How the Cleantech Industry Fits with Socially Responsible Investing

A Q&A with Rafael Coven of the Cleantech Index

View of solar panel and wind turbines
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Back in 2008, Rafael Coven was the managing partner of the Cleantech Group, LLC, which managed the Cleantech Index, a portfolio of global cleantech companies that tracked the performance of the cleantech sector and could be found on the American Stock Exchange under the symbol CTIUS.

It is interesting to look back at how industry experts felt now some 5-10 years ago.

While some new constructs such as YieldCos have done quite poorly, their performance compares equally with the struggles of traditional energy securities such as MLPs which have also fared poorly, as the world is experiencing a lower cost of energy.

Cleantech is a broad term that includes a number of industries including energy, transportation, agriculture, and recycling. The 76 public companies listed on the Cleantech Index are firms that Coven believes are developing “solutions to the biggest problems facing the Earth in terms of resources, environment, and public health.”

The Cleantech Index was founded in early 2006 and in 2007 outperformed the S&P 500 by 37.4 percent. Two exchange-traded funds (ETFs) are based upon the Cleantech Index: PowerShares Cleantech Portfolio ETF (Amex: PZD) and KSM Cleantech ETF (Bloomberg: KSMCLNT: IT) in Israel.

Coven, who is based in Baltimore, has more than 20 years of experience as a manager, investor, and entrepreneur among cleantech companies. He holds an MBA from Northwestern University’s Kellogg School. I spoke with him recently about the cleantech sector and how it fits with socially responsible investing.

Q. How large is the cleantech market and how fast is it growing.

Coven. “It’s in the hundreds of billions of dollars in terms of products sold but that’s tough to measure because you’re also talking about products of companies that aren’t publicly traded or products that may be made by government organizations.

But it’s huge and the growth rate is phenomenal. It’s more than 20 percent per year in some sectors and 50 or 100 percent in others, depending on the individual sector.”

Why is it so difficult to quantify this industry?

Coven. “There isn’t a cleantech industry. Cleantech cuts across all industries. There are cleantech products and services. It cuts across agriculture, new materials and there are many cleantech companies that aren’t cleantech, but they have a big cleantech business. Look at General Electric. Ten percent of its business is clean water and wind power and energy-efficient lighting. But they don’t make enough of their sales from cleantech products to fit in the industry.”

What’s driving the sector growth?

Coven. “The trend is massive. We’re on an unsustainable path for the life of this planet, yet we’ve got 2.3 billion people coming to the planet by 2050. How are we going to feed and clothe them? Their incomes are rising and they want to consume more resources in terms of goods and services. My goal is to track the trend. Therefore companies that really have the bulk of their business aligned with that trend are whom we’re trying to follow.”

How do the Cleantech Index and the exchange traded funds you’ve licensed differ from alternative energy funds?

Coven. “Energy is about 30 to 50 percent of cleantech. But there’s also water, agriculture, new materials, transportation technology, industrial efficiency technology and companies that do environmental quality.

“A lot of those alternative energy funds include things we would never touch. They have a lot of ethanol grain companies. We would never touch that because we think it’s a ridiculous business from an environmental, economic and social standpoint. They may hold a lot of stock in companies that make fuel cells. We haven’t seen a fuel cell company that’s even close to becoming profitable. We don’t have any investments in clean coal technologies because we haven’t seen any that work.”

With all this growth and investor interest, is a cleantech bubble developing?

Coven. “There may always be a bubble in whatever is hot today.

But most areas of cleantech are relatively untouched. There may be a bubble right now in solar photovoltaics and in certain types of biofuel. But there are areas in aquaculture and bionutrition that have barely been touched and solar thermal is just starting to attract the real dollars.”

You obviously have a progressive index, but how would you fit in to a socially responsible investing portfolio?

Coven. “We are not a socially responsible investing fund. But we are an outstanding complement to SRI investing.”

Why is that?

Coven. “If every company behaved perfectly and socially responsible, it would still not be enough to get us on a path to sustainability. It won’t answer the problems of 2.3 billion people coming to the planet and resource depletion. You really need to have the technology-driven tools to provide the solutions.”

“Most socially responsible investing is based on negative screens that weed out companies in firearms and polluters. But you end up with a portfolio that’s devoid of energy companies and you get a portfolio that’s lacking in smaller and midcap companies, particularly in the technology sector. By adding the cleantech index back to an SRI portfolio, you get your energy exposure and your small and midcap technology exposure back.”

Finally, your index and the entire market have been down in 2008, but what in particular has been weighing on your performance?

Coven. “Solar has taken a beating this year – solar photovoltaic in particular. But in the long run our companies are strong in organic growth - growing their sales and revenues by selling more products – as opposed to growth through buying more companies or just raising prices.”