Progressive Investor Sample Article
The 2006 SB20: World's Top Sustainable Stock Awards; Judges, Criteria, Discussion; Meet the SB20: Capsule Company Profiles
Issue 37: June - July 2006
Introducing ... The 2006 SB20
5th Annual World's Top Sustainable Business Stocks
Public Companies Changing the World (for the better!)
This is the fifth year for the SB20, the top Sustainable Business stocks worldwide. As in past years, we worked with a group of judges who are leading sustainability stock analysts to choose the companies.
We changed the focus of our stock picks this year a bit: rather than trying to determine which 20 companies are the top in the world, we identified 20 companies that, through their products or actions, contributed substantially to the advance of sustainability this year.
Our goal is to create a list that showcases publicly-traded companies leading the way to a sustainable society. To make the list, companies must be strong on both the sustainable and financial side, but it is not a "buy" list (great companies don't always make great stocks) and it does not constitute a diversified portfolio based on industry, market cap or country allocations. It is simply a list of our favorite companies that are both strong financial and sustainability performers - at this time.
Our judges decide on the 20 companies that make the list based on the following
Sustainability and Financial criteria:
The most exciting companies in terms of how they are conducting their business, or in the technologies they are advancing that solve environmental or social problems.
A company has a a stock price over $1, is selling products and is profitable, or close to it. The company's stock must be considered investable by our judges.
Our judges are some of the most respected environmental/ social analysts in the world:
Matt Patsky, Managing Director, Winslow Green Growth Fund
Patrick McVeigh, President, Reynders, McVeigh Capital Management
Max Deml, Editor & Publisher, Oeko Invest Publishing Ltd
Ton Rennen, Senior Sustainability Analyst, Triodos Bank NV
Matt Patsky is a partner at Winslow Green, known for its Winslow Green Growth Fund, a mutual fund which has produced outstanding performance. Patrick McVeigh is one of the original social advisors, having managed client SRI portfolios for some 15 years.
Max Deml publishes Oeko Invest, an Austrian version of Progressive Investor. In print (only in German) for 15 years, he has a broad view of companies from around the world, and provides an insider's perspective on European companies. Ton Rennen joins us this year from Triodos - one of world's few completely sustainable banks - with headquarters in The Netherlands. In addition to banking services, Triodos has private equity funds, microfinance funds and several mutual funds.
Before the judges conferred, we came up with the universe of companies by gathering nominations from the judges as well as other expert analysts in the field:
Terry Foecke, Managing Director, Investment Research, Materials Productivity LLC
Carsten Henningsen, Co-Founder & Principal, Portfolio 21 Mutual Fund
David Schoenwald, President, New Alternatives Mutual Fund
Mark Cox, Founder & Chief Investment Officer, New Energy Fund LP
Gerard Reid, Portfolio Manager, Hornet Renewable Energy Fund
Rob Wilder, Founder, WilderHill Clean Energy Index
We also partnered with SiRi Company, an umbrella SRI research group that brings together company social/ environmental analysis from 11 research groups around the world. We are grateful to them for providing company profiles which helped us confirm and validate our analysis of nominated companies.
Table 1 presents the SB20 List for the past three years. The number of asterisks *** next to a company's name indicates the number of years it has been on our list.
The SB20 List
|Baldor Electric Co.
|Baldor Electric Co.**
Canon (NYSE: CAJ)
|Chiquita Brands International (NYSE: CQB)
||Best Water Technology*
|East Japan Railway
|East Japan Railway **
||Energy Conversion Devices* (Nasdaq: ENER)
|Green Mountain Coffee Roasters
||Green Mountain Coffee Roasters
||Gamesa Corporation Technologica *
||Green Mountain Coffee Roasters ******
|Herman Miller ****
|Natura Cosméticos *
(Sao Paolo: NATU3.SA)
|JM Inc. **
|Philips Electronics N.V.
|Novartis AG *
||Ormat Technologies *
|Svenska Cellulosa AB
|Philips Electronics NV**
(Geneva: SWX: PRWN)
||Renewable Energy Corp*
|Triodos Groenfonds NV (Netherlands: TRIO.AS)
||Sharp Corp. **
|United Natural Foods
|Timberland Co. ***
|United Natural ****
||Wainwright Bank **
|Whole Foods Market
||Whole Foods Market
||Whole Foods Market *****
General Electric (NYSE: GE)
ITM Power (AIM: ITM.L)
We consider every company that's been on the list throughout the years to be a model of excellence. Some of the leaders that aren't on the list this year are core sustainability leaders: Electrolux, Canon, Chiquita, Novozymes, Vestas, ST Micro, Timberland, Henkel, Herman Miller and Umweltbank, for example. It is only our desire to present as fresh a list as possible each year that took them off the list.
