Institutional investors and 401K plan managers only buy into safe, proven companies and industries, right?
So, when the media declared in November that SolarCity's (NASDAQ:SCTY.DL) plan to sell $54.4 million in bonds was "another way" for institutional investors to get into solar, what did they mean? Solar, in its current incarnation, is an extraordinarily young industry with some of the biggest name companies, such as SolarCity, only on the market a year or two. It has experienced notorious volatility since its explosive growth began in 2007.
Yet, even conservative institutional investors have been drawn to the big gains the solar industry saw over the last year. The Guggenheim Solar ETF (NYSEMKT:TAN) is up more than 64% for the year, and mutual funds heavily invested in renewable energy companies are also up significantly. The Calvert Global Alternative Energy Fund is up more than 40% for the year and the Firsthand Alternative Energy Fund Fund up more than 111%.
A mature industry?
The idea that institutional investors are eyeing solar stocks might mean the industry has arrived and is in a mature enough position to draw major investors.
"If you look at where solar is going, there's no question anymore that you're going to see dramatic increases in consumer demand," said Zachary Bouck, co-founder of Denver Wealth Management in a phone interview. "People want solar. It's just a matter of affording the upfront cost."
And new financing methods, including solar leasing programs offered by companies like Sunrun, Sungevity and SolarCity, have answered that question in certain markets. The tricky part for those companies has been getting enough financing and capital investment to continue building the $0-down systems fast enough keep up with ever-increasing demand.
The need has resulted in some creative answers. Mosaic uses crowdfunding to finance solar projects, offering returns of more than 4% for everyday people willing to contribute as little as $25 in certain markets and accredited investors anywhere.
The bonds SolarCity introduced last month are another example of a creative financing model that permits direct public investment in solar. The model could provide a nearly never-ending supply of capital for solar leasing companies if this test run proves successful.
Investing retirement money in new energy
"When you buy bonds, you're really betting on the long-term health of the company," Bouck said. "You're betting the company will be around long enough to pay them."
For that reason, he said more conservative 401K managers aren't likely to include solar bonds in their basket of offerings for employee retirement plans. However, they are increasingly including renewable energy funds.
That's largely because employees are asking for it. While only 15% or so of people with retirement plans through their employers take an active roll in investing their money, those who do are asking specific questions. They're requesting clean energy investment options.
"We've seen a lot more people asking for socially responsible funds," Bouck said. "A lot of times, people who are interested in clean energy will want their whole portfolio to be socially responsible businesses."
That wasn't easy to accomplish a few years ago because many of those types of funds are so new. Since most 401K managers are held to the high fiduciary standard of acting in the best interests of their clients, they won't include any investment options with less than a 10-year track record, Bouck said.
But people were asking for it. So, Bouck and colleagues broke away and established their own wealth management firm so they could custom-build 401K plans that would answer new demand for socially responsible and green investment opportunities.
Hedging against fossil fuel losses
A lot of 401K plans are heavily invested in coal, oil, and natural gas companies and funds. They have long, stable histories in an economy that has always depended on them, according to Ken Beitel, executive director of The Renewable Energy Initiative, an organization working to get human resource and 401K managers to create opportunities for employees to invest retirement funds in renewable energy stocks.
But that might not always be the case.
"We believe offering a renewable energy investment option diversifies employee exposure in the energy sector," Beitel said.
It's an argument that many human resources directors and 401K managers can get behind, he said. His organization has successfully helped a handful of Colorado businesses, including Colorado's Regional Transportation Authority with its 2,400 employees, incorporate a clean energy investment option this year.
Good for business
While focused on giving employees the option, Beitel said TREI has a dual mission. In addition to helping employees planning for retirement, the organization aims to help clean energy grow,
If 5% of the $7 trillion in employee retirement plans in the country were invested in clean energy technology, it would give renewable energy businesses a $350 billion cash infusion, according to Beitel. That could give the solar industry and other renewable energy sectors what's needed to sustain today's rapid growth.
Fool contributor Amanda Miller owns shares in SolarCity. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.