Going Bearish on Green Investing

by Steve Choi

Last month, I received a statement from one of my financial institutions and opened it to find that most of my investments were in the red at a double-digit loss. I panicked! Out of all the funds, the wind and alternative energy fund at -45% ruined my day. It seemed the odds of betting on the green sector were against me. I wasn’t up for the leap of faith to stick with this fund, so I researched the near-term profitability of this product. Seasoned analysts had a gloomier outlook than what I’d hoped for.  I took immediate action and cashed out before generating any further loss, putting the rest in another product that I deemed more lucrative.

That was my last green sector investment in my small but highly diversified investment portfolio. Many of us have experience investing in companies through direct stock purchases, mutual funds, or the like. As investors, what is our expectation for profitability? Should investing be some sort of charitable act?

Public awareness in environmental protection, social welfare and corporate transparency is rapidly increasing. The collapse of Enron, the BP oil disaster, and the notorious sweatshop practices of Nike’s past have awoken public rage. We have witnessed viral protests against the companies suspected of hiding Dr. Evil behind closed boardroom doors.  But is it fair to point the finger at them? Are we ready to pay a premium for business morality or receive fewer dividends for good business practices? If so, to what limit?

Professor Karnani of the University of Michigan writes in his Wall Street Journal article “The Case Against Corporate Social Responsibility,” “the idea that companies have a duty to address social ills is not just flawed…it also makes it more likely that we’ll ignore the real solutions to these problems.”  Public for-profit companies have a duty to maximize shareholder value. This is—and should be—their priority. If that weren’t the case, investors would turn elsewhere to generate the most profit.

When the bottom line—the traditional, financial bottom line—is at stake, any prioritization of doing what’s good for the community becomes a true test in shareholder interests.  The less socially responsible companies would self-correct if both the consumers and investors turned their backs. The challenge lies in finding investors willing to support socially responsible companies at their typically higher price tags.

As consumers, most of us are bound to some price elasticity when choosing what to buy. Many will favor products and services that make them feel better. However, we didn’t see a price drop for the plastic saved. I remember paying $1.25 per half-liter bottle of Poland Spring in 2007 and I still paid $1.25 after the change. Even though the new bottle used 30 percent less plastic and green dye was removed from its cap so they could participate in the recycling program, we did not see a change in price. It didn’t seem to matter much, because at least the price didn’t go up, and it made us feel less guilty for being irresponsible bottled water drinkers. Maybe this was a cost cutting measure disguised as a green measure, also known as “greenwashing.” Whatever the intention, this was a “win-win-win” case, for company, consumer, and environment.ter as good citizens, even for a small premium. When the bottled water companies first introduced a new bottle that used less plastic, the public welcomed and embraced the new product. It sure made us feel better.

But not all companies can afford the luxury to participate in win-win(-win) marketing. The bottled water case made sense because the company could actually save money in making the change.  Unfortunately, not all companies are in a position to truly deliver green value. Top decision makers need to ensure that meeting social welfare and environmentally sustainable standards will yield the expected profit that investors are looking for.

For example, multinational companies operating in different geographic locations will almost certainly choose to manufacture their products where they can have comparative advantage. Consumers will continue to demand the most bang for their buck and investors will continue to demand maximum return on their investments. That said, I return to my opening question: Where should our focus lie and our fingers point? More investors will be attracted to invest in green companies as consumer orient themselves more into environmentally and socially sustainable goods and services. The shift into green will be inconvenient and financially challenging, but achievable, when the public is truly ready to do more than embrace the trade-off – they need to pay for it!