Another factor in choosing companies is to have some spread among industries, and to include small and large companies from various regions of the world. Although we mostly discuss the environmental side of the sustainability equation, most, if not all of the companies also stand out on the social side.
In the end, we hope the SB20 list as a whole helps you see the sustainable businesses/ technologies that are taking us into the future - and what it takes to get there in the various industries these companies play in.
Renewable Energy Companies
Renewable energy is obviously the hottest sustainable business sector this year; half of this year's list consists of leaders in wind, solar, geothermal and biomass.
Solar companies have been the true stars over the past year. We chose Conergy, REC and SunPower to represent the group, but we could easily have included Q-Cells, SolarWorld, Solon, ErSol, Evergreen, Suntech - the list is long. All the major players in the space have superb management, are selling everything they can make, and have great stock performance. They are fundamentally sustainably oriented companies focused on low energy prophecies, reducing and recycling waste, and delivering a product through a green brand image.
Other companies on this year's list that have a solar component, but are also involved in other areas are Energy Conversion Devices, Sharp, Abengoa, Acciona and Gamesa.
According to Michael Rogol, former solar analyst and consultant to the industry, the top three companies likely to become the Intel of the solar industry are Sharp, REC and Hemlock [privately held]. Add QCells and Conergy and you've got the top five. He believes they have the potential to establish a dominant market position with distinctive products and brands.
Runners up that could catch up with them are: Evergreen, Motech, SolarWorld, SunPower and Suntech.
Why did we choose Conergy, REC and SunPower? They are innovators - each in their own way - with key technologies and strategies that will move the field of solar energy forward.
Conergy is unique in that it provides everything a customer needs using solar: solar electricity, solar heat, solar hot water and solar air conditioning. It also can combine small scale wind and biofuels with solar, offering customers a complete renewable energy solution. The company has a worldwide presence and doubled revenues in 2005. They also use SunPower's panels, the best on the market right now.
REC, on the other hand, stands out because it is the most vertically integrated solar company, producing silicon, wafers, cells and modules.
"If you had an option of all the different solar panels," says Mark Cox, "you would pick SunPower's. The cost per watt is the lowest on the market and it's the best looking solar panel available." Matt Patsky adds that SunPower is a major player in the U.S. market and, compared to Evergreen, is a larger player that's reached critical mass.
Ton Rennen also likes ErSol, which is involved in much of the value chain as well as innovating in thin-film solar and silicon recycling. The company is also well positioned financially.
QCells is another great company with sky-high revenue, that's the most efficient solar cell-maker in the business. Its EverQ project with REC and Evergreen gets lots of praise, and QCells' stock is currently undervalued. Gerard calls them the "Toyota of the solar business." Yet, the company only makes solar cells, and could be at risk because its success is at least partially pegged to strong German solar laws. SolarWorld was on our list last year and is also a fantastic company with unbelievable stock performance.
All the judges are impressed with Energy Conversion Devices, which derives most of its revenues from solar, but is also very active in energy storage. Ton Rennon summarizes their feelings well: "For me, there is no company more innovative in the renewables space. Its thin film solar in particular is very important for the future." Mark Cox adds, "Both their solar and battery discoveries will have a huge impact on those markets. They have the potential to completely transform electronics. This company will be a significant player - a $65 stock in my opinion."
Then there's Abengoa. Few companies are so diverse in product and as committed to social change in society. This multi-division company is involved in a diverse array of environmentally oriented business lines including solar, biomass, recycling, and desalination plats. Reading Abengoa's Sustainability Report, it's clear the company is driving sustainability throughout operations.
