Wells Fargo 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 OK’d 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, Citigroup, Merrill Lynch, UBS and Piper Jaffray.
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,
which provided editorial review of the report. Kurtz administers SRIStudies.org,
an online annotated bibliography of quantitative research about 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, which became
the world leader in solar by purchasing AstroPower last year; United Technologies,
through its fuel-cell division; and BP and Shell, 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 vs. 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 and Spain-based Gamesa in
the wind sector, and U.S.-based Evergreen Solar. However, it cautions investors
against jumping without a net.
“For example, PlugPower, a manufacturer of fuel cells designed to generate
electricity, and Ballard Power Systems, 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 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.”
The report recommends gaining exposure to such companies through a diverse portfolio
like the PowerShares WilderHill Clean Energy Portfolio, an exchange traded fund
(ETF) based on the WilderHill Clean Energy Index of 37 U.S.-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 successful.”
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
This article originally appeared on www. SocialFunds.com, the largest
personal finance site devoted to socially responsible investing.
William Baue works with
SRI World Group, Inc., the publisher of www.SocialFunds.com.