Green Shares: A Compilation of Moral Investments

According to the liberal theories of Adam Smith, in order to maximize efficiency in the production process, a commodity must be produced in the cheapest manner possible. Because of this theorem, industrial giants have often put economic efficiency before personal ecological responsibility. As a direct result, investment money, which is always geared by efficiency and profits, often makes its way into the hands of immorally wasteful companies.

Thanks to advances in both ecological awareness and in technology, however, today there are alternatives for the green-wise investor. The companies that will be discussed in this paper have found a way to efficiently produce goods while still remaining ecologically responsible. Green companies, as they are called, give investors an opportunity to invest not only in their own economic futures, but also in the future of their planet2.

British Petroleum (BP)

In 1954, the Anglo-Iranian Oil Company (AIOC) became the British Petroleum company as an American coup d’état removed then Iranian leader Mohammed Mossadeq from office. Before the coup, oil industry in Iran was shared between the British and Iranians. After attempts to nationalize the oil industry in 1950 and 1953 by the Iranians, however, the British needed a way to preserve their seat in Iranian oil politics. In order to achieve this, the British enlisted the help of the United States. By planting bogus evidence of communist activity on Mossadeq, the British engineered the removal of Mossadeq from Iranian office by the United States. He was replaced with the pro-Western Iranian general Fazlollah Khomeini, who would allow Britain to remain at the summit of the world’s oil industry.

British Petroleum has often benefited as a result of shady business enterprises. In 1969, BP acquired the Valdez Oil Terminal of Alaska for $1 from Chugach natives inhabiting the area surround Prince William Sound. To this day, natives of the surrounding area contend that the transaction was illegal and not agreed upon by the Chugachian people. In another example of BP corporate malfeasance, as a reaction to the Thatcher-driven privatization of the company, Kuwait claimed part ownership of BP in 1984. These claims were largely ignored by the British government. Whereas this privatization had a crippling effect on the oil-reliant Kuwaiti economy, however, it had an altogether different effect on waste reduction efforts taken by BP.

As a result of privatization, BP efforts towards becoming environmentally friendly increased. In 2005, the main oil division of BP, Innovene, was sold to Ineos, a privately owned British chemical company. As a result of losing it’s main oil division, research and development in BP was shifted away from efficient oil production towards the production of environmentally friendly energy sources. Locally, BP has created an alternative fuel division in Whiting, Indiana. In order to inspire creation of the factory, Indiana legislators agreed to allow BP to dump up to 1,584 pounds of ammonia and 4,925 pounds of sludge into Lake Michigan – every day. In spite of this state allowance that would undoubtedly have translated into improved efficiency for BP, however, BP’s website claims that “the BP Whiting Refinery does not and will not dump sludge or toxic waste into Lake Michigan.” As the example indicates, BP has certainly grown beyond it’s roots in capitalism towards becoming an ecologically responsible company.

Today, research of alternative energy sources by BP includes solar energy and fuel cell energy research. Money.aol.uk reports that “BP has built a substantial solar energy division, which made a profit for the first time in 2004 and increased global sales of solar capacity by more than 30%.” Future residual effects of this successful expansion into the solar energy field will undoubtedly include inspiring other companies to look into the research of alternative energy sources. Where there is net profit, there will be competition.

Elementary economics has shown that becoming green is another way of saying becoming inefficient. If this was true in the case of British Petroleum, inefficiencies would be reflected most profoundly in the price of company share value. In December of 1995, British petroleum closed on the market with a share value of $20. In December of 2003, BP ended the fiscal year with an individual share value of $40. As of writing this paper, the share price of BP is $72.74 per share. This data shows that since 1995, BP has typically doubled every five years. Any investment guru will tell you to bet the house on a stock that doubles in value every five years. But what chances does British Petroleum have at continued growth in the presence of stricter air pollution regulations?

The popularization of environmental friendliness in recent years has placed new emphasis upon the importance of developing alternative fuel sources. Since Carbon Dioxide released as a byproduct of oil burning is the foremost contributor to global warming, this has meant an industrial shift away from excessive oil usage. Similarly, higher gas prices as a result of worldwide oil shortages have given new potential to developers of alternative fuel sources. For these reasons, it is highly likely that BP will continue expansion into the next decade, even if not at the rate of doubling every five years. British Petroleum therefore receives the author’s certification as a fiscally and environmentally responsible choice for the everyday investor.

