Why I wouldn’t put my money in stocks in the clean tech space.

By Anonymous

Upon reading the Dow and Nestle cases, I had the exact same response as Kayley – wondering if there is a link between investing in sustainability and financial outperformance. Her research points to the fact that investing in sustainable initiatives may be a proxy for other company practices that drive strong performance, but does not allow us to conclude that investors actually reward these initiatives with a stock price premium. Having spent two years pitching stocks and talking extensively with institutional investors on their investment theses, never once did I hear sustainable initiatives even mentioned, let alone lauded.

So if you choose to put your money with these companies because of their sustainable practices, the financial gains or loses you receive will have no correlation with their sustainable efforts. If I want to invest my money to benefit from being “green,” where should I do so? I would argue, not clean tech stocks.

My experience made me very pessimistic about the ability of publicly traded clean tech companies to be sustainable and sound investments. For a number of reasons, clean tech deals were the hardest deals to sell:

(1) Volume Constraints: There is an extremely small dedicated-investor base when compared to any other sector.

(2) High Barriers to Entry: The business models are often foreign, and obviously contain less known technologies that investors need to become familiar with in about two weeks for the average IPO. On a non-IPO basis, the companies require significant time investment to get up to speed, and then the knowledge is not as transferable. In other words, an investor could spend that time learning abut something else that would allow them to make investment decisions on multiple stocks rather than one.

(3) Unknown influences: There is often a great amount of uncertainty surrounding demand, the macro environment, and regulation.

(4) Time vs risk tradeoffs: Hedge fund investors tend to have a shorter timeframe in which they require a return, and investors with a longer time frame may not have an appetite for the volatility.

(5) Sentiment: Attitudes around the space are poor, and certainly still influenced by the solar stock crash in 2011. [1]

While these may seem like very tactical arguments, they address the reality of why money would or would not be invested in these stocks. The below chart from Capital IQ shows the relative performance of investments in the S&P500 and the S&P/TSX Renewable Energy and Clean Tech Index starting in March 2010.

Tactical issues aside, I don’t believe that the aggregate of clean tech stocks have solid business models that justify their being public companies. There has been a lot of VC and government money funneled into the clean tech space in the past few years. While we should be investing and actively researching alternative energy solutions, in our haste to support I think we over idealized and over subsidized a number of these sub-industries. These companies then take advantage of momentum, subsidies, and investor hope of the next tech boom, and IPO. While it could be argued that a longer-term strategic objective justifies this heavy VC and government investment, I don’t see the argument of why those companies need to be public. Solyndra is a classic example of such a company. A 2012 article by Wired Magazine is a great read placing Solyndra in the context of a clean tech bubble [2].

Now understandably, this generalization does not and cannot apply to every single stock. For example, SolarCity (SCTY) has had a great run since it’s IPO in December of 2012. There are a few factors that I think set them apart.

(1) SCTY plays in the distributed solar power space. I believe that this business model is easier for investors to perceive the value proposition, and to feel comfortable with market sizing and revenue projections (see Jim’s blog post for his positive outlook on distributed solar power).

(2) They benefit from a wider range of investors. Real estate and housing investors follow and invest in Solar City as in some ways it is a derivative of the housing play.

(3) The star power of Elon Musk adds credibility.

So it’s not to say that there are no opportunities to be found, but as a whole, I would not be putting my money in the public market clean tech space. Looping Kayley’s thoughts back in here, I think investors, institutions, and high net worth individuals looking to make an impact (and to benefit from that impact) should look to VC and PE, and stay out of the “green” public markets space.

[1] http://www.fool.com/investing/general/2011/06/19/wall-streets-irrational-dangerous-hatred-of-solar-.aspx

[2] http://www.wired.com/2012/01/ff_solyndra/all/

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

One Response to “Why I wouldn’t put my money in stocks in the clean tech space.”

  1. Super interesting post Ms/Mr Anonymous. I am not used to thinking in this way (I’m a strategist, not an investor) so it opened my eyes. I have a question though, perhaps you can tell me where I am going wrong.

    To me, this implies that I should invest in clean tech. They’ve managed some IPOs and are now tanking because not enough investors understand their business model. Extending this logic implies that eventually more clean techs will prove themselves out than the market currently believes. So if I am patient, I invest now and wait for the market to learn this sector better and catch up with me. Does that work?

    I do see that this poses a pickle for clean tech firms who have not yet IPO’d. They will be staring at a market that is a bit gun-shy and a small investor base. Doesn’t look like a great recipe for getting a big return on your IPO.

    So maybe VC firms and strategic investors will be scared off from working with the pre-IPO clean techs but, as a casual investor, publicly-listed clean techs look like a good deal to me.

    Please put me straight before I blow all my hard-earned cash! 🙂

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