Author: louis

United For Action SRI Presentation

United For Action SRI Presentation

Louis will be speaking about Socially Responsible Investing at the monthly United For Action meeting this Thursday, September 8th from 6:30-7:30.  United For Action is Non-Profit organization comprised of volunteers who shape public policy decisions by organizing and mobilizing groups of like-minded citizens to promote public health and sustainability.  The meeting is open to the public and will be held at the New York Society for Ethical Culture.  Further details about the event can be found here.

2016 Investment Themes: An Uphill Battle

2016 Investment Themes: An Uphill Battle

  1. Fed stays the course: We expect short term rates to rise by 1% over 2016, and believe long-term rate rises will be roughly commensurate. We believe the Fed’s board will stick with their stated intentions, it would require dramatic events to make them change course during an election year.


  1. A return to risk: We believe risk concerns will weigh on markets all year, primarily driven by rate hikes, stagnant/declining earnings and a slowdown in demand in China and other markets. Continued war and turmoil in the Middle-East and uncertainty in US presidential election could add to the negative sentiment. US equities markets will be down for the year, with a strong possibility that we see a decline of 20% or more over the course of the year.


  1. Oil is red: We expect oil prices to continue to be weak in 2016, oil is likely to see the $20-25 range. We expect oil companies (particularly E&P) to face continued stress and expect defaults on high-yield issues in the sector. Oil price declines continue to be driven by softer demand in Asia (particularly China). Expanding supply has also played a role, for the first time in over 40 years, the US will export oil in 2016 (this had been prevented by law since the 70s oil crisis).


  1. Emerging markets comeback: We believe smaller emerging market equities will outperform developed markets in North America and Europe which we expect to be stuck in the doldrums during 2016. This opens up opportunities for smaller Asian (ex-China/Russia) and African markets to outperform.


  1. A Tech-wreck redux: Technology companies have been among the strongest performers over the past few years. This has been true for both listed and privately traded companies. Some of the outperformance is driven by actual changes in consumer and business behavior; more leisure and work activity is moving online, and that creates opportunities for technology companies that did not exist earlier. However, extremely optimistic valuations for unproven business models have become the norm and we believe the inevitable reckoning is quite likely to occur this year.


  1. Commodity economies fumble: Australia and Canada were both spared the worst of the global financial crisis thanks to their resource driven economies and the determination by some governments to support heavy industries that consume them. Neither country suffered a significant real-estate correction for example. We believe both will be among the worst performing markets in 2016.


  1. The greenback still rules: We expect upheaval in a number of markets to drive a flight to safety and support USD through 2016. We believe the dollar continues to remain strong in 2016 against Euro and other major currencies.


  1. Renewables: We are long-term believers in the prospects of the renewable energy industry and the recently concluded Paris accords should support prices in the sector. The extension of solar credits should also boost the domestic market. We expect renewables to continue outperforming their conventional energy counterparts.


  1. Presidential election: 2016 is a US presidential election year and an unusual one to boot. We believe the sentiment favors non-traditional candidates who reject the status-quo. There is a strong possibility one or both major party nominees will be from outside the establishment mainstream. In part this reflects a broad decline in deference to the governing class after the financial crisis of 2008 and the decade that preceded it. Recent European elections in France, Hungary and Greece have reflected similar sentiments. If as we suspect, a candidate opposed to the status-quo ends up on a major party ticket, this will create additional uncertainty weighing on markets in 2016.


  1. Unemployment Rises: We expect headline unemployment in the US to end the year above 5%. The softening in global demand, rising rates (however slight) and lackluster earnings we expect will also impact employment within the US. This is in keeping with our expectations of an economic downturn during 2016.



Climate Action Panel

Climate Action Panel

Lou will be speaking on a Climate Action Panel titled “Local Climate Action in the Age of Big Fossil” sponsored by Greater NYC For Change, 350NYC, Manhattan Young Democrats and United For Action this Tuesday February 3rd starting at 6:30pm.  The event will be held at St. John’s Church meeting room located at 81 Christopher Street.  Space is limited, so if you are interested in attending, please RSVP on Facebook or via emai  to  Hope to see you there!

Sustainable Investing Panel Discussion

Sustainable Investing Panel Discussion

Louis will be speaking on a sustainable investment panel with the Portfolio Director of the Acumen Fund next Monday November 24th at the Center For Social Innovation.  The panel starts at 6pm and it should be an interesting and lively discussion.  If you would like to attend, please reserve a spot by clicking on this link.

Understanding the Risks of Crowdsourced Clean Energy Investing

Understanding the Risks of Crowdsourced Clean Energy Investing

Below is an article written by Louis about the recent trend in clean energy crowdfunding.  It was first published by Green Tech Media and the original article can be found here.


For clean energy investors, Title III of the JOBS Act could change the game.

Prior to its implementation, investing in clean energy startups or small-scale utility projects has been a pursuit reserved mainly for venture capital and private equity firms investing on behalf of their institutional and high-net-worth clients. The barrier to entry into these funds is high, with six- to seven-figure minimum buy-ins typically the norm. But in a post-JOBS Act America, we’re entering a crowdfunding-inspired era where barriers to entry are crumbling.

Take Mosaic, for example, where an investor with as little as $25 and an internet connection can fund a portion of a solar project via an online investment platform.

Sounds great, right? Well, it is. But as with any other investment opportunity, putting money to work in crowdsourced clean energy projects comes with risks. And as crowdfunding gains in popularity and scope, these risks may be glossed over or simply ignored by an enthusiastic investing public eager to put their money where their eco-conscious mouth is.

So what are the risks, exactly?

Let’s take a closer look at Mosaic — not because its offering is especially risky (compared to other crowdsourced investment opportunities, it’s not), but because it’s currently the poster child for this new business model.

In a nutshell, Mosaic helps investors of any size lend money to small-scale solar projects in need of capital. As a result, the solar projects get financing, Mosaic is paid a fee, and investors earn interest on their loan. Think of it as Kickstarter meets Kiva for solar project financing.

Here’s Mosaic’s pitch, in the company’s own words, taken directly from its website: “Mosaic connects investors seeking steady, reliable returns to high-quality solar projects. To date, over $5.6 million has been invested through Mosaic and investors have received 100% on-time payments.”

Below this statement is a list of Mosaic’s projects (all of which have been fully funded) showing annual payments of 4.5 percent to 5.5 percent. This number is net of Mosaic’s annual 1 percent management fee on loans that mature in five to twelve years.

Steady and reliable returns of 4.5 percent or more per year on your investment, plus pride in knowing your money is supporting a clean energy project. Sounds terrific. Everybody wins.

So what’s the catch? Is there a catch?

