Study Shows Coal is a Bad Investment

There was a time when investors made a great deal of money from investing in coal, but new research shows that those days are drawing to a close.

As reviewed in a ThinkProgress article by Joe Romm, Goldman Sachs has published a new research paper shows that coal used to generate power is no longer the profitable investment it once was. The tile of the paper says it all, “The window for thermal coal investment is closing.”

As explained in the paper:

"We believe that thermal coal’s current position atop the fuel mix for global power generation will be gradually eroded by the following structural trends: 1) environmental regulations that discourage coal-fired generation, 2) strong competition from gas and renewable energy and 3) improvements in energy efficiency. The prospect of weaker demand growth (we believe seaborne demand could peak in 2020) and seaborne prices near marginal production costs suggest that most thermal coal growth projects will struggle to earn a positive return for their owners."

Investing in Energy Efficiency

One of the most promising investment areas for 2013 may come from the area of energy efficiency. Unlike some other investments, this compelling investment opportunity is being driven by companies seeking immediate cost savings. For the investor this can translate to a shorter payback period. According to most estimates, global power needs are expected to rise more than 50 percent in the next few decades. This growing investment arena will increase the market demand for energy efficient lighting, engines and buildings.

Stock Exchanges Increasingly Recommending Sustainability Reporting

A growing number of stock exchanges around the world are recommending sustainability reporting. A number of diverse groups support sustainability reporting including the Rio+20 (negotiating text) and the U.N. (secretary general’s High Level Panel on Global Sustainability).

The Brazilian stock exchange (BM&FBOVESPA), also recommends that its listed companies either publish sustainability reports or explain why they do not. The initiative is intended to create a public database of reporting which was made available at Rio+20. BM&FBOVESPA says it was the second exchange in the world and the first in the Americas to use the GRI sustainability reporting model in its own annual report, starting in 2010.

Environmental Comportment Impacts Stock Valuations

According to a Deloitte report, information about a company's environmental conduct directly impacts its market value. The report from is titled, “Drivers of Long-Term Business Value: Stakeholders, Stats and Strategy.” The research drew on an MIT study of US publicly traded companies from 1980 to 2009. The 30 years of data reviewed in the study showed that stock prices dropped an average of 0.65 percent within a two-day window following the release of negative environmental news.

The risks from bad news appear to be greater than the benefits of good news. As reviewed in the study, investors tended to react more strongly to negative environmental news with the effect getting stronger with each passing decade. While positive news on a company’s environmental behavior produced an average increase of 0.84 percent in the stock price, the study shows that the increased valuations have decreased over time.

Mandatory Emissions Reporting on the UK Stock Exchange

Starting in 2013, UK companies will have to report their greenhouse gas (GHG) emissions. At the Rio+20 conference in Rio, UK Deputy Prime Minister Nick Clegg announced that starting next April, companies that are listed on the London Stock Exchange will be required to publish their GHG emissions in corporate earnings reports. The rule affects about 1.800 businesses and in 2015, it will apply to all 24.000 large corporations based in the UK. Companies will be required to publish annual GHG emissions, measured in tons of carbon dioxide equivalent.

Green Investing Part 1: Objective Research and Analysis

Despite wild fluctuations in the stock market, Green is becoming a major economic power. However to be a successful investor in this area you must remain objective. Emotions are often harmful to the value of an investor's portfolio, this is particularly true in Green investing. For many investing in Green businesses, decisions are based on their hopes rather than on objective research and analysis. A successful (Green) approach to investing implies more than the ability to recognize a good concept or anticipate a trend, to be a bottom line investor you must also research and analyze a company's finances and business practices. Examine the management, the uniqueness and positioning of the product, the industry, and the competition. Consider also the future growth prospects for the company and the industry. Above all, effective analysis must review the plan for integrating green technologies or concepts into sustainable profitability.

Investors may also want to consider Green Chips, (exchange traded funds or "baskets" of green energy companies). Although sustainable energy gets a lot of attention, there are many smaller opportunities that offer favorable rates of return. Assess risk by anticipating obstacles, and the individual set of pros and cons that come with each investment. To help minimize your risk, diversify your portfolio.

When eco-convictions hold sway over analysis, invest only what you can afford to lose. When analyzing a Green investment, research the details and remain objective.

Next: Green Investing Part 2: The Green Wave