Abengoa designs, finances and builds all kinds of solar plants: PV, thermal, parabolic cylinder and parabolic dish collector plants. It's the world's second-largest bioethanol producer and a leading innovator in cellulosic biomass, currently building the world's first commercial scale biomass plant. It also builds solar, biomass, and cogeneration plants for customers.
On the wind energy side, we have Gamesa, the world's second largest turbine manufacturer (after Vestas). Gamesa is the only major turbine manufacturer that also develops wind parks, and has a solar division. Gamesa Solar manufactures equipment and constructs solar farms on both the PV and thermal sides. GAM is also the only profitable wind company right now - even Vestas, which was on our list for four years and is a wonderful company, is struggling to return to profitability due to the turbine shortage.
One of the judges was against including Acciona because of its involvement in such a wide range of conventional industries, but the company is impressively transforming from its construction conglomerate roots to sustainable services, particularly renewable energy project development. It carries the distinction of being the world's third largest wind project developer and is also a major player in solar project development, with emerging interests in biodiesel/ biomass and small hydro.
For sustainability aficionados like us, Acciona warms the heart. For a company involved in so many high impact businesses from highway construction to real estate development, Acciona clearly elucidates in its 2005 Sustainability Report (its first) how it is embedding sustainability into every line of business.
Ormat is an easy choice for the SB20. The world leader in geothermal energy, Ormat is a fantastically managed company with a great stock (if you'd bought it a year ago!). Ormat designs and builds its geothermal plants and sells the electricity. One of its special strengths is its modular power unit - which can recover otherwise underutilized energy that's generated from a variety of power plants.
Energy Efficiency/ Storage
A major barrier in the mainstreaming of renewable energy is our current inability to store it for use when it's needed. Wind blows intermittently and solar works when the sun shines. In hybrid cars, when you put your foot on the brake, you make electricity, but where does it go?
Ultracapacitors are rather dull products, but they offer a very important solution to this problem. Maxwell Technologies is the leader in the field. Says Mark Cox: "Hybrids need large amounts of electricity very quickly and they also need to store it very quickly - you produce scads of kilowatts when you brake, which needs to go somewhere immediately - ultracaps are the perfect bucket. They capture all the energy created by braking and pump it right back into acceleration. The technology will bring down the price for hybrids."
Terry Foecke notes that Honda's coming out with a conventional car that gets 65 mpg in California next year. They did it partially using ultracaps. Although he believes Maxwell will fly high for coming years, it's pretty easy to make ultracaps, and at some point, he says, we'll get them all from China.
Matt Patsky says, "I think the technology is important and exciting. We've been putting Maxwell in our portfolios - it's ramping top line and should be profitable this year. It's hard to say a company is reasonably valued though when it's not making money yet - I wouldn't pay much more than $22 for it."
Philips Electronics was on our list a couple of years ago and came off because of temporary financial difficulties. Some of their big expansion markets were gobbled up by the Koreans and now the Chinese," says Terry Foecke. Since then they've revised their strategy a bit, going for higher end products, for example, he says.
Terry agrees with Ton when he says, "Philips and Electrolux [on our list for four years] are the two big capital goods manufacturers where it's always easy to make the sustainability case; they have fantastic engineers really focused on it.
What's new for Philips, which has always been a leader in efficient lighting, is their recent acquisition of Agilent's LED business, and soon after announced breakthrough efficiencies for white organic LEDs. "A big company ploughing into general illumination is exactly what you want to see," says Terry.
Sharp is the world's largest solar manufacturer, but since it still constitutes a minority of revenues, we're focusing on the efficiency side, its other strategic growth area. Humans love TVs and they're growing ever larger and more energy consuming - Sharp has a 30% share in the LCD TV market and is making a special effort to root out toxic components and make them energy efficient. In fact, 74% of Sharp's sales as a whole come from "Green Seal" products - a process the company developed based on life cycle analysis. It would be great if Sharp took more of a leadership position in product take-back.
We finally have a water company on the list for the first time. It's rare to find a water company that we consider sustainable, going above and beyond just making filters and using chemicals for treatment.
Austria's BWT Water Technology fits the bill. Max Deml knows the CEO and is impressed by BWT's efforts and success in eliminating chemicals used in water treatment. "The company looks for environmentally and socially responsible companies to buy and has bought many European companies, but hasn't found one in the U.S. yet." They're also getting into water desalination and have a project to develop fuel cell membranes using their technology - one of the CEO's special interests, he says. Ton adds, "This is a large water company that sticks to environmental principles."