To answer this question, we have to take a closer look at Mosaic’s prospectus, a densely worded document that lays out the deal terms and accompanying risk factors in explicit detail. After all, the language found on the website is meant to sell prospective investors on Mosaic, not scare them away.

So, onto the prospectus, where on page 2 of the offering memorandum, in capital letters, we get this: “These are speculative securities. Investment in the notes involves significant risk. You should purchase these securities only if you can afford a complete loss of your investment.”

Speculative securities; significant risk; complete loss of your investment. Not quite the sunny language we found on the website. So what exactly are investors getting themselves into here?

It turns out these loans are not made directly to the solar project. Rather, they are funneled through an intermediary (Mosaic), which deploys capital to the projects on behalf of investors. So when an investor lends money to one of these projects, what they’re actually getting is an unsecured note issued by Solar Mosaic LLC, which is meant to “mirror the terms of the corresponding loan.” This is an important distinction, as certain bondholder rights are lost in this structure.

This leads us to the most important risk factor for investors to consider.

Default risk

What’s the risk that the issuer will fail and be unable to make interest payments or pay back your principal? Unlike bank CDs (insured by the FDIC), Treasury bonds (backed by the full faith and credit of the U.S. federal government), or municipal bonds (which often carry third-party insurance), Mosaic notes are uninsured, unsecured corporate bonds.

The repayment of principal with interest hinges on the success of the solar project and its ability to generate the necessary cash flow. Because of the way these notes are structured, investors will have two entities to worry about: the borrower (solar project) and the issuer (Mosaic). If the solar project fails, the investor will not receive interest payments and risks losing the invested principal. If Mosaic goes bankrupt (even if the solar project is successful), the investor also may not receive interest payments and risks losing the principal.

Oh, and by the way, if things do go south, the investor “will not have any recourse to the borrower under the loan.” If the solar project fails, you’re relying on Mosaic to recoup your principal through litigation, and the investor “will not have any security interest in any of MSI’s (Mosaic Solar Investments) assets.” That means if Mosaic goes belly up, don’t expect its other assets to cover your losses.

Since the performance of each note is tied directly to the success of the individual solar project, the next factor to consider is credit risk.

Credit risk

How can you quantify which projects are in the best position to repay the loan? Remember, if the project fails, it’s the investor’s capital at risk, not Mosaic’s (although the company’s reputation would likely take a hit). Most publicly traded bonds carry a credit rating from one or more of the major ratings agencies like Moody’s, S&P or Fitch. While these ratings should not be considered gospel (just ask anyone invested in “AAA”-rated mortgage-backed securities in 2008), they can provide a useful marker to help investors gauge the default risk of the borrower.

While Mosaic is working with Standard & Poor’s via truSolar to develop a scoring system for solar bonds, there currently isn’t any third-party analysis of the credit quality of the borrowers. Investors can conduct some limited due diligence on their own, but most will be relying on the judgment of Mosaic’s underwriting team, which have only been at this since 2012. So while there may have been 100 percent on-time payments to date, this is based on a very limited track record.

Since the notes are only available on Mosaic’s platform, another factor to consider is liquidity.

Liquidity risk

What happens if you need access to your principal before the loan matures? With publicly traded bonds (treasuries, corporates, municipals), there’s a secondary market where investors can sell their bonds prior to maturity. With Mosaic’s notes, there is no secondary market.  Also, there isn’t a mechanism in place for investors to redeem their notes prior to maturity. So if your note matures in twelve years, your money will be tied up for the duration. Think of it as a bank CD: you’ll be able to withdraw interest payments, but your principal is illiquid.

This lack of liquidity on a longer-term bond can expose investors to interest rate risk.

Interest rate risk

Right now, we’re living in a time of historically low interest rates. As anyone who holds money in a checking or savings account can tell you, yields on cash are virtually nonexistent. This is a result of the federal funds rate (the rate at which banks borrow money from each other) being set at essentially 0 percent. This impacts rates across all loans, keeping them low — until rates go up again.

And make no mistake, rates will rise. It’s not a question of if, but when and by how much. A twelve-year Mosaic note paying 5.5 percent per year may look great today, but if interest rates are substantially higher a few years from now, you’ll be stuck in an illiquid investment paying below-market rates.

In addition, there are a few other risks to consider.

Technology risk

Will the solar technology being used in this project still be viable twelve years from now? What happens if there’s a major breakthrough in panel performance that causes the panels used in your investment to become obsolete? Or what happens to the warranty on the solar panels if the manufacturer goes out of business?

Catastrophe risk

With climate change impacting weather patterns, what happens if a natural disaster (hurricane, tornado, flood) wipes out the solar farm you’re invested in? Mosaic requires borrowers to carry property insurance, but how would the lack of cash flow during repair work impact interest payments?

Do all these risk factors mean investors shouldn’t put money to work into Mosaic or other crowdsourced clean energy projects? Not necessarily. In fact, these types of investments can make a nice addition to a diversified portfolio. And Mosaic deserves a lot of credit for successfully building out this business model and proving it’s viable, not to mention wildly popular amongst clean energy investors.

However, just like any other investment opportunity, investors need to carefully consider all the risks involved prior to putting their money to work.



2014 Q2 Letter: Are US Equities Reaching a Top?

2014 Q2 Letter: Are US Equities Reaching a Top?

The second quarter of 2014 saw global markets rise after shrugging off a number of geo-political concerns clustered primarily around the middle-east (Ukraine, Egypt, Turkey, Iraq, Palestine). Stocks and bonds in the US have continued their march upwards with the S&P 500 and Dow Jones indices scaling all-time highs. There is some speculation that turmoil in Asia and Eastern Europe has driven investors to seek the relative security of US-based assets, including stocks, bonds and real-estate.  While this is anecdotal, we do see signs of foreign investments boosting asset prices in each of these markets.

We continue to advise caution to equity investors. The S&P 500 is trading at 19 times last year’s earnings, while the Nasdaq composite index is over 23. Longer term measures of value (such as the Cyclically Adjusted P/E) are close to levels reached at the peak of 2007. Though it is not possible to say exactly when a decline might begin, hazard signs are clearly visible and we think risk should be considered when looking at portfolio allocations.

Stocks have been buoyed by the low-interest rate policies still being followed by most central banks. With short-term rates close to zero, holding cash remains an unattractive proposition for investors and has led many to conclude that stocks are a relative bargain, even with very small anticipated returns.

Bonds offer little respite for investors. Due to continuing loose monetary policy by central banks, interest rates are close to historic lows. Long term bonds offer very little by way of return potential. 30 year treasuries are offering a 3.4% yield and 10 year treasuries are at 2.58%. These are meager returns for considerable risk since we anticipate the Fed will continue to reduce bond purchases and begin raising rates next year.  Long term bonds perform very poorly in a rising rate environment.

