General Electric (GE 0.54%) recently announced that it intends to splash $10 billion in clean energy research by 2020. The focus will be on wind energy as well as exploring the use of capture-use-recapture CO2 systems. The initiative, which is a joint effort between the conglomerate and Norwegian oil and gas company Statoil ASA (EQNR 0.48%), is geared toward clearing the way for the next generation of 'econimagination ideas.' Already, this cross-company initiative has generated $160 billion in sales since its 2005 launch.
In a previous article, Fool contributor Justin Loiseau discussed this cross-company initiative in greater detail, assessing its impact on the future of fracking. I, on the other hand, will jump right into what the initiative means for long-term GE investors.
Right off the bat, I would start by saying that General Electric's initiative is not only good for the environment but also great for the pocketbook of long-term investors. If anything, long-term investors should laud the move and hope that similar initiatives along the same lines are announced.
Here's why.
ESG factors are centering in investment decisions, look around
Environment, social, and governance (ESG) factors are no longer issues akin to intelligent conversations among Wall Street's top investors and money managers. These factors have become of central importance in the investment space. Investors are increasingly using measures such as commitment to sustainability and social good as a part of the criteria used to invest.
Companies with business models that support environmental sustainability and social good are increasingly becoming the darlings of Wall Street. Look at SolarCity, for instance. Despite going public barely two years ago in late 2012, Solar City's stock has gained well over 600% on the exchange.
However, a greater testament to just how much investors are warming up toward stocks that present good propositions, as far as ESG factors go, is Tesla Motors (TSLA -3.39%). For the trailing twelve months (ttm), Tesla has gained around 588%. Tesla has gone up even in the face of increased pressure from short-sellers, who have become notoriously attached to the stock. In view of Tesla's resounding victory over short-sellers, financial news site ValueWalk added some humor to Tesla short-sellers' plight with a clever depiction of how they can handle their losses:
Source: ValueWalk; Tesla short seller
No offence intended to Tesla short-sellers -- everyone should be able to take a good joke once in a while.
Returning to the main issue at hand, socially responsible investing is really gaining traction. We are seeing increased interest not only in companies whose core focus is presenting sustainable solutions to everyday problems -- Tesla, SolarCity, and the rest -- but also in companies that embrace the general idea of ethical business. This premise is supported by strong data.
The number of signatories to the United Nations Principles for Responsible Investment (UN PRI) reached 1,085 in July 2012 (including 258 asset owners and 651 investment managers), rising from less than 100 in 2005. The UN PRI says that about 94% of the signatories have adopted responsible investing policies, managing assets valued at more than $30 trillion as at 2012.
Source: BSR; growth of asset under managements in UNPRI signatories
Fracking a real problem area in need of solution
Fracking is a real problem area. The golden-tongued orators on Capitol Hill may present a solid economic case for fracking -- which I generally subscribe to -- but the underlying, less talked about truth is that fracking is greatly straining the water supply and the wider environment. Fool contributor Justin Loiseau couldn't have put this across any clearer in his previous article mentioned earlier in this article, citing a report by Ceres Investor Network which says that since 2011 around 40,000 oil and gas wells have guzzled 97 billion gallons of water. At current consumption rates, fracking mops up as much water as 60 cities each with 500,000 residents.
Despite the compelling economic case, I view fracking by itself (without accompanying sustainability measures) like I do the infamous mortgage-backed securities of the 2008 financial crisis. Many knew that giving out home loans to borrowers with not-so-good credit in order to sell more mortgage-backed securities was bound to hit a wall. But everyone was making too much money, and nobody wanted to regulate. The same case is being seen with fracking. Fracking has increased production tremendously and driven unprecedented rallies for energy stocks and the economy as a whole. However, if nothing is done to offset the disproportionately huge volume of water it uses, the long-term benefit could be totally erased.
Final thoughts
General Electric's approach is laudable. An innovative capture-use-recapture system that uses CO2 instead of water presents a two-fold solution for fracking. First, it reduces exclusive reliance on water, thereby promoting a more sustainable production technique. Second, the recapture reduces carbon emissions, which are bad for the environment. The recapture also reduces the amount of CO2 used, which saves costs and leads to higher profits -- no wonder the initiative has raked in sales of $160 billion in five years.
Going forward, increased leanings toward socially responsible investing will place General Electric on the watch list of many long-term investors. GE's 3.5% yield is already greater than most stocks in the market, and a slant toward sustainability amplifies General Electric's long-term attractiveness both from a growth and income perspective.
