The label “green stocks” refer to stocks in companies that are environmentally friendly. If you are interested in investing in green stocks, a good stepping stone for further research is the Renewable Energy Industrial Index (RENIXX). This index is comprised by 30 of the world’s largest stock companies in the renewable energy industry. So, if you want to invest in “blue chip green stock” rather than small green start-ups, the RENIXX provides a nice overview.
Of course, there is great debate about exactly what products, services and processes that are environmentally friendly, and due to increase investor interest in green stocks, many companies try to look more green than what they really are. Green washing is definitely something to look out for, since the market price of stocks can plummet if a green-labeled company is found out as a green washer.
In the aftermath of the “clean diesel” Volkswagen scandal of 2015, the Volkswagen stock price sunk like a stone, and it also brought the share price of other German car manufactures with it – although to a smaller extent. Right after admitting to cheating on U.S. air pollution tests for years, Volkswagen AG lost almost a quarter of its market value. On the Frankfurt stock exchange, Volkswagen rapidly sunk by 23% down to €125.40, representing a lost market value of €15.6 billion. That day, the stock closed as €132.2 which was the lowest in over three years.
In the case of Volkswagen, the green washing was tricky to detect, even for skilled investors. In other cases, it is blatantly clear when a company just tries to project an eco friendly image without actually doing anything substantial to be eco friendly. In 2005, General Electric spent $90 million on a market campaign called “Ecomagination”. Big bucks were shilled out to let the populace watch an endearing add where a diesel engine makes its way through a pristine mountain landscape filled with thriving flora and fauna. At the same time, General Electric was lobbying the U.S. Environmental Protection Agency (EPA) in order to weaken proposed pollution restrictions for diesel engines.
Another striking example is British Petroleum. In the year 2000, they launched a $200 million public relations campaign to promote them selves as a green company. They even changed their logo into a yellow sun, conjuring up images of renewable energy solutions rather than fossil fuel reliance. In 2006, an accident occurred where British Petroleum spilled 200,000 gallons of crude oil into the sensitive Alaskan environment. An investigation showed that this wasn’t an unpreventable accident – it was the result of British Petroleum cutting corners and neglecting to carry out essential routine maintenance. They spent $200 million on a marketing campaign, but were unwilling to pay for the basic maintenance required to protect the environment from this type of accidents. In other cases, British Petroleum polluting the environment isn’t even an accident. In August 2007, The Washington Post uncovered that BP had received permission to increase their dumping of toxic waste into Lake Michigan. Lake Michigan supplies drinking water to millions of people in the region. BP’s new permit allowed them to dump 50% more ammonia than before into the lake. In 2014, the Chicago Tribue reported how BP is still dumping thousands of pounds of raw sludge into Lake Michigan – every day! And of course, the accidents also continues. In March 2014 alone, BP’s Whiting refinery spilled over 6.100 liters of oil into the lake.
What all this means is that due diligence is really important if you want to invest in green stocks, regardless of weather you invest because you actually care about the environment or because you invest because you see a growing positive market trend for green stocks. Simply looking at stuff such as corporate responsibility statements or sustainability policies is not enough. Generally speaking, corporations that treat the environment as a “charity project” are not green to the core. No company is perfect, but donating $100,000 to plant trees somewhere isn’t really a good thing when a company is doing it to take attention away from the fact that they are destroying the environment somewhere else. As an investor, you need to examine their actual business – not their green hobby projects.
Here are few things that are good to keep in mind when investing green.
- Tax breaks and other subsidiesIn many parts of the world, green companies are receiving tax breaks or other subsidies. When you analyze the company, look how it would fare without these benefits – especially if you are planning to make a long-term investment. Also try to gouge the risk of these benefits being revoked.
Sometimes, a green company will continue to do well even after the benefits disappear, because it has matured. The benefits were only needed to get the company off the ground initially. For other green companies, tax breaks and other incentives are crucial to their business model.
- Law changesGenerally speaking, environmental protection laws are getting stricter. This can be great news for a company that is already green and is fulfilling the new legal requirements. With the stroke of a politician’s pen, competitors can be put out of business or forced to make huge investments in new technology. When you invest in green stock, try to keep yourself abreast of the political situation and any new green laws being pushed through the legislative system.
Also keep in mind that big and heavily publicized environmental catastrophes can sway voters and get politician’s running to sign greener laws into force. Are dead baby seals washing up on popular beaches? Look out for a new anti-bleach law in your near future and invest accordingly.