So where are the investment opportunities?  There aren’t many areas where we see a lot of value.  We continue to prefer high quality, dividend paying stocks both domestically and internationally.  For bonds, we prefer short term and floating rate issues as well as certain foreign sovereigns.  There are a few general investment themes that we still find compelling like alternative energy, energy efficiency, water resources and healthcare-related companies.  But, in general, we think an allocation weighted towards asset preservation is advisable.

In other news, Louis had a second article published by Green Tech Media on the topic of clean energy YieldCos.  You can read the article here.

What You Need to Know About How Clean Energy YieldCos Work

What You Need to Know About How Clean Energy YieldCos Work

If you follow the clean energy investment space, you’ve probably heard the term “YieldCo” thrown around quite a bit in recent months.

YieldCos have burst onto the investment scene and quickly become the company structure du jour for publicly traded power producers looking to capitalize on their renewable energy assets.

In the past year, we’ve seen a flurry of activity in this space as companies such as NRG, TransAlta, NextEra, and Abengoa have spun off the renewable portions of their power portfolios into separately held YieldCos.

Following their lead, SunEdison plans to spin off 524 megawatts of solar farms across the U.S., Canada, the U.K. and Chile into a YieldCo called TerraForm Power later this month.

The YieldCo structure has become so popular that analysts at Deutsche Bank expect as many as six more entities to become publicly traded in the coming twelve to eighteen months. And even private equity behemoth KKR is getting into the act by acquiring a 33 percent stake in Acciona with the goal of cashing in on a future YieldCo spin-off.

So what exactly is a YieldCo, why are companies suddenly attracted to this corporate structure, and most importantly, should you consider investing in one?

Let’s start with the basics. YieldCo is shorthand for “yield company.” In the investment world, yield is synonymous with income. So, essentially, a YieldCo is a corporate structure where the income component (generated by the underlying assets) is emphasized.

YieldCos are similar in concept to an MLP (master limited partnership) in the oil and gas sector or a REIT (real estate investment trust) in the real estate sector. All three investments are designed to provide a dependable stream of cash flow to investors.

Whereas MLPs use oil or gas pipeline income and REITs use commercial real estate lease income, YieldCos use completed renewable energy projects with long-term power purchase agreements in place to deliver dividends to investors.

So why are so many companies embracing this new structure? The primary reason is to unlock shareholder value. By spinning off their renewable power assets into a separate, high-yielding entity, power producers are attracting interest from two types of investors who may not have been interested otherwise: socially responsible investors and income investors.

The SRI investor

Prior to creating a YieldCo, most power producers commingled renewable energy assets with their other businesses. For example, in addition to wind and solar, NextEra has exposure to natural gas, nuclear and oil-fired power plants. A purist socially responsible investor may have avoided buying NextEra stock specifically because of this exposure (even though NextEra has long been a leader in the renewable energy space).

By creating a YieldCo, they were able to segregate their renewable power assets from fossil fuel and nuclear power plants while still retaining ownership in both. The same purist SRI investor who may have balked at owning shares in NextEra’s entire power portfolio (via the parent company) can now invest in a pure-play renewable company via NextEra’s YieldCo.

The income investor

In addition to being renewable, YieldCos by design are created to house completed power projects with long-term PPAs in place. This means the more capital-intensive, less cash-flow-positive business units like R&D and construction can be retained by the parent company. Without these capital-intensive units under the YieldCo’s umbrella, a higher portion of the profits can be paid out to shareholders via dividends rather than reinvested back into the company.

Given the current historically low interest rate environment, many income investors (who are traditionally more risk-averse compared to growth investors) have been pushed out of their bonds-and-blue-chip-stocks comfort zone and forced to find yield elsewhere. Enter the YieldCo, which, like MLPs and REITs, emphasizes cash flow over growth and owns a portfolio of lower-risk assets.

Now that we’ve established what a YieldCo is and why companies are creating them, the question remains: are they worth investing in? Like any other investment, a YieldCo has pros and cons that an investor should carefully consider before putting any money to work.


  • YieldCos provide SRI investors with a pure-play clean energy investment vehicle (while a few may contain fossil-fuel exposure, most are 100 percent renewable).
  • Since they are consist of completed projects with long-term PPAs in place, YieldCos are less speculative and carry lower risk relative to other clean energy stocks (such as biofuels, solar panel manufacturers, etc).
  • Unlike other clean energy stocks (which are growth-oriented), YieldCos are designed for predictable income via dividends.
  • A YieldCo will provide a geographically diverse portfolio of several power projects.
  • Unlike energy MLPs, cash flows from YieldCos aren’t dependent on fossil fuel prices, so they don’t carry a commodity price variable.


  • YieldCos will likely be vulnerable to rising interest rates. Low rates have allowed power producers to borrow money on the cheap to build and acquire new assets. Higher rates will mean that these activities will become costlier. Also, while historically low rates have drawn income investors into alternative asset classes, higher rates will mean they can return to the safety of bonds.
  • For growth, YieldCos will be dependent on having a pipeline of new projects to add to their portfolios. This means risk exposure to future legislative and tax policies (which are currently favorable toward renewables), which could adversely impact the costs associated with construction and acquisition.
  • YieldCos are equity investments, so they will tend to trade with the movements of the stock market, which means they are susceptible to stock-market volatility.
  • Utility-scale solar and wind power are still relatively new sources of energy, so it’s a bit of an unknown what the life cycle of these assets will be. It’s difficult to project what maintenance costs will be twenty to 30 years from now. Will energy production (from solar in particular) degrade over time, and if so, how will this impact cash flows?

On balance, for an investor comfortable with stock market volatility and looking for a pure-play renewable investment that provides income and is less speculative than many other cleantech investments, YieldCos will likely make a nice portfolio addition.

That said, valuations for several YieldCos seem quite rich at the moment. Yes, it may be an exciting space to be in, but just like any other stock investment, you need to pick your entry point carefully. As always, the fundamentals of investing still apply.


This article originally appeared on Greentech Media.



2012 Q1 Letter: Austere Growth and the Summer of Discontent

2012 Q1 Letter: Austere Growth and the Summer of Discontent

Before we begin our quarterly market commentary, we wanted to give you a few quick updates.  Louis was recently profiled in the Wall Street Journal online where he discussed the mobile budgeting app we are developing.  The genesis for the idea came from speaking to both clients and non-clients who have expressed a need for on-the-go assistance in tracking their spending habits.  We’ll keep you posted on the app’s progress and let you know when it’s in beta.

