, publicly traded cleantech companies on the market, retail investors’ access to the green technology and equipment sector is still somewhat constrained.
Project-Focused Investment Vehicles. An increasingly attractive approach that offers a combination of retail accessibility, real impact and stability that many advisory clients may find appealing can be found in the emerging area of project-focused investment vehicles.
Such firms purchase existing renewable energy projects such as solar and wind farms that have long-term contracts in place to provide electricity to local municipalities, corporations and other entities. Since the projects are already up and running, this model avoids development risk while offering steady income to investors, along with the possibility for moderate capital appreciation.
Equally important, vehicles such as these typically help to expand renewable energy capacity by creating a market for developers’ projects, thereby helping clients maximize the impact of their investment dollars. And, since such firms offer a range of share classes via publicly-listed and private investment vehicles, this strategy is accessible to retail investors and high net worth individuals.
To effectively serve environmentally conscious clients who are focused on truly making a difference with their investment dollars, it’s time for advisors to take a fresh look at the options available in the sustainable energy sector.
Between innovative, project-focused investment firms, project developers and equipment manufacturers, advisors will likely find that the possibilities for making a real impact are more compelling than they have ever been.
On the flip side, financial advisors need to be aware that continuing to focus on green investing that is more about checking the box than driving real impact could increasingly spur negative reactions among certain client segments that such investments usually target.
David Sher is Co-CEO of Greenbacker Capital (www.greenbackercapital.com), an investment firm focused on the sustainable infrastructure sector.