Where the Smart Money Goes Next

As thousands of young scholars bid farewell to familiar homes and high schools to enter college in the fall, it made me wonder where the smart money will be going (other than the contents of my son’s 529 account, which I know is headed to Penn) as it leaves the old economy behind and moves into the 21st Century. Ernst & Young may have the answer.

A new survey from the Big Four accounting firm shows that more than two thirds of major corporations globally plan to spend up to 5% of their revenues on carbon cutting initiatives over the next two years. For a company with $1 billion a year in revenues (the minimum sized company in the survey) is that just a $50 million charitable donation? Hardly — the shrewd executives surveyed plan to make a lot of money from those investments.

Many report they will invest in energy efficiency measures that also cut carbon, which are quickly repaid from savings on energy bills and generate handsome ROIs thereafter. Others, especially in the auto, consumer products, and technology sectors, report a significant competitive advantage with customers by lowering carbon footprints. Think of how Ford, Walmart, and Apple are already proving that thesis in the marketplace, for example.

The survey also uncovered that analysts are now often linking a company’s approach to cutting carbon and it’s valuation. That inspires execs to push for carbon reductions within their supply chain too, in part because the reduction of waste means lower costs in finished goods and higher margins for those Wall Street analysts to admire. This data suggests a tipping point - - the majority of companies and consumers are now cutting carbon (well ahead of government regulation, by the way). So if smart money is moving to reduce carbon, what spending is taking companies in the opposite direction?

I thought no executive could be more out of touch with the realities of both economics and public opinion than BP’s Tony Hayward, but decision-makers at Valero and Tesoro recently spent $3 million to put a measure on the November ballot in California to effectively kill that state’s Global Warming Solutions Act (aka AB32), clearly living in the Dark Ages compared to the marketplace highlighted by the Ernst & Young survey. Actions by these oil giants reveal serious disconnects with modern consumers and regulators alike, but their business models are even more out-dated.

My wife drives a Honda GX, powered by compressed natural gas (CNG), a fossil fuel that is far cleaner and lower in carbon emissions than petroleum fuels. We pay typically about a buck less than gasoline (for a volume of CNG equal in energy to a gallon of gasoline), but...our little secret has gotten out, as the buses and the cars lined up at a CNG station in Los Angeles last week clearly demonstrate.

Perhaps still more dispositive however, is that while several automakers sell factory-built CNG vehicles, a growing industry is forming around converting existing gasoline models to run on CNG (almost any car on the road to day could run on CNG or hydrogen). As millions of Americans look for ways to reduce their own costs and carbon footprints - - and look for ways to turn their anger over BP’s disaster in the Gulf into action - - watch for this trend to accelerate. And on the same day I snapped the photo of the lineup at the CNG station, another fueling choice was being unveiled by Honda a few miles down the freeway - - the home hydrogen filling station.

Unveiling a device that looks similar to WALL-E’s sleek robot girlfriend, Honda is changing the way we get from A to B with its solar-powered home hydrogen fuel maker. I drive the Honda Clarity, the first hydrogen powered electric car to roll off a regular assembly line and into the hands of real consumers, which could refuel with this appliance. Add these vehicle innovations and the Ernst & Young survey results to the recent announcements by Nissan and Tesla about new production of battery-powered electric cars and the trends are clear - - except apparently to the nineteenth century business model of BP, Valero, and Tesoro.

While some are boycotting the products of those companies to protest oil spills and positions on climate change, these data points suggest that the smarter thing to do would be to divest your portfolio of their stocks and replace them with forward-looking companies like Honda and Clean Energy (major CNG fueling station operator). It’s where the smart money is headed next and can make your portfolio look more Ivy League and less likely to lose value in the School of Hard Knocks.

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