Over at the WSQ Capital blog, Subir wrote a blog post examining the fundamental differences between Google and Yahoo in how they approach the internet.  He wrote a second piece where he sites Pandora as a case study for how entrepreneurs can run into trouble if they sell too much equity to outside investors. And to complete the tech trifecta, he wrote a third piece looking at Facebook’s growth prospects just as the hype machine for the company’s IPO grinds into high gear. Meanwhile, Louis wrote a post that provides a primer for investors interested in learning what makes an investment socially responsible.

We look forward to speaking with you over course of the summer.

This has been an eventful quarter in the global markets. We now know that the UK has slipped into a double-dip recession with negative growth in the past two consecutive quarters. The jury is still out on whether this was driven by the relatively austere economic policies adopted by the Tory government and the Bank of England or the general weakness in broader Europe. Looking out east, we see a carefully choreographed political transition in China becoming unexpectedly messy. A very senior official, who was expected to join the nine-member Standing Committee of the Communist Party has been removed from his position in the Politburo and remains under house arrest amidst allegations of wire-tapping and murder. Meanwhile, the housing bubble in China continues to deflate.

Against this background, US stocks continued their upward trajectory. The S&P 500 index (a broad measure of large-cap US stocks) finished the quarter up over 150 points, closing at 1,408.47 – cracking the 1400 point threshold for the first time since 2008. This represented a quarterly gain of 12.59% (which, if annualized, would be 50.36%). These are gaudy returns and we don’t think it’s realistic for investors to expect stocks to continue performing at these levels for the remainder of 2012. So what’s been driving this rally? There has been a confluence of factors:

1. The primary explanation is extraordinary stimulus provided by the Federal Reserve over the past few years in an effort to stabilize the US economy. In addition to its 0% interest rate policy – intended to drive down mortgage rates, boost lending and encourage both investors and savers to flee cash and take on more risk – the Fed has played a direct, directional role in the bond markets via quantitative easing. So far, there have been two major rounds of quantitative easing (QE1 in 2008/09 & QE2 in 2010/11). Both rounds helped prop up equity markets as investors expected the Fed to be ready with its safety net protecting them against catastrophic losses.

In a variation on this theme, the Fed announced “Operation Twist” on Sept 21, 2011. It would sell $400 billion in short-term Treasuries to buy longer-dated bonds, driving down long-term rates. The policy took effect in October and is set to expire in June, 2012. At the time of its announcement, the stock market was mired in a summer slump with investors increasingly jittery about muted economic data and continued problems with the European debt crisis. Once Operation Twist took effect on Oct 1st, the US stock market began its renewed run upward to where we are today.

We recognize that these stimulus policies have been implemented to support the fragile US economy as it slowly emerges from the Great Recession. The catch, however, is that risk-taking investors have come to rely on the Fed’s intervention in the markets. Like clockwork, once these policies are set to expire, equity markets (and other risk assets) have sold off until a new iteration of the policy is announced. This is a dangerous precedent for the Fed to set. A constant cycle of interventionist policies skews market prices and encourages the type of herd-driven speculative behavior that caused the crisis in the first place.

2. In addition to continued Fed stimulus, the stock market has benefited from improving economic data (albeit from very low levels). Unemployment – while still stubbornly high – has continued to drift lower with recent monthly numbers beating expectations. Corporate earnings have beenstrong, especially for large-cap US conglomerates, which have continued to benefit from a weak dollar. Several of these companies have cut costs by reducing head-count and used the savings for share buy-backs and dividend distributions. With interest rates at historic lows, blue chip stocks with dependable dividends are attractive to conservative investors in search of income.

3. The equity rally has also been strengthened by the threat of inflation. The Fed’s policies have brought trillions of dollars of liquidity into the markets over the past few years. This liquidity has weakened the US dollar and driven up commodity prices. The consumer price index (CPI) – which measures changes in the price level of set basket of consumer goods and services purchased by households – has steadily crept upwards over the first three months of 2012. This trend suggests inflation could be closer on the horizon than expected, despite continued high unemployment levels and a stalled housing recovery. Since companies can adapt their strategy and pricing to changed conditions, stocks tend to be a better hedge against inflation than fixed income.

4. As the economy emerges from recession, an overheated economy becomes a very real concern. A majority of the board of governors in the Federal Reserve have stated that they expect interest rates to remain historically low through the end of 2014. However, this is not written in stone. If the economy does rebound and inflation picks up, the Federal Reserve will need to raise interest rates before 2014. Since the Fed can’t lower interest rates any further than where they are now, they will go up at some point. The question, of course is when. Once interest rates do start to rise, stocks will outperform bonds.

As the second quarter is now underway, we have seen a few of these drivers fading (which, not surprisingly, coincided with a selloff in stocks). The Federal Reserve has given no indication that another round of quantitative easing is imminent once Operation Twist expires in June. Corporate earnings continue to be strong, but US economic data, which was strong during the first quarter, has started to flag. If the macro-economy weakens materially, both inflation and the potential for an interest rate hike prior to 2014 become less of a concern and the Fed’s attention will turn back to unemployment. The monetary quiver though, is virtually empty, and there is not much we feel the Fed can do beyond keeping rates low.

So what does this mean for investors?

While we still view equities on the whole as over-valued, there are pockets of value in certain industries, and in individual stocks. We prefer large cap, blue chip stocks with strong balance sheets and dependable dividends. We favor short term, high quality bonds, with a preference for inflation protected or stepped coupon/variable rate securities. We continue to think that there will be an opportunity to buy stocks at an attractive level in the near future.


Louis Berger                                                                   Subir Grewal

What Makes an Investment Socially Responsible?

What Makes an Investment Socially Responsible?


If you’re new to investing and thinking about putting your money to work using an approach that incorporates social or ethical criteria, it’s important to know what types of strategies are available to you and how to differentiate between them.

When we consider the socially responsible investment (SRI) universe, there are five main strategies most often used by investment managers.  SRI investors will usually incorporate some combination of these five when picking their investments.

1.  Positive Screening.  With positive screening, the investor looks for profitable companies that integrate corporate social responsibility (CSR) into their business practices and operations.  Typically, this investor wants to see the company actively engaged in the following issues: environmental conservation, human rights, labor rights, fair trade and indigenous rights.  This investor may also consider companies whose products or services directly address CSR issues, like a solar power company or an organic food manufacturer.  However, it’s important to note that just because a company is engaged in a sustainable business, doesn’t necessarily mean they are exempt from other CSR considerations.

2.  Negative Screening.  With negative screening, the investor excludes certain companies that do not place a high value on CSR within their business practices.  Often times, this approach means eliminating entire industries, like tobacco companies or defense contractors.  Like positive screening, negative screening can be subjective, as each SRI investor has his or her own idea of what does or does not constitute an ethical company.  For example, an investor who uses religious screening criteria may want to avoid a medical devices company that manufactures products used in abortion procedures.  However, a pro-choice investor will likely not take issue with this company, and rather, may actually consider it as a candidate for a positive screen.

