As investors continue to pour money into small solar, wind and biofuel ventures, hoping they've made the winning bet on the next green Big Thing, Calvert Funds' Paul Hilton believes the real action is in bigger, established companies that are taking advantage of the new green economy.
Hilton, director of advanced equities research at Calvert Asset Management Co. Inc., a division of Calvert Group Ltd., believes investing in large-cap, mainstream companies that devote part of their efforts to green technologies is a great way today to play the future of clean energy and green investing.
Among the firms he cites are IBM, Johnson Controls and Itron.
Calvert, based in Bethesda, Md., is a well-known player in sustainable investing, with more than 50 funds and $14 billion in assets under management.
"Many of our investors who have been doing green investing many years are more interested in what some of the larger companies are doing and which ones are polluting, versus which ones are trying to take advantage of environmental opportunities and reduce their exposure to environmental risks like climate change," Hilton says.
Calvert invests in the environment using three distinct approaches. Its "Signature" strategy combines a rigorous review of financial performance and a thorough assessment of environmental, social and governance performance.
"It's more of a traditional kind of approach," explains Hilton. "Most of our equity funds fall in this category. Historically, they have been more of a value-based product with explicit criteria companies must meet in order to be acceptable for investment. The one big criteria is the environment, probably the single important criteria to our shareholders."
Calvert's "Solution" funds specialize in companies with clean tech technologies. "We call them solution funds because the companies in them are providing solutions to global problems like climate change and water scarcity," says Hilton. Two examples are the Calvert Alternative Energy Fund and the Calvert Global Water Fund.
Calvert's "Sage" funds-an acronym for "sustainability achieved through greater engagement"-emphasize strategic engagement to advance environmental, social and governance performance in companies that may not meet certain standards today, but have the potential to improve. Calvert's best-known fund in this category is the Calvert Large Cap Value Fund, which contains stocks including General Electric, Wal-Mart and Exxon Mobil.
Hilton describes this category as an "an advocacy approach that goes beyond SRI screening. We believe that a combination of funds is a good way to retain our core investors that have an SRI interest, but also we try to reach out to a broader group interested in green investing."
Hilton views IBM, Johnson Controls and Itron as good alternative energy plays. His assessments of the firms follows.
Big Blue Is Pursing Big Green
IBM (NYSE: IBM) has changed its focus from producing big, mainframe hardware systems to offering higher-margin software and computer consulting services, resulting in a steadier income stream in tough economic times. They've realized there's money in building a consulting business around green, which fits very nicely into the general changes the company has made, says Hilton.
The firm has had an environmental policy in place since 1971. IBM launched its "Project Big Green" in May 2007, aimed at providing solutions to global problems like climate change, energy efficiency and water shortage. The firm has since renamed it "Smarter Planet Initiative."
IBM is making steady progress promoting green data centers, which for many technology companies is their biggest use of energy. Data centers eat up about 2% of the energy generated in the U.S. IBM just completed a data center with Syracuse University that is expected to use 50% less energy than a comparable-size traditional data center. The $12.4 million, 6,000-square-foot facility will feature its own electrical tri-generation system and incorporate IBM's latest energy efficient computers and computer-cooling technology.
IBM has cut its C02 emissions in half since 1990. It saved $30 million in 2008 by reducing its own energy consumption, according to IBM's annual Corporate Responsibility Report.
On The Rebound
Johnson Controls (NYSE: JCI) is an industrial company that provides batteries and interiors for auto manufacturers. The stock was hit hard with the auto slump but is recovering.
Two parts of its business are focused on the environment. One is the battery business. The company still produces traditional batteries and is a market leader. The firm is also innovating through its fast-growing energy efficiency business and through its lithium ion battery technology for hybrid autos and plug-in electric vehicles, which is the part of the business likely to win out, Hilton says.
Johnson was awarded a $300 million stimulus grant by the U.S. Department of Energy to build up its domestic lithium ion manufacturing capacity.
Its energy efficiency business is focused on HVAC (heating, ventilation and air conditioning), which produces thermostats and sophisticated computer controls for energy efficiency.
Johnson Controls is part of a consortium that has entered into a $500-million contract to retrofit the Empire State Building, once the world's tallest building. The goal is to reduce energy consumption by up to 40% and provide a model for similar projects worldwide.
Smart Meters Are Key
Itron (NYSE: ITRON) began in the 1970s providing old line meters for utilities. The firm now makes smart meters for water and electricity that help consumers and utilities monitor usage. It has a 50% share of the U.S. market for smart meters and is expanding globally. Only 8% of meters globally are automated, showing the potential of the company as it expands internationally, Hilton says.
Itron also provides solutions for data management, which will become more important as utilities shift the timing of consumer energy usage. Itron has won four major U.S. utility contracts worth over $1.4 billion.
Bruce W. Fraser, a financial writer and author based in New York City, is a frequent contributor to Financial Advisor magazine. He can be reached at [email protected]. Visit him at www.bwfraser.com/home.