March 08, 2006
Wells Fargo Issues Alternative Energy Report to Join Ranks of Banks Advancing SRI Research
by Bill Baue
The report provides an overview of the alternative energy market as well as the pros and cons of
investment opportunities in wind, solar, hydroelectric, hydrogen, biomass, and even nuclear.
Wells Fargo (ticker: WFC) is taking something of a
Jekyll and Hyde approach to climate change. In its Hyde persona, it petitioned the Securities and
Exchange Commission (SEC) for permission to omit
a global warming resolution from its proxy (SEC lawyers okayed the request) instead of engaging
with the resolution filers to find a mutually agreeable way to comply with the request. In its
Jekyll role, however, the company recently released a report entitled
Identifying the Opportunities in Alternative Energy, which succinctly examines energy
sources that help mitigate climate change and straightforwardly lays out the pros and cons of
investing in them.
De rigueur, banks are issuing reports employing socially
responsible investing (SRI) strategies, and this report is a welcome addition to the trend
established by the likes of Goldman Sachs (GS), Citigroup (C), Merrill Lynch (MER), UBS (UBS), and Piper
While these reports take in-depth approaches, the Wells Fargo report is meant more as a primer to
orient individual investors to the alternative energy landscape.
Given its limited scope,
it achieves its objective quite well, encapsulating the basics of the market in less than 20 pages.
Credit for the tight balance between comprehensiveness and concision no doubt goes in large
measure to Lloyd Kurtz, senior investment manager for Wells Fargo affiliate Nelson Capital Management, who provided editorial review
of the report. Mr. Kurtz administers SRIStudies.org, an online annotated bibliography of
quantitative research on SRI.
That said, the report takes a qualitative, not quantitative,
approach. It focuses on the most promising investment opportunities in electricity generation and
transportation. In electric generation, it highlights hydroelectric, nuclear, and wind power. It
also notes momentum moving away from large-scale grids and toward distributed energy (which
localizes power production), a trend favoring wind as well as solar, biomass, and hydrogen. In
transportation, it focuses on ethanol and hydrogen.
The report divides investment
opportunities into three tiers. First, many large companies have exposure to alternatives, such as
General Electric (GE--which became the world leader in
solar by purchasing AstroPower last year), United Technologies (UTX) through its fuel-cell
division, or BP (BP) and Shell (RD), which have alternative energy
"The drawback to gaining exposure to alternative energy through such companies,
however, it is that the alternative energy divisions of these companies tend to be relatively small
versus their core businesses," writes report author Sarah Douglass, Wells Fargo's vice president of
investment research publications.
Second, smaller companies offer "purer plays" focusing
exclusively on alternative energy, such as Denmark-based Vesta (VWSYF.PK) and Spain-based Gamesa
(GAM.MC) in the
wind sector and US-based Evergreen Solar (ESLR). However, it cautions
investors against jumping without a net.
"For example, PlugPower [PLUG], a manufacturer of fuel cells
designed to generate electricity, and Ballard Power Systems [BLDP], a company that focuses on
developing fuel cells for the automotive industry, may look attractive from a technology and
market-positioning point of view," states Ms. Douglass. "Upon further research, however, the
stocks of both have been highly volatile since their public listings, suggesting that such stocks
are not suitable for many investors and, if you are prepared to take on the additional risk, they
should be considered only for the riskiest portion of your portfolio."
recommends gaining exposure to such companies through a diverse portfolio such as the PowerShares
WilderHill Clean Energy Portfolio (PBW), an exchange traded fund (ETF) based on the
WilderHill Clean Energy Index (ECO) of
37 US-based companies.
The third option, available only to "qualified" (read: "high net
worth") investors, is venture capital investment in start-ups "that often have unproven
technologies, but offer the potential for high returns, should these technologies prove
While neither the investment options nor the market overview are intended to
provide the kind of robust information necessary to make an informed investment decision, the
latter gets readers further down the road than the former. The sections discussing each type of
alternative energy in turn are incredibly well organized, providing a brief snapshot before listing
advantages and disadvantages and then projecting the outlook. Some surprising information
surfaces--for example an unusual link between hydroelectric and greenhouse gas (GHG) emissions,
considered the primary cause of global warming.
"Reservoirs may produce substantial
amounts of carbon dioxide and methane gas because of the decay of plant material in areas
inundated," the report states. "The methane releases once the water is discharged from the dam and
goes through the turbines."
"The only solution is to clear the reservoir growth," it adds.
The report takes an agnostic approach to nuclear, pointing out both pros and cons (as with
all the other sections) of this "alternative energy" source that is generally avoided by SRI but
regarded by some as a viable solution to climate change due to its minimal GHG emissions. In
addition to listing environmental concerns over radioactive waste and security concerns over
potential terrorist attacks on nuclear power plants, the report soberly notes that uranium prices
nearly tripled between March 2003 and May 2005, a steeper incline than petroleum prices.