3.  Best-in-Class.  With best-in-class, the investor often targets a progressive company within an industry likely to have a poor CSR track record.  An example would be an oil company that’s an industry leader in environmental conservation.  While the type of business (oil drilling) may not be considered socially responsible, the way the company conducts their operations (making environmental protection a priority) is the chief criteria.  In a way, this investor seeks to encourage and reward good corporate behavior with their investment dollars.   It’s important to note, however, that this approach can be susceptible to greenwashing, as a company may market themselves as being an upstanding corporate citizen, but in reality, may not live up to that image.  A prime example of this would be BP, which was once a top pick for best-in-class SRI investors prior to the Deep Horizon disaster.

4.  Activist Investing.  With activist investing, the investor targets those companies with poor CSR track records in the interest of changing the company’s business practices.  This approach uses proxy votes and shareholder resolutions to pressure management to alter corporate behavior.  This approach is most effective when used by large institutional investors (mutual funds, pension funds or foundations) or a coalition of smaller investors.  The activist investor, while a bit unorthodox in their approach, can achieve significant long term CSR victories when successfully petitioning large corporations to change their business practices.

5.  Community Investing.  With community investing, the investor is less concerned about the financial returns of their investment then they are about the greater social impact.  The main goal with this approach is to deploy investor capital to individuals, organizations or geographic areas that have historically been denied access to capital by traditional financial institutions.  Often times, this style of investment is done by larger institutions.  Individuals can also take part in this approach through microfinancing, for example.

In addition to considering the social and ethical approaches discussed above, it’s also important to make sure that an investment is a good fit for you, especially in terms of risk tolerance (how much risk you are comfortable taking – some investments can be riskier than others) and time horizon (when you will need access to your money – investors with short time horizons generally should stick to less risky investments).

As always, if you need help finding a socially responsible investment that’s a good fit for you, let us know and we’d be happy to schedule an introductory phone call.


Image Credit: Tom Magilery

2012 Themes: The More Things Change…

2012 Themes: The More Things Change…

Here are our top 10 investment themes for 2012.  These are the topics we think will have the biggest impact on client portfolios in the coming year…


1.  Steady as she goes: We think it unlikely the Fed will raise rates in 2012, largely due to the presidential election. With the ongoing crisis in Europe, the Fed would normally be engaging in further monetary easing, but there is nowhere to go below the current 0.00% target overnight rate. In most presidential election years, the Fed is hesitant to make large moves in either direction, to avoid appearing politically biased. That instinct is especially heightened in an election cycle where Fed policy action and arcane monetary policy debates have unexpectedly become contentious, emotional political issues.

2.  Risk Off: We believe risk assets (stock, real-estate, long-dated and high-yield bonds) will have a difficult 2012. Stocks have benefited from a sharp rebound after the credit crisis and are now back to the higher end of the historical range. Bonds meanwhile, are trading at yields that are lower than any seen in two generations. During the course of 2012, we would expect both to correct towards the mean. This should provide some interesting buying opportunities, especially for dollar-based investors.

3.  Break-Up or Make-Up, Brussels is good for both: 2012 should be the denouement for the European sovereign debt crisis.  Though it has been over a decade in the making, things have finally come to a head. All the dominoes (Greece, Portugal, Spain, Italy) are lined up, and we wait to see which the two players (France and Germany) will allow to fall before they stop the carnage. We believe a Greek default is extremely likely this year. Even if there is a pre-negotiated haircut with some lenders, the market will treat it with the seriousness that the first default by a “developed” economy in a generation should. In either case, Greek bondholders should be prepared for losses on the order of 60% of par value.

4.  Euro Trash: We expect the Euro to bear much of the burden of the European sovereign crisis, and the currency to weaken significantly against the dollar. We would not be surprised if the Euro approached parity with the dollar over the course of the year. When we discussed a Euro break-up last year, it seemed like an outlier scenario. We have been amazed at the speed with which events have moved and a potential Euro-exit for one or more peripheral economies is now being openly discussed.

5.  Blue States/Red States: The US presidential election cycle should be the major story in the US in 2012. US and individual state debt burdens will be the most important topic of debate, as the European sovereign debt crisis plays out in the background. American politicians will have to negotiate some cut in benefits for the charmed baby-boomer generation to ensure the financial burden of these programs in coming years does not doom the economic prospects of their children and grandchildren. This negotiation of a new social compact between the generations is the most important issue of our times.

6.  Chinese Math: At the 18th Communist party congress to be held this year, we expect power to be transferred to a new generation of Chinese political leaders. We have no doubt that the enormous state apparatus will be fully utilized to ensure economic stability during the transfer. However, we believe these efforts will ultimately be for naught. The structural shift required as China moves from an investment driven economy to a consumption driven one will make for a tumultuous year in Chinese markets. The stock market has been depressed for almost five years, GDP growth is slowing as labor costs rise, and we expect Chinese real-estate is beginning to make the first moves in an unavoidable decline towards more reasonable levels.

7.  Revolutionary Times: We were surprised to see the speed at which the political structure of the Middle East has been transformed in a remarkable series of revolutions. Though we have been aware of the demographic pressures that created the basis for these changes, their rapidity has astounded us. As events unfold in the Arab world, something perhaps even more remarkable has begun to happen in Russia. A previously apathetic Russian electorate seems to be flexing its muscle in opposition to a renewed Putin presidency.  We expect to see more political turmoil in Europe and the Middle East in 2012. This coupled with major elections and power-transfers in the US and China make for a very uncertain 2012 politically speaking. In our view, this will make for very jittery markets throughout the year.

8.  Oil Slicks: The events in the middle-east will of course have an impact on energy prices. We expect political tensions to keep oil prices artificially inflated in 2012, but longer-term we think $100 oil is unsustainable as alternative energy sources approach cost-parity with conventional sources. And while we’re talking about oil, we would like to reiterate our skeptical view of gold prices, which we believe would be well under $1,000 an ounce if the political and economic future were not as muddy.

9.  Smart Homes: The past decade has seen the widespread adoption of computing and telecommunications technology touch virtually every aspect of human activity. We expect the markets to be enamored with a couple of very high-profile IPOs expected in 2012/2013 (Facebook and Twitter). We believe some of the higher profile IPOs of 2011 will perform poorly (GroupOn for instance). The larger story will continue to be the steady march of the internet into every device and living room, placing a strain on core Internet infrastructure. We heard relatively little about a seminal event that took place in 2011, the last large block of addresses (IPv4 numbers) was assigned and there is no address space on the current infrastructure to accommodate another few hundred million devices. The public discussion has centered around the addition of new top level domain names (like .com, .org), but the addresses that sit behind these are the real concern. A new addressing scheme (IPv6) has been built into most devices for years, but adoption is minimal. We expect this will have to change in 2012, with a few hiccups along the way.