Real Estate Development
There aren't many (if any) publicly traded green building and development companies, but JM, Inc., a Swedish developer, does more than construct buildings, it builds communities.
Comments Terry Foecke, "Big companies that use green construction techniques are solving problems that will really change the world. Gigantic conventional firms look to developers like JM to find out what works."
The issue for the judges regarding JM is that much of what they do is driven by Sweden's extensive regulations which limit suburban sprawl and require energy efficient construction, among other factors. Terry says, "Sure, you can look at JM and say they're responding to regulatory drivers, but we don't have them elsewhere in the world and we might not for a long time. They are really changing the game because they're finding materials and processes that are most cost effective."
JM does go above and beyond Sweden's regulations, especially with its building materials database that informs product selection. It's a strong company with great stock performance that anyone interested in green building will want to know about.
Precious Woods, the only publicly traded sustainable forestry company, is small company based in Switzerland. It's mission is to preserve forests through sustainable management, provide income to the people that share the forests, and to re-forest degraded pastureland in places like Costa Rica.
Max Deml says, "They are a model for the role business can play in a sustainable society - and they do it profitably."
Precious Woods operates primarily in Brazil's primary Amazon forest, and we're glad to know they are there. The company spent lots of money 14 years ago pioneering the same forestry practices that were later codified by the Forestry Stewardship Council (FSC).
It is now widely accepted that simply purchasing tropical forestlands is not enough to protect them. Only when the local population views the forest as a source of employment, of income, and of economic activity - will they protect it. PW has created thousands of new jobs in Latin America. It uses stringent, very low impact forestry methods - visiting a given area every 25 years, harvesting only five trees per hectare. PW also harvests 40 species of trees rather than only five or six well-known commercial species, another important way to maintain biodiversity.
Home Depot, Gibson Guitars and the German Government (for sea berms to protect the Baltic seacoast from erosion) are some of its biggest customers, but PW sells products worldwide: small parts for the furniture and flooring industry in Asia; small manufactured parts for barbeques, wheel barrels, hammocks and decking in the U.S.; and products for decking and marine pilings in Europe.
The company was the only IPO in 2002, a miserable year on the stock market. They were able to raise capital in such a difficult year because timberland assets tend to be negatively correlated with stock market performance.
Although many major pharmaceutical companies have extensive environmental management systems, such as Pfizer, Johnson & Johnson and Glaxco, it's hard to find one we really admire. Animal testing is required by law, but we're still uncomfortable with it, and even though pharmaceutical use of GMOs isn't considered the problem it is in food, which takes it off Max Deml's list.
Novartis joined our list this year because of the CEO's outspoken advocacy of climate change solutions and the new Sustainable Wage Program. The company surveyed all its workers around the world last year asking whether they were being paid a living wage. Those that weren't got immediate pay raises. Suppliers are being asked to follow suit this year.
Patrick McVeigh says, "Novartis could have a big impact on the salaries other companies pay through this program."
Ton Rennon concurs, noting that Triodos recently studied 21 pharmaceutical companies worldwide, and on a wide range of sustainability issues, Novartis took first place. Triodos doesn't invest in them however because, along with other companies like Nestle and Danon, they often violate codes that prevent aggressive marketing of breast milk substitutes in developing countries.
Natural Foods/ Natural Products
Green Mountain Coffee Roasters started by making specialty conventional coffee, but more and more its brand is associated with Fair Trade and Organic coffee. Each year, sustainable coffees become a larger proportion of sales, and are an increasingly important driver for growth. GMCR has been on our list all five years.
A couple of years ago, Green Mountain started supplying Newman's Own coffee - a key partnership, which resulted in McDonald's signing on to sell double-certified coffee (organic and fair trade) in 650 New England restaurants. "This is the start of bringing sustainable coffee to the masses," says Patrick McVeigh.
United Natural got on the list this year "under the wire." The largest natural products distributor in the U.S., UNFI was founded by pioneers in the organic food movement, and has always taken a strong stand on the importance of organic products. They are a sterling company when it comes to handling and transporting organic food, recycling and other aspects central to this kind of business.
