Green Investing Gold Rush

As wealthy investors pour money into green investments, small investors flock to green funds, despite high volatility

Published on: Tuesday, September 02, 2008
Written by: Helen Kaiao Chang

The “green rush” is on. From large to small investors, the financial community is mining for green investments, making them one of the fastest-growing areas of the market.

Billionaires and millionaires are pouring trillions of dollars into green companies, while smaller investors are putting money into a slew of new green mutual funds and exchange-traded funds, or ETFs.

Green companies are dedicated to find alternative energy solutions, reducing carbon footprints and cleaning up the environment. The breadth and depth of money going into these companies is creating more viable investment opportunities for the market.

“Green investing has definitely taken root,” said Michael Herbst, analyst covering green funds at Morningstar, a leading investment research firm. “You have some very, very experienced, savvy, bottom line-oriented investors taking a pretty hard look at some of these opportunities and determining that they are attractive over the long haul.”



Green mutual funds can be as volatile as they are popularBut as with any gold rush, the risks can be high and the market volatile. Financial advisors caution that anyone venturing into this market better be prepared to stomach volatility and stick it out for the long term in order to realize strong returns.

“Most of the publicly-traded companies in this space are small and their share prices can be highly volatile,” said Steve Schueth (pronounced “sheeth”), president of First Affirmative Financial Network, an FCC-registered group of 120 advisors, which manages $700 million in socially-screened funds. “The innate nature of these kinds of investments requires a longer-term, well-diversified investment strategy.”

Billionaires and millionaires have started staking out claims in the green rush. Texas oil magnate T. Boone Pickens is investing $10 billion to build the world’s biggest wind farm. Bill Gates dropped $84 million in an ethanol company. Sun Microsystems co-founder and billionaire Vinod Khosla invested in cellulosic research.

Multi-millionaires worldwide are also panning for green. According to the World Wealth Report 2008, released by Capgemini and Merrill Lynch financial advisors, wealthy individuals have upped their investment in green industries. Total investment in the clean technology sector rose by 41 percent from 2005 to US$117 billion in 2007, the report said.

Wealthy individuals are devoting a greater portion of their portfolios to green industries. Globally, individuals with more than $1 million in assets put 12 percent of their portfolio in alternative energy investments, while individuals with more than $30 million put slight more at 14 percent, said the World Wealth Report.

In the U.S., high net-worth clients parked $39.5 billion in socially and environmentally-screened investments with management advisors in 2007, more than double the $17.3 billion managed in 2005. This is according to the 2007 Report on Socially Responsible Investing Trends, released by the Social Investment Forum.

Wealthy individuals have also invested in green companies through venture capital firms. Venture capitalists worldwide invested a whopping $3.25 billion in green energy companies in the first six months of 2008, according to the Cleantech Group, market researchers which track green energy investments. This is about a 50 percent increase over last year, which raised $3.9 billion for the entire year.

But the market is still young and investors will need patience to see returns. Morningstar’s Herbst noted that venture capitalists investing in the green sector “may not expect profits for five to seven years. So it is that longer term view that might be necessary for recognizing some of these opportunities.”

Smaller investors have also joined in the green rush, despite volatility. Morningstar tracks 38 green funds and ETFs, valued at about $7.5 trillion as of August 25 this year. Among these, nearly two-thirds, or 22 funds and ETFs, were launched within the last two years, including seven this year alone.

Analyst Herbst said he attributes this growth to media attention on green issues, as well as market opportunity. “It’s not surprising for us to see a number of new product launches where there is perceived opportunities,” he said.

Yet, most of these green funds have had extremely volatile performance, many rising by some 50 percent annually in the last two years, only to sink as much as 30 percent this year to August 25. In contrast, the S&P 500 was down about 12 percent by the same date this year.

First Affirmative’s Schueth recommends that investors diversify and take a long-term view. He advises clients to not allot more than 7 percent of their total portfolio—or 10 percent if they have very deep pockets—to green funds. He also suggests that green stock investors plan to park their money for at least five years. “People with short-term perspectives are not really investing, just gaming,” he said.

Despite all the volatility, the green energy sector could be here to stay. “There are organizations that are dedicating pretty meaningful research resources to this area, and thus could have some staying power,” said Morningstar’s Herbst.

For more info about the green movement's impact on venture capital investment, see our article Clean Technology "Boom"? and the accompanying data chart.