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October 21, 2008
Green Stocks Expected to Rebound in Wake of Financial Crisis
    by Robert Kropp

Green stocks are down with rest of market as investor confidence wanes, but new tax credits and the need to address climate change point to likelihood of strong recovery.


The global financial crisis has hit stocks in every sector of the economy. Green stocks in both renewable energy and consumer products have not been immune. Solar companies have been especially hard-hit because sales of solar panels are largely dependent on financing and the recent decreasing price of oil has made investment in them less attractive in the short term.

Prospects for cap and trade legislation that would require companies needing to increase their emissions to buy credits from those that pollute less faces uncertainty. Republicans in the US Congress decry the impact on heavy polluters if required to pay for such credits. As does the McCain campaign, which calls for issuing such credits without cost to companies.

But investment managers committed to green funds see opportunities for long-term growth in green stocks, and contend that many companies in the green sectors are performing better than their falling stock prices might indicate. "These companies continue to offer bona fide solutions to critical problems that have not gone away, and over time the disconnect between their performance and stock prices will realign," said Jack Robinson, President and CIO of Winslow Management, an investment advisory firm that has been a pioneer in green investing for 25 years.

"In recent days I have talked with the CEOs of every company represented in our mutual funds. While they are depressed about current stock prices, they remain fully confident in their businesses," Robinson said.

Calling October 3, 2008 "a defining moment for renewable energy in the United States," a just-published evaluation by Winslow Management finds that the Energy Improvement and Extension Act of 2008 included in the Economic Stability Act represents "a big, bold new tax incentive plan that will stimulate the installation of renewable-energy products and systems across America. Winslow believes that this Act will generate thousands of new green jobs and help rekindle economic growth."

"The extension of production tax credits to the solar industry for eight years is a game-changer," Robinson said. "With the financial aspect progressing toward solution, concerns over financing for renewable energy should ease."

The Act extends production tax credits for wind energy for one year, and for the first time includes tax credits—for two years—for geothermal.

As for green stocks relating to consumer goods, Robinson notes that their recovery may be slowed by economic conditions, as consumers faced with hard choices may balk at paying a little more for green products.

Carey Callaghan, CIO of American Trust Energy Alternatives Fund, agrees that the Energy Improvement and Extension Act is a major development for the renewable energy industry.

"To develop renewable energy as an alternative to fossil fuels, in effect we replace fuel with significant upfront capital costs. With investment reduced and capital availability down significantly from a year ago, alternative energy continues to face a headwind. But with long-term production tax credits in place, we are looking for explosive growth in the industry."

Callaghan expects prices to drop considerably in the wake of the current credit crisis. "I recently attended a solar industry conference, where a leading company, First Solar, acknowledged that its stock price is half what it was a year ago. But the company continues to do well, and fully expects to come out fine."

Callagahn added, "The law of supply and demand should benefit the buyer of solar installations over the next two years, as we expect prices to come down by half in that time."

Professionals at the consulting firm Ernst & Young seem to concur with the optimistic forecast outlined by Robinson and Callaghan. In a recent report on venture capital investment in cleantech, the firm found that such investments have increased from 1.6% of total investment in 2003 to 11% in 2008. Global venture capital investment in cleantech in 2008 is expected to significantly exceed the record $3 billion invested in 2008.

According to Gil Forer, Global Director, Cleantech, IPO and Venture Capital Initiatives at Ernst & Young, "Cleantech is here to stay.

"Cleantech has passed an important investment tipping point. Demand for cleantech solutions is increasing due to higher energy and resource costs, regulatory requirements and the desire for corporations to pursue climate change related market opportunities."

While the number of mergers and acquisitions and IPOs by cleantech companies have slowed in 2008 due to market conditions, the report found that an overwhelming majority of corporations are undertaking climate change initiatives. Many plan to significantly increase investment in cleantech by their corporate venture capital programs during the next few years.

If, as Robinson of Winslow observed, the "financial aspect (is) progressing toward solution," it will have occurred because investor confidence in the market has been restored. As governments shore up the global economy with large infusions of capital, it is expected that investor confidence will follow. Expanded government commitment in renewable energy, as evidenced in the US by the Energy Improvement and Extension Act, should encourage investors.

The prospect of a new administration in Washington also gives hope to the growing numbers of responsible investors who recognize the fact that climate change is indeed an issue that has not gone away. If Barack Obama maintains his current lead in polls and wins the Presidency, he will take office with a platform that calls for $150 billion in investments in clean energy, $60 billion in investments in transportation infrastructure, and a cap and trade program to reduce greenhouse gas emissions by 80% by 2050.

"The US has shifted into a chronic state of action on energy," said Jason Grumet, executive director of the National Commission on Energy Policy. If the trend accelerates as expected in coming months, investors in renewable energy and related green technologies can expect to reap steady rewards for their commitment to energy independence.

 

 
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