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Green Investing: 10 Risks You Should Know

There are many opportunities in green investing, and I believe those outweigh the risks. But investors also need to be aware of the potential pitfalls associated with their investments, especially in a volatile and evolving sector. The following are some of the risks involved with putting your money in the Eco sector:

1. Effects of a Cap and Trade system or other legislation on carbon remains unknown – If and when a carbon accounting system is put in place, whether as a tax or cap and trade, it may unfairly favor one sector or another. Credits may be given away to favored industries, which happened in the European system. Other polluters may be grandfathered in, given tax breaks, or a host of other unknowns, leaving the competitiveness and promise of various green companies and industries in question. It is certain that any legislation that passes will be complex and riddled with giveaways and other freebies, making investment calculations difficult.

2. Dependence on erratic government tax incentives and other support may continue – Although President Obama’s recent stimulus package increases investment in renewable energy and green companies, it is a one-time investment. The wind and solar sector have been plagued over the years both in the United States and abroad with government price support in the form of rebates, tax incentives and other programs that have come and gone. Long term, reliable and consistent support may remain elusive, a necessity for some of the large capital intensive projects that take years to recoup investments, and for new technologies that need time to mature.

3. Government support may favor one technology over another – The good example of this is ethanol. Due to various political factors, rather than cleantech superiority, ethanol has received preferential treatment in the form of mandates for production and investment dollars over other biofuel alternatives from the US government. As long as government support for various companies and technologies remains political, choosing which ones will be profitable in the short term will remain a challenge.

4. A prolonged recession may dampen new regulation, investment and public support – A severe recession and high unemployment in the last two years has caused public support to wane for various environmental regulations and programs. While some stimulus dollars and private investment have continued, the broad public, media and government support for climate change issues that was building two years ago has taken a back seat to healthcare, employment and other economic concerns.

5. Dependence on social movements and consumer demand may hold back green companies – The growth of many companies in the sector will depend on the consumer to choose green over traditional products and services, often times at perceived higher prices. In the past ten years Organic foods and textiles have grown into a billion dollar industry as some consumers have chosen to go green. However, negative perception and cultural acceptance may hamper growth in these sectors.

6. Disruptive technology may cause volatility – A new technology in one area may suddenly overtake previous leaders. For example, a sudden breakthrough in solar or battery technology that is cheap and easily scalable could have sudden and severe price effects on competitors. In this rapidly evolving sector, with ongoing private and governmental research and development, it is nearly impossible to predict winners and losers in the space.

7. Promising technologies may fail to scale-up – Almost daily we hear of new research and developments – new types of more efficient solar panels, or most recently, the Bloom Box fuel cell in development by Bloom Energy. However, the ability to scale up these technologies to offer a product that competes megawatt for megawatt in cost and reliability with traditional energy sources is a much harder task. Many companies with revolutionary technology are volatile and ultimately fail because they are unable to make this transition.

8. Green today may not be green tomorrow
– Technologies that enjoy the support and investment of green dollars now may turn out to be not as green in the future. Ethanol again is a good example. Initially thought to be a promising renewable source of fuel, concern of its effects on food prices and the carbon savings it provided caused it to fall out of favor among environmentalists and investors. Currently, the lithium used in many new battery technologies is being questioned as to its availability and green credentials, and whether it is trading one scarce, non-renewable resource for another.

9. Oil and fossil fuel energy prices may remain low – Much debate exists over the long term price and availability of oil and other fossil fuels. Although it remains a certainty that availability will decrease and cost will increase in the long term, the time frame in which this will happen is unclear. Because of this, the direct cost competitiveness and demand of other renewable energies will remain unknown and volatile in tandem with traditional energies. In 2008 as oil prices reached $150 a barrel, consumer demand for more efficient vehicles including hybrid and electric cars began to surge, dropping off as oil prices decreased dramatically over the next year.

10. Climate Change “debate” may continue to plague the sector
- The effects of climate change may remain incremental in the short term and its validity may continue to be challenged. Recent incidents have spurred a renewed media-fueled effort to deny the overwhelming science behind climate change. A resurgent effort to deny the need to reduce carbon emissions may delay the governmental policies and support that will drive new business and investment. While many other reasons exist for greening the economy, acceptance of climate change remains the overriding call for action, so its perception may continue to effect support and investment.

Conclusion: Balance your portfolio according to your risk tolerance, research your investments carefully, diversify your holdings with mutual funds and ETFs in volatile sectors, and seek professional guidance if you need more information about investing green.

Disclosure: None