Ethical investing: Funds that favor planet savers

Global warming gains as a theme for investors. But the strategy carries real risks.

from the February 25, 2008 edition

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"We're optimistic about the opportunity here because we think it stands on its own" as a potentially profitable proposition, says MGI Director Diana Farrell. But, she adds, slowing global demand for energy "probably won't happen without thoughtful intervention" from regulators. Conversely, if governments raise minimum efficiency standards to fight climate change, she says, investors will likely back firms instrumental to such transitions and reap profits.

Despite its lack of a social mission, the DWS Climate Change Fund is structured to give exposure to this area of energy productivity, which MGI highlights as a top priority as demand climbs worldwide in coming years. Firms that make energy-saving products, such as high-quality insulation and compact fluorescent bulbs, make up 20 percent of the fund's holdings. Another 20 percent encompasses natural-resource management, including environmental consulting. The last 60 percent targets clean-technology, such as wind and solar stocks.

Meanwhile, funds with a bent toward finding solutions are taking divergent approaches. The Winslow Green Solutions Fund, which launched Nov. 1, weights the clean-energy sector most heavily in its portfolio. That's followed by resource efficiency, green building, and environmental services. Meanwhile, the Calvert Global Alternative Energy Fund takes a more concentrated approach by focusing on renewable-energy producers, such as wind, solar, and tidal, and including utilities that foresee a growing role for renewables in their source mixes. Nuclear technology is largely left out due to Calvert's misgivings about waste disposal and safety issues.

"We do not want to encourage investment dollars going to nuclear at the expense of wind, solar, and biomass," says Bennett Freeman, senior vice president for social research and policy at Calvert. "We really think it's fundamentally important that those emerging renewables industries, those sectors, attract significant investment resources."

For investors, Calvert's bet on alternatives has been a roller coaster. After the fund's June launch, it earned a handsome 30 percent during the second half of 2007, a period when market turmoil sent the S&P 500 Index down more than 11 percent. But over the first five weeks of 2008, the fund gave up most of those profits as its net asset value fell by 22 percent.

Other funds, meanwhile, expect a host of sectors to be involved in responding to climate change. The Global Climate Change Equity Fund, available to Europeans from Schroders in the United Kingdom, includes among its top 10 holdings both nuclear giant Exelon and luxury auto manufacturer Rolls Royce. These and the fund's 72 other holdings are presumably well positioned to "benefit from efforts to accommodate the impact of global climate change."

In the US, the Spectra Green Fund takes a best-in-class approach by including companies that seem to be making environmental progress in less-than-green industries. Its holdings include oil titan British Petroleum and Coca Cola, whose usage of water resources has come under fire from environmentalists. Beyond the realm of mutual funds, six new exchange traded funds (ETFs) have launched within the past year with focuses in such climate solution-minded areas as clean energy and nuclear energy.

For now, the landscape is littered with opportunities for trial and error. And those concerned about climate change aren't disturbed one bit by all the interest in the subject. "These are all ways that groups are trying to grapple with the issues of climate change, producing renewable energies, finding alternative ways of consumption," Coleman says. "There's room for all of them."

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