Then why do we hear things like, "United Natural is a good company, but they aren't very innovative. For the last 10-15 years they really haven't changed much," says Max Deml.
While they have a very positive impact on the environment through their product lines, they have a negative impact from trucking emissions produced from transporting them.
"Michael Funk, the original CEO, is now back in office; he's much more interested in the innovations we're looking for," says Matt Patsky. "In fact," he says, "they already reduced transportation costs during the last quarter because they're doing a better job on logistics, to minimize the distance they're traveling and the amount they're spending on fuel."
Meanwhile, Whole Foods Market, on our list every single year, continues to innovate. The world's largest retailer of organic/ natural products is an exemplary model all around - from its product lines to internal environmental practices.
Natural foods are entering the mainstream largely due to Whole Foods' success. It's not easy introducing the public to food, cleaners, personal care products they're not familiar with - Whole Foods has created an environment where a wide range of people enjoy shopping. Their private label products give WFMI high margins, but they also make products like natural shampoos inexpensive. Stores incorporate green building features, the company purchases 100% wind energy, is expanding composting programs, shows courageous caring for animals, and on an on.
Are they perfect? No, even Whole Foods has room for improvement (don't we all?) We'd love to see WFMI find innovative ways to reduce packaging, for example. Over the years, the SRI community has filed shareholder resolutions asking them, for example, to eliminate a questionable ingredient in shampoos, and to label food for GMO-content.
In a recent shareholder meeting, CEO John Mackey got annoyed, lashed back and shut down the discussion - how can the SRI community take us to task when we're doing so much? Perhaps he could have handled it more diplomatically, but we still think Whole Foods is the greatest of companies.
This year, we're putting Wainwright Bank back on our list. This small, regional bank that serves the greater Boston area came out with the first company-specific Certificate of Deposit (CD) issued in the United States. The beneficiary is Equal Exchange, an employee-owned pioneering Fair Trade company that sells coffee, cocoa and tea. When you purchase an Equal Exchange CD, the money goes directly to them to expand their business. WAIN is also notable for committing 40% of its commercial loans to community development.
German Umweltbank was on the list last year - another great example of a small bank that only lends to environmentally beneficial projects and companies such as wind parks, solar plants and green buildings. Most of its loans go to people who want to put solar panels on their homes.
General Electric deserves an Honorable Mention this year because of its Ecomagination Initiative, and especially because of its symbolic impact on the world's business community. When GE talks, the world listens. GE proclaimed that green products make green (money) and that's the direction the company's going in.
Says Terry Foecke, "The fact that GE is talking about green products in terms of profits, strategy and markets is huge. I have clients all over the world who say GE is the reason they are in business."
"GE has made an incredibly meaningful contribution in the move toward sustainable business practices this year," says Matt Patsky. "I wouldn't be surprised if it becomes a top sustainable company two years from now. We'll see how aggressive the CEO is, but I can see them shedding some of their "bad" businesses off.
That's why GE isn't on the list - because the company still has too many unsustainable product lines, such as defense contracting, nuclear arms manufacturing, and nuclear plant construction (which CEO Immelt insists is necessary and will continue to participate in).
Ton Rennon adds, "GE's been acquiring interesting companies like Zenon and Ionics in water, but it's such a huge conglomerate that is involved in all sorts of activities not related to sustainability, we would never think of investing in them.
In fact, GE has been making energy efficient, water-saving and many other sustainable products for a long time. They are a major wind, water and solar player. What's changed is they've put a new twist on them, and rolled them up into an effort they are labeling "green," and in doing so, they're saying to the business community, "this is a smart, profitable thing to do."
We're giving HSBC an honorable mention this year for leading the big banking world on sustainable initiatives. It's the first bank to commit to being climate neutral, and more significantly, is showing the most progress in implementing the Equator Principles - which commit them to using sustainable guidelines when making financing decisions.
But what's happening on the ground? Have they stopped financing environmentally and socially destructive projects like pipelines through rainforests and huge dams? Are they clearly showing a preference for financing life-enhancing projects instead?
HSBC receives Honorable Mention because out of all the banks, it has developed the most sector policies, covering forests, dams and chemicals. Specific policies, followed by concrete targets and data on whether the goals are being met, are essential to putting the Equator Principles into practice.