10.  Housing: Still a buyer’s market: We expect the overall US housing market to remain stagnant in2012 with pockets of strength, particularly in major urban areas (NYC, DC, San Francisco) and some suburban and rural areas that did not overbuild in the run-up to the credit crisis.  We believe there is still too much supply available and US consumers as a whole will be reluctant to financially over-commit themselves given job security concerns and how many were burned by homeownership in the past few years, despite record low mortgage rates.


“2011 Themes: These Go To Eleven” Year End Review

“2011 Themes: These Go To Eleven” Year End Review

Since we’ve now closed the chapter on 2011, we’d like to review our “11 Economic Themes For 2011” from last January, to see how well our ideas performed.

1.   No.   Raise ’em sort of high: We expect the Fed to raise short-term interest rates towards the end of the year, in response to slow but steady growth and a more hawkish group of voting members. We were flat out wrong on this one. The Fed kept rates steady at the lowest possible level of 0-0.25% throughout the year. A blip in US economic data mid-year and continuing concerns about Europe held back even the most hawkish voting board-members from recommending a raise.

2.   Not exactly.  Risk Off: We believe stock prices are quite a bit higher than underlying fundamentals support, at a trailing P/E of around 18.25 , prices are at the upper end of historical range. We were right to think that 2011 would be a year where market participants would lower risk, but we focused on US Equities. In fact, US Equities became a relative safe-haven as investors fled the Emerging Markets and Europe.

3.    YesUnited States of Europe: We expect the deterioration of sovereign credits in peripheral Europe to continue as these governments struggle with difficult but necessary financial decisions. We expect continued friction between fast-growing Northern European economies and Southern Europe. We have been discussing this theme for years, but it did come into its own in 2011. If anything, the conversation about potential outcomes has moved much faster than we would have expected. A year ago, who would have thought the markets (and even some in European political circles) would be discussing Greek default, and the break-up of the European currency union. The conclusion of the extraordinary events in Europe is still unclear and this will be a theme for 2012 as well.

4.    Yes.  Moody & Poor: We expect the US municipal bond market and state finances to continue as a topic of discussion. We expect certain weaker revenue and real-estate projects linked bonds to default… large scale defaults by major issuers (state GOs, water/sewer) are very unlikely. Municipal and State finances have continued to be in the news all year. We saw a very high-profile bankruptcy in Jefferson County, Alabama. We expect the role that financial intermediaries played in that case, and others, to receive attention over the course of 2012. As we anticipated, defaults in the municipal space were limited and the muni-market did quite well in 2011. However, the longer-term challenges remain in place. State revenues improved in 2011, but the fate of state-guaranteed pension funds and health benefits is still uncertain and remains a huge future liability for most US state and local government.

5.   Yes.   Running on Empty: The Chinese stock market did not fare well in 2010, and we expect the Chinese economy will experience lower growth in 2011. It is now clear to most participants that China is at an inflection point. The Chinese equity market has been in an unbroken bear market since reaching an all-time high in 2007. We believe other asset bubbles in China are at the point of bursting as well, and that this could well lead to large-scale social and political change in China.

6.   Yes.   Consuming Confidence: We expect consumer de-leveraging to continue in the US as consumers pay down debt till it approaches historical averages. Deleveraging continued as US consumers reduced debt wherever possible. Debt service and financial obligation ratios fell over the course of the year as rates remained at all time lows. Total outstanding consumer credit rose by 2%. Consumer sentiment returned to where it was at the tail end of 2010, after spending much of the year at depressed levels.

7.   Yes.   Help Wanted?: We expect unemployment in the US to remain high, slowly falling below 9% towards the end of the year. We also expect broader measures of unemployment and underemployment (the BLS’s U6) to stay above 15%. Though headline unemployment took a large drop towards 8.5% in December, it had spent most of the year around or above 9%. And if the political discussion is an accurate measure, the country as a whole remains concerned about jobs. As we anticipated, U-6 stayed over 15%, suggesting almost one in every seven workers is under-employed in some way.

8.    Yes.   Arrested Development: Though it is notoriously capricious to forecast, we expect GDP growth in most emerging markets will continue at high single-digit rates, while slowing in the US and Europe to a sub-trend 2% rate till household and government deleveraging has run its course. Though the full-year numbers are not available as yet, growth in the first three quarters in the US was estimated at an annualized rate of 0.4%, 1.3% and 1.8%. Unless the fourth quarter growth rates were truly remarkable, we will be well under 2% for the year. The story in Europe was, if anything, worse, with full year growth rates for the 27 member EU estimated at 1.6% and growth-forecasts for 2012 at 0.6%.

9.   Yes.   Double Helix: We expect health-care technology related to genetic sequencing to increasingly take center stage in preventive and curative care as sequencers become cheaper and consumer testing becomes more prevalent. We started 2012 with the news that a number of companies expect to offer solutions to sequence a person’s entire genome for about $1,000. We believe the rapid commercialization of this technology will change health-care and many other realms of human activity.

10.  Not exactly.  Feast and Famine: We expect 2011 to be a very volatile year for commodity prices. We believe the environment is ripe for a sharp price correction in some commodities, gold and oil for example, and perhaps certain base metals as well. We were partially right here. Commodities remained volatile in 2011, with the DJ-UBS commodities indices down over 13%. However, the two commodities we highlighted, gold and oil, remained relatively strong though gold did see a selloff during the second half of the year.

11.  Yes.  Death and Taxes, It’s all Politics: In the run-up to the US presidential election in 2012, we expect the political discussion to focus on debt and tax reform. The Congressional debt ceiling crisis and the subsequent downgrade of US treasuries by S&P this past summer brought this topic to the fore. As with everyone else, we wait to see what reform proposals the tax discussion will bring to the 2012 political season.


The final score is 8 out of 11, which is not bad.



Q4 2011 Letter

Q4 2011 Letter

We hope you enjoyed a restful holiday with your family and are off to a great start to 2012.

We’ve attached two documents to this letter: the first reviews our economic themes for 2011 (evaluating where we were right and where we were wrong) while the second outlines our investment themes for 2012 (topics we think will have the biggest impact on client portfolios in the coming year).

The fourth quarter of 2011 saw US stocks recover sharply from the mid-summer selloff.  The S&P 500 (the broad measure of US stocks), which had ended the third quarter at 1,131.42, finished the year rallying up to 1,257.60, a gain of over 11%.  Despite these gains, the S&P 500 finished 2011 virtually unchanged at -.11% (when dividends are factored in, the return was a positive 2.11%).  The Dow Jones Industrial Average (the index that tracks 30 blue chip US stocks) finished the year up 5.5% (8.38% with dividends), which was in line with our investment thesis of buying large cap dividend paying US stocks.  The Nasdaq (the tech heavy index) finished 2011 lower at -1.8%.

