Tuesday, May 15, 2007

Due Diligence Dilemma

Last week, in the post “Low Hanging Green Fruit,” I suggested new investment strategies focused on “green companies.” One theme followed operations that were cleaning up polluting processes and products. Another theme emphasized companies that are reducing their carbon footprint, i.e. reducing use of oil and gas as well as petroleum by-products like plastics.

The title of that post may be a bit of a misnomer, in as much as the fruit might be just out of arms reach. This is because the information, which investors would need to separate companies with reduced carbon footprints from those that remain petroleum hogs, may not be readily available. This presents a bit of a dilemma for investors.

Are public relation pronouncements sufficient evidence that corporations are taking action? Does the SEC need to step in and require a note on sustainability in management’s discussion and analysis? Should public companies be required to report carbon debits on their balance sheet to show the amount of carbon emissions generated by operations over a certain benchmark?

Although the idea of carbon debits on the balance sheet is compelling, I doubt it is workable. It would take decades just to agree on the appropriate benchmarks. Even the most environmentally conscious investors among us would probably blanch ghostly white to see the impact that might have on equity.

As to announcements in the press, there is already plenty of public posturing. The idea is to invest in operations that are making a real difference in for the environment. Public posturing is probably not enough.

For the time being I favor a set of notes on sustainability in public filings. Management could embellish, but would probably strike a more serious and honest tone if the SEC handed out guidelines for the commentary. It is just a start, but would give investors greater clarity on which companies are truly green and which are just striking a pose.

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