According to SiRi Company's profile on HSBC, the bank continues to invest in controversial projects/companies, such as the Thai-Malaysian pipeline, polluting mining projects, and Chinese Henan Rebecca wigmaker that makes use of forced labor.
The analysts at Portfolio 21 are impressed with HSBC's progress. Says Carsten Henningsen, "We met with HSBC in London. They are definitely incorporating environmental risk assessment into the lending/investment process, especially on the project financing level. As one of the largest banks in the world, with the volume of projects they finance, you'll likely see some negative loan stories."
Ton Rennen says, "Big banks are not yet at the stage of providing convincing evidence that they apply environmental risk assessment in lending/investment processes. The most progressive banks have policies and are beginning to implement them.
"I wouldn't include any big bank on the SB20 List yet - maybe in 5-10 years," says Max Deml. "There's a 100 to 1 difference between what big and small banks like Umweltbank are doing. I'm sure there are 10-100-fold other destructive projects the banks are still financing beyond what SiRi identified."
Indeed, I learned a lot about when I participated in the conference call announcing the revised Equator Principles. In response to the question, "China is planning to dam most of its largest rivers. What role would banks that have signed onto the Equator Principles play in that?" The representative from Citicorp said, "They are going to build dams one way or the other. Our job is to make sure they are built with the greatest respect for environmental and social considerations." [Our interpretation would be that such projects would be rejected by banks].
Says Indigo Teiwes, Sustainability Analyst with Portfolio 21, "I have serious doubts about whether the Equator Principles can instill real change in the finance industry because the results completely depend on a company's interpretation and implementation. HSBC is doing far more than just signing the Principles. Its development of sector policies enables us to see more clearly exactly how it uses environmental screens in the evaluation process. HSBC also committed to becoming carbon neutral and is doing good internal environmental work.
Says Gerard Reid, "I will make a bold statement - ITM Power is on course to be a massive energy player." Mark Cox concurs: "Will a big carmaker suddenly announce a commercial fuel cell or hydrogen vehicle using ITM technology in the next couple of years?
"While Ballard Power Systems spent 10 years promising fuel cells in our cars, they forgot to investigate how to make them cheap enough to actually buy," he says.
What's remarkable about ITM's technology is its ability to increase the efficiency and capacity of renewable energy production. Most people drive about 25 miles a day - what if you could generate a gallon of hydrogen by plugging your electrolyzer in overnight? The technology is actually slightly more efficient - you could get 90% or more of your daily driving distance… from renewable energy.
Yet, the judges do not feel it's responsible to put a development stage company on the SB20 List. They haven't sold a product yet - who knows if they will survive? Max Deml summarizes the group's feelings: "It's a problem to have a company on the list which may be bankrupt next year. No matter how great its prospects, companies without sales should not be on the list."
Matt Patsky elaborates, "ITM says they may have a commercial sale in 2008. They don't have a date for profitability, but my guess is it could be around 2010. There will likely be opportunities to buy the stock at less than half the price it is now over the next couple of years."
ITM's valuation is sky high. "The stock is fraught with high expectations," says Cox. "They're about to come out with predictable year numbers in July; they have lots of cash on hand, but if they don't start making revenue the stock price could drop to fifty cents."
"Some might say that a £200 million market cap is a huge amount of money to pay for a company without revenues. I would counter that by saying the company appears cheap when one considers the commercial opportunities facing the company," concludes Gerard Reid.
We laughed during our judge conference call when we talked about some of the companies we were considering for the List this year. "Green Mountain Coffee is great," quipped Matt Patsky, but it's actually McDonald's that is selling the coffee." "Maybe they should go on our list," I said with tongue in cheek. Patrick McVeigh joked that since Wal-Mart is now the biggest seller of organic food, so maybe they should go on the list too.
This year we gave honorable mentions to behemoths General Electric and HSBC, companies we never would have considered several years ago. We asked each other what we thought the SB20 List would like 10 years from now. It could well be filled by some of the largest companies in the world that are just starting to take our life's work - sustainable business - to heart.
What do you think about our Honorable Mentions? Would you put GE on the SB20 List? How about HSBC to acknowledge the beginnings of real progress? Our judges were split on it, and we'd like to hear your opinion.