The Nasdaq losses were minor compared to stock returns overseas.  While the losses in the UK were modest (the FTSE 100 finished down only -2.18%) due mainly to the strength of the Pound, countries in the European Union fared far worse.  Germany (DAX) finished the year -14.69% and France (CAC 40) saw a return of -14.28%.   The so-called BRIC countries (Brazil, Russia, India, China) – those emerging market powerhouses that seemingly sidestepped the credit crisis – saw stock returns that lagged Europe.   Brazil (FTSE Brazil) finished the year -21.02%, Russia (FTSE Russia) -20.74%, India (Sensex) -24.64% and China (Shanghai Composite) was -21.7%.  However, the biggest loser of the year was Greece (FTSE Greece) which saw a return of -60.01% for 2011 (this was after a -45.83% return in 2010).

The continued debt crisis in Europe was the main reason for European stock declines (banks especially were clobbered) while BRIC losses can be attributed to the slowing global economy and a hard landing after years of rapid growth.  The stock losses in Greece demonstrate what can happen when a sovereign mismanages its debt levels and capital flees when investors lose confidence in that country’s ability to effectively govern itself.

Commodities were down, overall – the Dow Jones UBS Commodity Index saw a return of -13.32% – although there were a few bright spots.  Despite a late year selloff, gold continued its climb in 2011, ending the year at $1,566.80 per ounce, up 10.2% (this finish was well below its September peak of $1,895 per ounce).  Crude oil was up 8.2% on the year, closing at 107.50 per barrel, while natural gas saw continued losses and finished the year -32%.  Copper and cotton also saw big losses, finishing the year -22.73% and -36.69% respectively.

Once again, bonds performed exceptionally well in 2011.  The Barclays US Aggregate Bond index saw a total return of 7.84% while the Barclays US Government index saw a 9.02% total return.  Not to be outdone, the Barclays Municipal Bond index saw a total return of 10.7%.  Even the Credit Suisse High Yield bond index (the riskiest of the bond space) saw a total return of 5.47% despite a big selloff in junk bonds during the third quarter.

While bond returns post-credit crisis have certainly been gaudy (virtually all client portfolios have some bond component), we can’t, as prudent investors, expect these rates of return to continue in perpetuity.   Part of what has been driving these returns is the 0% interest rate policy the Federal Reserve enacted during the financial crisis.  With rates this low, conservative investors who normally leave money in cash or buy CDs have been forced into the bond market in search of yield.  Another factor contributing to these returns has been the continued lack of confidence in the global economy: when investors (both US and foreign alike) want to limit their risk exposure, they often look to the US bond market as a safe haven.

Eventually, though, interest rates will go up, the global economy will recover and investors will begin moving money out of bonds and into more risky investments.  Our job is to try to make adjustments to client portfolios in anticipation of these market forces.  So, with that in mind, we may recommend moving money out of the bond market towards the end of the year and into dividend paying stocks, inflation protected bonds and other non-correlated investments.

We look forward to speaking with you during our quarterly review and wish you the best over the coming year.






Subir Grewal                                                                           Louis Berger



Q3 2011 Letter

Q3 2011 Letter

The third quarter saw equity markets trade substantially lower from where they began—the S&P 500 index started the quarter at 1,320.64 and ended at 1,131.42, a loss of nearly 15%.  On October 4th, the S&P 500 saw an intraday low of 1,074.77, which marked a decline of more than 20% from the 2011 high of 1,370.58 reached on May 2.  This level was important both from a technical and psychological standpoint since a 20% major index decline is the metric used to determine whether or not we have entered a bear market.  Equity markets have bounced back over the past several days, but it remains to be seen whether we are entering a longer term bear market in stocks or if we are merely experiencing a “soft patch”.

So what has caused this decline in stocks?  There are several factors at play:

US Economic Data

The US economic picture, which we have long viewed as being fragile and artificially supported by government stimulus, is showing substantial cracks in its façade.  In early August, the US GDP for Q1 was revised down from an initial estimate of 1.9% to .4%, a huge 1.5% move down.  Second quarter GDP came in at 1.3%, well below analyst estimates of 1.9%.

While many market commentators at the time pointed to the Congressional budget standoff and the S&P’s lowering of the US credit rating to AA+ as the reasons for the stock selloff, it’s now apparent that the problems run much deeper.  Over the course of the quarter, as employment, housing, manufacturing and consumer sentiment data rolled in, it became clear that the selloff was a response to a US economy losing its footing rather than a gridlocked Congress (although that certainly didn’t help matters).

Federal Reserve policy

From our perspective, the stock market rally of the past two plus years can largely be attributed to the stimulus policies of the Federal Government and the monetary policies of the Federal Reserve rather than an organic economic recovery.

While government stimulus has largely dried up after Republicans regained control of Congress in the 2010 mid-terms, the Federal Reserve has continued to implement a monetary easing policy with ever more inventive sequels to the original QE.

These measures include: ZIRP (zero interest rate policy), quantitative easing (versions QE1 and QE2) and POMO (permanent open market operations).  While the economy and unemployment rate has seen little in the way of tangible benefits as a result of these strategies (although it could be argued that the Fed’s policies helped stave off a Depression), interest rates remain at rock bottom levels and the stock market has roared back to life. The question on every investor’s mind is whether this is a sustainable burst of energy, or a sugar high that will soon wear off.

If the latter is the case (which we believe) then it appears the stock market has gotten ahead of itself and its bullish trajectory does not accurately reflect the fragility of the economy.  Instead of an organic recovery driving the markets, it seems stocks are being buoyed by the Fed’s policies and can only continue moving upwards if the Fed keeps refilling the punch bowl of liquidity.  But what happens if the Fed decides to end the party and cease its easy monetary policy—will the economy be able to expand on its own?

Increasingly, it looks like this decisive moment has arrived. When the QE2 program expired at the end of June, the Fed elected not to renew it. Instead of entering into another round of buying bonds with cash, as many investors hoped/expected, the Fed went in a different direction.  On August 9th the Fed announced its expectation that it would extend the ZIRP policy through 2013 in an effort to keep interest rates low and encourage lending.  On September 22nd, they also announced Operation Twist, an action in bond markets designed to push down long term interest rates on everything from mortgages to business loans, giving consumers an additional incentive to borrow and spend money.  This approach was first used in the 1960’s (originally named after the dance craze that swept the nation).

