Green.
When you hear that word, what comes to mind? Mother Earth, hippies, and granola? (If that's the case, you're not alone.)
However you feel about our nation's push to become more environmentally friendly, the movement seems here to stay. So ask yourself: What can green do for your portfolio?
Apologies to UPS
Because of their own values or because of pending legislation, many companies are moving toward becoming sustainability-minded operators. And these companies are already reaping the economic benefits of their eco-friendly practices. As investors, we must pay attention to this trend.
But don't take my word for it. In an insightful article from World Trade Magazine, John Davies, vice president of green technology research at AMR Research, said:
Enterprises that want to succeed in the marketplace must integrate "green" thinking into their overall approach to growth and profitability. ... Early movers are reporting long-term advantages both in cost savings as well as new revenue opportunities.
I promise not to preach about global warming
For those who believe environmentalism is overplayed or that it won't make a difference in a particular investment, think again. I'd argue that it's already happened -- and for evidence, look no further than General Motors (NYSE:GM).
Granted, last week's $15.5 billion quarterly loss was not a direct result of GM's environmental action. But its declining market share certainly was. One media outlet called GM -- peddler of the Hummer and late to the party on hybrid cars -- a "poster child of environmental irresponsibility."
Ouch. GM spent a long time focused on producing energy-inefficient automobiles and totally missed the memo that green/hybrid cars were a true market (and not just for a handful of hippies) -- especially with gasoline prices steadily climbing higher. As a result, early hybrid adopters Toyota (NYSE:TM) and Honda have stolen market share, while GM is mired in a turnaround and tries to repair a damaged reputation.
The company may be late to the party, but it is coming strong with its Chevy Volt. Nevertheless, according to The Detroit News, GM, Ford (NYSE:F), and Chrysler will have to spend $47 billion on R&D by 2015 to comply with higher fuel-efficiency standards.
Of course, there are notable exceptions
While GM illustrates the perils of ignoring environmentalism, there are some financially successful companies that buck the green trend. James River Coal and International Coal (NYSE:ICO), for example, have been stellar performers in an otherwise down 2008. It's true, these companies profit from doing the polar opposite of being "green" -- extracting coal from the earth that gets pumped into the atmosphere as CO2.
These companies make a fortune by selling a hot -- and cheap -- commodity that we rely on. And as we all know, coal isn't exactly helping to reduce the carbon footprint.
But I beg you to look beyond the next six to 12 months. Try to envision just what green legislation and green PR tactics will do to fruitful coal companies down the road. The environmental legislation in the works doesn't paint a pretty picture for companies that refuse to green their practices.
Using the market to achieve environmental objectives
What do you think is the world's next biggest market? Rumor has it that carbon trading is vying for the spot. According to a recent New York Times article, "Carbon will be the world's biggest commodity market; it could become the world's biggest market overall."
Why else would General Electric (NYSE:GE), a reputable brand as it stands, be rushing to change its face with its new eco-imagination campaign, which backs energy-efficient products?
Now is the time to get into this infant industry, and you can do it. Simply invest in companies that stand to make extra cash by reducing emissions.
Cap-and-trade means 100% accountability
Edwin Mongan III, director of energy and environment at DuPont (NYSE:DD), said, "[Carbon credit trading] gives an incentive to use your best technology to get well below the mandatory targets."
Even DuPont, a company that has rubbed environmentalists the wrong way since the 1930s, has hopped aboard the green bandwagon. In fact, the company's "2015 Sustainability Goals" ranks right up there with some of the top environmental initiatives, which may mean big bucks for the company and shareholders if legislation goes through.
While it seems likely that cap-and-trade legislation will go through, it's not a certainty. And with many varying ideas for how the specifics will be structured, there's no set plan. But in its simplest form, a cap-and-trade works like so: Each industry is allowed a certain amount of CO2 emissions. For companies that don't exceed emissions ... no penalty.
There will be winners and losers
Companies that substantially reduce emissions are awarded carbon credits, which they can then sell on the carbon market to firms that refuse to reduce emissions or simply can't catch on fast enough. Heavier polluters will need to buy credits or pay fines. This will generate an incredible windfall for early adopters of green practices.
It may seem that as long as heavy polluters have deep enough pockets to buy emission tickets on the carbon market, then the cap-and-trade system poses no real financial burden.
But there's more. Every year, the cap will be lowered and fewer credits will be freely awarded as the carbon market shifts to an auction-based system (with the government acting as the seller). Prices for credits will climb upward, squeezing the heavy polluters' bottom lines and forcing them to raise prices and lose customers.
But, again, don't take my word for it: ExxonMobil is taking serious flak from descendants of John D. Rockefeller. As major shareholders, they filed four resolutions accusing the company of falling behind competitors BP, Royal Dutch Shell, ConocoPhillips (NYSE:COP), and Chevron in emissions-reducing technology and experience, arguing that "ExxonMobil's business plan considers few scenarios that incorporate a decline in the oil and gas markets due to forthcoming regulations and incentives."
Though their resolutions failed to pass, they garnered enough votes to make their message clear: No company can afford to ignore its emissions for long. Companies that are taking advantage of the green trend that's taking shape may stand to profit enormously.
The Foolish bottom line
However you feel about going green, it's here to stay. Governmental legislation will shape the way companies interact with the environment; finding companies ahead of the curve may mean good things for your portfolio. We're following the green space at Motley Fool Rule Breakers, where we've recommended to our subscribers three investments we believe will profit from increased emphasis on eco-consciousness. To join our community and to see those three tickers, join us with a free 30-day trial.
Hilary Schronce does not own shares of any company listed. International Coal is a Motley Fool Hidden Gems Pay Dirt recommendation. The Fool has a disclosure policy.