Citigroup

To economic gurus of the past, it would be a logical assumption that no environmentally friendly company could reach the summits of capitalism. Citigroup stands as a stunning counterexample to this assumption.

Citigroup formed in 1998 as a result of a $140 billion merger between Citicorp and Travelers Group. It is composed largely of financial institutions, including Citibank banking and Ameriprise investments. In March 2007, the Forbes 2000 declared Citigroup the largest company in the world. Contrary to the teachings of traditional economics, however, this financial success has not been at the cost of environmental friendliness.

Whereas globalization usually means destruction of the environment, Citigroup has worked towards reducing the effects of it’s expansion. Most recent green efforts by Citigroup include a 2007 donation of $50 billion to the research of renewable energy sources. Among the sources being developed, Citigroup has put special emphasis on the research of wind and solar energies, often considered the most promising of all alternative fuel sources. In Manila, Philippines, Citigroup has worked with SM supermarkets (one of the largest supermarket chains in the Philippines) to revolutionize the grocery shopping industry. Under the joint program, Citibank credit card users receive free “GreenBag” shopping bags in reward for purchases. According to Bea Tan, Citibank’s Cards Business Director, these bags will replace “plastic bags and other non-biodegradable products [that] not only endanger marine life, but are also hazards during the rainy season and the cause of many floods in the Philippines.” Achieving environmental friendliness is another success in the history of the world’s largest company.

As a result of Citigroup’s worldwide success, it’s share value has shown continually promising growth since 1997. Citigroup’s induction to the Dow Jones Industrial Average (DJIA), a compilation of the thirty leaders of enterprise in the United States, stands as a testament to the financial success of the company. Among others, AT&T, Johnson and Johnson, and McDonald’s are all included in the DJIA. Empirical analysis of the stock reaffirms Wall Street’s classification of Citigroup in the Dow Jones.

In addition to individual share price, Price/Earnings (P/E) ratio reveals an important indicator of stock potential. P/E ratio is calculated by dividing the price of one share of a stock by the earnings of that stock during the past year. In layman’s terms, P/E ratio reveals how long each share of a stock must be held in order to see a profit from ownership of the annuity. If a company’s P/E ratio is too high, this means it’s price is high in comparison to it’s earnings, and the stock is therefore a bad investment. If a company’s P/E is too low, this means that while it’s shares are inexpensive, the company has limited earning potential.

Comparison of historical Citigroup P/E data shows promise for future investors. Over the past ten years, Citigroup’s P/E ratio has declined from over twenty to where it stands today at around nine. Whereas ten years ago Citigroup stock was overvalued by buyers because of the company’s obvious growth potential, a recent lowering of share value has opened new doors to investors. This new affordability of Citigroup shares in combination with the company’s historic success gives Citigroup (C) this author’s certification as an environmentally and fiscally friendly stock choice.

European Climate Exchange (ECX)

Worldwide anti-pollution measures have lead to the creation of institutions that oversee the exchange of pollution credits. These credits, most valuably in the form of “carbon credits,” are issued to companies by local governments, and restrict the amount of legal air-pollutants that a company may release. For each credit, a company is allowed to release one ton of carbon dioxide. Since air pollution is proportional and large companies often produce the most air pollutions, smaller companies with unused carbon credits may sell them to larger companies.

In Europe, the creation of carbon credits has lead to the creation of the European Climate Exchange. Since it’s launch in 2005, the ECX has been responsible for the exchange of nearly 1.3 billion tons of carbon credits, whose total worth is around €24 billion ($35 billion)7. Because the ECX provides companies the ability to increase profits by decreasing wastefulness, the ECX figures to play an integral role in encouraging companies to join the green revolution. The ECX’s potential, however, is not limited to reducing worldwide pollution.

ECX has shown enormous financial growth potential as a result of stricter worldwide pollution regulations. This can be seen most obviously by a skyrocketing of ECX individual share values during recent years. At the beginning of the current fiscal year in January 2007, the individual share price for ECX was valued at around $1070 per share. Today, as of nearly one year later (December 2007), the stock is valued at $2,500 per share. In little over a year, the value of ECX shares has increased nearly 250%. As pollutant-regulating legislation will only become stricter in years to come, the value of ECX stock should continue to rise. Because of this, ECX (CLE.L­) receives the author’s certification as a green share with enormous investment potential.