While both of these measures are intended to help support the economy, they failed to elicit the same level of excitement in stock investors as the first two rounds of quantitative easing. We remain skeptical of these policies since, in our mind, the problem is not high interest rates, but rather the desire and ability of businesses and consumers to borrow. If businesses do not believe expanding their operations will be profitable, they will not borrow to do it. If households do not believe they will earn more in the future, they will not borrow to finance home-purchases and consumption today. And if loan and credit officers across the country do not believe the economy and employment will grow in the next few years, they will not extend credit. The problem is not the supply or price of credit (the interest rate), rather it’s the demand for it.

European Sovereign Debt Crisis

Ah, our dear old friend, the problem that just won’t go away, no matter how many summits are organized to exorcize it.  It seems we always devote some space to this topic every quarter and this letter will be no different.

The problems in Greece and in other European debt-ridden nations, reared its ugly head again this quarter.  However, the focus shifted a bit from the nations themselves to the European banks which hold much of this bad debt on their balance sheets.

The major concern many economists and market participants have is that several of these banks would not survive a Greek default.  So, if Greece were to go down, it could create a cascading, domino-like event, similar to what was narrowly averted during the 2008 credit crisis.  The prevailing view is that the countries and banks are so interconnected that one failure – a European country or a bank – could potentially bring down the entire system.  Of course, nobody knows for sure whether or not this is really the case, but elected officials do not seem interested in testing this hypothesis after witnessing firsthand the economic carnage that was unleashed when Lehman Brothers failed. The trouble, however, is that their constituents do not want to pay for the cost of rescuing Greece or even large pan-European banks.

In our view, this train-wreck will continue to play out in slow-motion for the next several months. The solution has to involve some restructuring of Greek debt, and some mechanism to conclusively stop the damage from spreading to Spain and Italy. We do not hold out high hopes for a speedy resolution though. The outlines of the solution have been known for quite some time, but the relevant political and regulatory actors do not appear to have the will or courage to take decisive action and implement it.

So where does this leave investors?

We think the status quo will continue for the near future: structural headwinds in the US economy will persist and the debt problems in Europe are still a long ways from being resolved.  Barring another massive monetary intervention by the Federal Reserve (QE3), we believe stocks will continue their slide lower. If there is a QE3 announcement too soon, we think there’s a pretty substantial chance it will be seen by the markets as a sign of desperation on the part of the Fed. We believe the chance that Congress manages to enact meaningful tax or budget reform, or additional fiscal stimulus, is negligible as we enter the presidential election cycle.

We have seen a few weeks of remarkable volatility within financial markets. Stock indexes have moved hundreds of points in both directions with some regularity. Interest rates, bonds and the FX markets have also seen very sharp moves in each direction. We believe this period of volatility will continue for the next few months as the European crisis grinds towards its inevitable conclusion and signs of stress in China make themselves apparent.

As a result, we continue to recommend a defensive portfolio for clients, with high quality, short term/intermediate bonds and cash making up the bulk of client holdings.

We think there will be an opportunity to buy high quality stocks on the cheap in the coming weeks/months and have targeted a list of companies using the following criteria:

  1. Large cap, US-based companies that have significant exposure overseas, particularly in developing markets
  2. Companies that have sustainable, attractive businesses and a history of paying dividends to investors through tough market cycles
  3. Preference for defensive/non-cyclical industries like consumer goods and utilities rather than banks or financials

We believe that, longer term, investments in these types of companies will perform well.  In the short term, they will provide cash flow through dividends, so investors will benefit by being paid to hold these stocks in the event the stock market trades in a flat or negative trajectory.

Buyer Beware: Has the SEC Uncovered a Green Con?

Buyer Beware: Has the SEC Uncovered a Green Con?

When UK-based CO2 Tech began trading in the public equity markets in 2007, they appeared to be an ambitious, forward-looking company poised to tackle global climate change head-on.  According to one of their early press releases, they referred to themselves as a provider of cutting-edge, sophisticated anti-global warming technologies along with a full range of expert consulting, and environmental products and services to businesses, industries and governments. In another release, they touted proprietary carbon absorption software designed to streamline pollution abatement technology in which pollutants are removed from air by physical adsorption onto activated carbon grains.

These press releases often featured enthusiastic quotes from company CEO, Helga Schotten, who seemingly knew how to talk the talk when it came to credentialing CO2 Tech’s climate change expertise and boldly predicted that CO2 Tech would revolutionize the way the world does business when it came to reducing carbon emissions. Investors took notice.

The company began trading on January 25th, 2007 at $2 per share, with light volume: only 1200 shares traded hands. But the volume on the subsequent days spiked enormously – particularly for a small, relatively unknown company – peaking at 12,204,795 shares on January 30th.  Curiously, despite this huge uptick in volume, the stock price quickly took a nose dive. After peaking at $7 on the second day of trading, by February 2th 2007, CO2 Tech was trading at $1.17 per share.  By February 9th, 2007 it was down to $.40 per share.  By May 2007 the share price had fallen below $.10 per share, never again to recover.  It now trades at less than 1 penny per share.

So what exactly happened to the company that pioneered the cost-effective heavy duty evaporator unit”?

According to a complaint filed by the Securities and Exchange Commission (SEC) on February 18th 2011, CO2 Tech was nothing more than a sham company run by swindlers capitalizing on the climate change craze, generating more than $7 million in illicit profits from unknowing investors.   The SEC claims CO2 Tech never had substantial operations, lied about their business relationships and expertise, and used off-shore entities to launder proceeds from the stock offering.  It was a classic pump and dump scheme — promoters artificially inflated the company’s share price through false press releases (the pump) and then sold these overpriced shares to public investors at a profit (the dump), leaving these unsuspecting investors holding the bag.

Pump and dump schemes are fairly common in the risky world of penny stocks, where smaller, often illiquid companies trade on the Pink Sheets an electronic quotation system with minimal listing requirements.  However, what makes this case unusual is the company in question specifically and quite brazenly targeted the SRI market. If the SEC charges are true, then the group behind this fraud used social responsibility as a means to attract and dupe investors.

What does this mean for the SRI investor?

Just because a company has issued shares and trades on an open market doesn’t necessarily make it a legitimate company with viable business prospects. Given the rapid growth in profile of socially responsible investments in recent years, there will undoubtedly be those individuals and entities looking to exploit this trend. As an SRI investor, it’s important to be vigilant not just for greenwashing, but, as alleged in this case, outright fraud.  When it comes to investing in individual companies, particularly those that are smaller entities with limited financial filings available to the public, it is essential that proper due diligence is conducted before any money is invested.  If you feel that you can’t conduct the necessary due diligence on your own and are still interested in investing, contact a professional advisor to help you.

Image Credit: fotdmike

This article first appeared on Just Means.