writing » investing with kyoto
Canada's implementation of the Kyoto Accord on climate control will undoubtedly shake up the capital markets.
For investors the outlook is far from the doom and gloom many opponents of Kyoto would have you believe. On the contrary, Canada's commitment to Kyoto will help create new markets and strengthen some companies.
Under the accord, by 2012 Canada must reduce greenhouse gas emissions by 6 percent of 1990 levels. To achieve this target, there must be fundamental changes to the way automobile, energy and resource based companies do business. Additionally, governments will have to pour significant capital into helping mitigate the transition. Together these two realities should shake loose new opportunities for firms that operate in Kyoto-friendly lines of commerce.
Let's have a look at some ways green-leaning investors can put their money to work in a post Kyoto economy.
By far the most popular socially responsible investment (SRI) for Canadians is an ethical mutual fund. Easy to buy, and diversified over many companies to spread risk, these funds are actively managed to insure that the held firms are conducting their business in accordance with a philosophy that screens for, among other criteria, ecological friendliness, good corporate citizenship, and political issues.
There are roughly 45 SRI funds available in Canada, and you can usually obtain most of the 80 or so SRI funds listed in the US through dealer/brokers here. Each fund will have it's own unique philosophy, and sector that it focuses on, but they all share a similar approach to screening the businesses they invest in.
At the end of 2002 Canadians had $10 billion invested in SRI funds, 2.5% of the roughly $390 billion they had salted away in all mutual funds. SRI fund investment is growing rapidly, as more and more investors look to make ethical statements with their money. This is good for these funds, as the more capital that comes into them the stronger they are, and the better the potential returns.
Another plus for SRI funds is that owners of these securities tend to hold onto them in adverse market conditions - like the recent volatile swings. In the face of the last three years of roller coaster stocks, the average Canadian equity fund suffered a 27.6% churn of redemptions, while the average SRI fund saw only 5% of owners cashing out - socially responsible investors ride out the storms more stoically. This is also good for these funds.
Looking through a Kyoto filter, a few funds stand out as having the potential to benefit from the implementation of the Accord. Here are three typical funds, with varying risk profiles:
Acuity Clean Environment Equity Fund— This fund holds larger cap green-screened companies, along with big bank stock to mitigate risk. It is well diversified and has performed in harmony with the broader TSE/S&P composite index in the recent market turmoil - a reasonably safe bet.
(DATA/CHART)
Sentry Focused Alternative Energy — For more adventurous souls, this fund has exposure to nascent and young companies building businesses in alternative energy including fuel cells, solar, wind, and hydroelectric power. The fund has been pounded lately, but could have a strong upside over the next few years - high risk/reward holding.
(DATA/CHART)
Middlefield Alternative Energy— This fund holds a diversified line of smaller alternative energy companies with existing lines of business. It also contains more traditional power co-generation interests and a basket of income trusts (see below). - middle level risk of these three funds.
(DATA/CHART)
What about holding individual company stock straight out? While that strategy tends to be more risky than holding mutual funds, there is a better potential to hit a home run swinging at single equities; you also save the management fees that are attached to mutual funds. Be aware that most businesses that stand to benefit from a Kyoto implementation are small, and often in experimental and research phases. Owning these stocks is a high risk scenario.
Here's a short list from the TSE that you could put on your radar.
Westport Innovations Inc. makes and sells low-emissions, high-performance natural gas engines. Although recently battered in the market, Westport, like the more renowned eco-darling Ballard Power (BLD), is well positioned to take advantage of the shifting automobile industry, who must come to terms with emissions standards. Westport also builds bus engines, sells into emerging markets, and could benefit from Kyoto credits for public transportation and foreign development.
(WPT CHART/PROFILE)
Canadian Hydro Developers out of Calgary generates electricity, primarily out of wind and biomass. They have innovative plans and fairly solid lines of existing business, and should benefit from benevolent government incentives to financially assist the sale and generation of clean power. The stock has been steady for 5 years, and avoided the recent market meltdown nicely.
(KHD CHART/PROFILE)
Automation Tooling Systems is a Canadian technology company with a diversified product line and client list. In one of those lines (through their divisions Photowatt International, and Spheral Solar Power), ATS is an emerging leader in the rapidly growing market for solar energy cells and modules. ATS has kept pace with the TSE index, although it has recently underperformed that benchmark, which could signal a good buying opportunity.
(ATA CHART/PROFILE)
Another approach is to buy units of an Income Trust, an investment vehicle that has become popular in recent years. An income trust holds interest in several businesses much like a mutual fund, the difference being that it doesn't hold the underlying stock, but rather it “owns” a portion of the profit those companies generate. This portion is then distributed to the unit holders as a dividend, a few times a year.
A key to assessing whether to invest in an income trust is confidence that the businesses held will produce positive balance sheets. Another aspect to look at is the unit price range over time, as these trusts trade like stocks, with the price largely determined by the interest levels of sellers and buyers. There are a couple of trusts available in Canada that operate in Kyoto-friendly lines of business:
Clean Power Income Fund is involved in the contracted marketing of hydroelectric, wind, biomass and biogas produced power from established companies. This trust's unit price has done quite well since its inception in November 2001 against the broader TSE composite. It has dispensed cash dividends yearly of around 50 cents a unit, and is projecting 95 cents a unit in the future.
(CLE.un WEB/CHART)
Calpine Power Income Fund has an interest in three small alternative power plants in BC, Alberta and Ontario, with long term contracts selling power into the grid. Calpine has also performed well against the TSE composite, but is a little younger, being born in August of last year. It has released yearly cash dividends since its inception of around 96 cents a unit.
(CF.un WEB/CHART)
As with all investments, you should examine your tolerance for risk before buying. However, if you are going to be in the market, what better way to show your support for good corporate citizens than to invest in forward looking companies?
MORE INFO:
- www.socialinvestment.ca — Social Investment Canada
- www.canwea.ca — Canadian Wind Energy Association
- www.mjra-jsi.com — Jantzi Index of SRI funds
- www.ific.ca — IFIC (Investment Funds Institute of Canada)
- www.socialfunds.com — SRI information and news site
- www.socialinvest.org — The Social Investment Forum
- www.greenmoney.com — Greenmoney Journal Online
- www.cbsr.bc.ca — CBSR (Canadian Business for Social Responsibility)
- finance.yahoo.com — Stock quotes, news, profiles and filings
- globefund.com — Fund quotes, profiles and rankings