Ceres Power

Like many other companies in the world, Ceres Power was created in order to exploit technology discovered through research at a university. Traditionally speaking, this exploitation of technology has often translated into the corporate exploitation of nature. In the case of Ceres Power, however, the technology being exploited will greatly reduce the negative effects that humans have on the environment.

Professor Brian Steele, a professor of chemistry at Imperial College in London, first discovered the process of combining fuel cells with anti-oxidants in order to eliminate waste. In this process, special holding cells are able to harness the atomic energy of hydrogen. As energy is released by the hydrogen, a lack of oxygen in the fuel cells prevents the creation of carbon dioxide as a byproduct. This works to effectively limit waste, creating only oxygen and water as byproducts. By eliminating harmful carbon-based byproducts and still providing cheap energy, fuel cell technology promises to become an important alternative fuel source.

Ceres Power takes advantage of fuel cell technology by offering consumers a household water-heater that harnesses wasteful byproducts to create electricity. The heater uses energy produced by the aforementioned hydrogen fuel cells to heat water, and converts any steam byproduct into electricity. By allowing consumers to reduce energy use and therefore their effect on the environment, Ceres Power has found a way to escape an economic axiom that theoretically prevents the success of environmentally friendly businesses.

Similar to the European Climate Exchange, historic stock quotes for Ceres Power reveal the company’s investment potential. While in 2005 it was subsidized by the European Union to prevent bankruptcy, since then, the value of each Ceres Power share has grown to $592. The high price of the stock should not work to deter investment, however. Of the eight fiscal quarters that Ceres Power has been in existence, only one quarter has translated into financial loss for investors. In addition, the products of Ceres Power have gone largely unmarketed in places other than Britain. With further development and expansion into foreign markets coming in the near future, Ceres Power shares look to increase in value for years to come.

Implications

Because of it’s abundance and potential as an energy source, oil has seen widespread industrial use. The long-term overuse of oil as an energy source, however, has revealed some problems with initial assumptions about the infallibility of oil.

Before industrialization around 1750, concentration of carbon dioxide in the troposphere was calculated to be 280 ppm. Currently, the concentration of carbon dioxide in the atmosphere is at 377.3 ppm. Because it is the most significant of the green house gases, growth of carbon dioxide at the same level for the next 250 years would cause the temperature of Earth to rise over fifty degrees Fahrenheit. Significant heightening of the Earth’s temperature could in turn lead to glacial melting, worldwide flooding as a result of rising sea levels, and the occurrence of another ice age. Based on recent shifts in consumer and producer attitudes towards environmentalism, however, oil is not likely to cause the ruination of the Earth.

Technological advances in the field of alternative energies reflect a changing economic and political atmosphere in the world. National as well as economic laws are being revamped to reward green companies. Legislatively, the creation of a carbon credit system signifies the emergence of a generation of innovative, environmentally protective laws. This carbon credit system makes the cost of polluting higher for companies than that of simply developing green production processes, and provides economic benefits to companies that overcome the initial expenses of becoming green friendly. Today, because environmental protection laws are making waste expensive, green companies experience both direct and indirect benefits. As a direct benefit, more stringent pollution legislation has often meant the large-scale success of green companies. Before air pollution legislation in the form of the 1963 Clean Air Act, companies had no reason to risk efficiency in order to limit pollution. Creation of the law, however, and the successive creations of stricter Clean Air acts in 1967, 1970, 1977, and 1990, have forced companies to limit pollutant byproducts or face financial repercussion. Because of these laws and others that hold companies financially responsible for the impact they have on the environment, oil use has been largely reduced in industry.

In the case of Ceres Power, whose development of the hydrogen-powered water heater has lead to financial success, the research of alternative fuel sources has been highly lucrative. For non-energy producing companies, conversion to the production of machines that utilize alternative fuels can also mean success. To Toyota, this has meant the sale of one million hybrid cars since 1998. Elsewhere, donations by brokerage firms like Goldman Sachs to the creation of green friendly offices ($2.4 billion) reveal the importance of environmentally friendly business practices in the mind of today’s consumer.

Based on warming corporate and public attitudes towards environmental friendliness, the conventional economic wisdom that a green production process means red in the business prospectus is no longer true. In today’s world of environmentally friendly producers, there are many available green companies that provide investors with highly lucrative and moral investment opportunities. Those discussed in the paper represent only a very small percentage of available green friendly investment choices.