The socially responsible investment (SRI) movement continues to gain traction. The latest numbers from the Social Investment Forum show that an estimated $2.71 trillion out of the $25.1 trillion US investment market has been invested based on an SRI approach. That share is likely to continue multiplying–addressing environmental and energy independence issues are priorities for the Obama administration and essential elements in the economic stimulus plan. But as Christopher Walsh, manager of Alger Green, points out, there’s more than one way to approach sustainable investing. –Benjamin Shepherd

For starters, Chris, what are the benefits of sustainable investment?

Christopher Walsh: First of all, we think, obviously, that the sustainability movement is going to be here for some time because it’s making people think cleaner and save the environment. But we also think it’s advantageous to businesses to be sustainable.

The easiest example is Wal-Mart (NYSE: WMT); it’s spending billions of dollars to be sustainable. The company’s said it’s going to reduce its fuel costs by about five percent by 2013, and that’s going to save them $3 billion in terms of fuel charges. Many other companies are doing similar things. Wal-Mart and other companies are cutting back on packaging, which reduces weight, which reduces emissions in transporting and lowers shipping costs.

Alternative energy, on the other hand, takes a little bit longer to pay back. But once you reach that payback point, it’s advantageous and saves you money.

We also think that a lot of these companies are more forward-thinking and on the cutting edge; they’re the first to hit this frontier–and usually those are the best management teams that lead in their own field as well. We think these companies are usually the fastest-growing, most innovative companies in the first place.

With your example of Wal-Mart, and looking at your portfolio, you seem to focus on more mature traditional companies that are trying to “green up” their businesses. Why take that approach rather than invest in pure plays?

We actually mix it up. Obviously, Wal-Mart isn’t the next best thing, but they are doing a lot of sustainable things, and we could go into many companies that do that.

We’re not trying to run a straight alternative energy fund here. I think the main thing is that the alternative energy market right now is actually being held down and hampered by the fact that you need a lot of funding and you need to get debt to run these projects. Right now it’s very difficult to do that. That’s one of the reasons we’re not as heavily invested in those sorts of companies as we were a few years ago.

A couple of years ago we probably had about 10 percent of the fund in solar and other alternative energy products. We want to get back into these stocks once we think credit has improved.

Another thing that’s hampering the market is the fact that oil has come down so much, which makes grid parity a little further away. That’s not to say we’re not excited about alternative energy, because we are, but we own different companies with other sustainable qualities.

To be honest, looking at the bills that are going around Congress now and the new administration, we think there’s actually a really bright future, not to make that pun. There are tailwinds coming around from the new administration that we hope will get people more excited and ease the credit markets for these types of projects and make the stocks much more attractive.

Obviously the stimulus bill President Obama just signed is going to be a huge boon for the industry, but what will the longevity of that be?

To be honest about the stimulus bill, the biggest thing coming from there is just that it extends the production tax credits through 2013. But what’s also going on there, which we think is even more important, is that we think there’s a possibility that it will include about $80 billion in federal loan guarantees for alternative energy projects that would free up credit for a lot of these companies to invest.

Another thing that’s even more important than the stimulus is a bill circulating in Congress that will hopefully come out sometime this spring: a renewable portfolio standard that will apply across the country. Many states already have renewable portfolio standards, which mean that a utility operating in a given state has to use some percentage of alternative energy or it’s penalized for their electricity production.

There are two versions circulating now that will make it a federal mandate to use 20 percent in one and 25 percent in the other, by 2025. I believe President Obama has been a proponent of the 25 percent, so we think that would be the really big step to kick in a push for alternative energy in the next few years.

Nobody’s sure if it’s just going to apply to electric utilities because these are just drafts right now; what the final version will look like is still kind of foggy. But with monetary penalties for not meeting the standards, that brings parity down quite a bit. We think it’s going to be a very big catalyst that will get alternative energy stocks moving again.

Where’s the incentive to innovate when oil’s so cheap?

I think right now, if this new bill passes, that’s a heck of an incentive. People are going to be forced to. We did see the oil spike last year, and people do see what could happen if we depend so much on foreign oil. I think that woke people up to this is an important field.

I think people will innovate and push and prices will come down as people get into the business, and we’ll get closer to grid parity going forward. There are companies that are leading the field in terms of being a low-cost producer, such as First Solar (NSDQ: FSLR), which we think has a big advantage as an innovator in the space.

Europe and Asia have been pushing alternative energy for years now, but your portfolio is very US-centric. Why is that?

A lot of these companies we hold do supply everywhere, but the big change is coming in the US–other markets already being mature. Even the auto sector is going to cleaner cars with lower emissions, though Europe and the Middle East are much further ahead with those technologies. So the real growth is going to be in the US.

I’d say this is a perfect opportunity for the US to become a leader in an industry, and I think with the new party in office there’s going to be a push. Right now, one of the worst problems in the economy is jobs, and consumer spending has been the leading factor in our GDP for so long. Now we have an opportunity to create jobs and make us a leader in a field that’s going to be a true growth field over the next several years. On top of those benefits, such a transition would help our environment and lessen our dependence on foreign oil.

I think the US is a great place to be invested in alternative energy.

If someone wants to get into SRI investing right now, where should they start?

We take a barbell strategy, buying in two buckets. First, they should take a totally mature company like a Google (NSDQ: GOOG) or a Wal-Mart that’s doing these innovative things, but also boasts a great business and reliable cash flow. In the other bucket, take companies at the forefront of innovation. Examples of the latter might include Vestas Wind Systems (OTC: VSWYF), Fuel System Solutions (NSDQ: FSYS) or First Solar (NSDQ: FSLR)–all companies where we see huge potential for the future. That way you get paid both ways.

I do think if it was a better market, and people were going further out on the risk curve, investors would be buying these alternatives more than they are right now. In today’s credit environment and stock market, people are flocking to the safety of the Wal-Marts of the world.

I think that’s where we benefit because we can go more toward the safety stocks in the bad market, and then, when we think things are getting better, we can shift over and get more aggressive, which we would like to do.

What are your favorite investment candidates in the more mature markets?

Wal-Mart has been making a huge effort here. They’ve come out and said that their goal is to use 100 percent renewable energy. They’re nowhere near that, obviously, but they’re in the process of purchasing wind farm generated energy from Duke Energy (NYSE: DUK) that’s going to provide about 15 percent of the energy used in 360 stores in Texas. They’re equipping about 25 locations in Hawaii and California with solar panels and reducing excess packaging on their own brands—an initiative that’s expected to result in a 5 percent cost savings by 2013.

Another company would be Google which is a very sustainable, mature company in terms of knowing its business. But they’ve also made a commitment to be carbon-neutral by the end of this year. They’ve installed solar panels at the headquarters in California, and they just announced something they’ve developed called the PowerMeter, which allows consumers to actually track their energy use in their homes and businesses themselves. Those guys are always on the forefront.

How about in the pure play alternatives?

First Solar is an outstanding company and the clear leader in its field. The cost structure is significantly below anyone else in the thin-film industry, and 80 percent of their production capacity is already sold out at set prices, so they already know what kind of prices their getting in the future. They have goals to reduce their costs even more going forward, so their prices will continue to come down, allowing them to hold that competitive advantage.

Another one we like is Covanta (NYSE: CVA), which operates waste-to-energy facilities. Waste-to-energy now accounts for about 10 percent of renewable energy production in the country, and these guys are by far one of the leaders in that trend. They just announced a new facility they’re opening in Wales.

Waste Management (NYSE: WMI) also just got approval to open a new waste-to-energy facility here in the US, which is the first time such a facility has been approved in at least 15 to 20 years.

Covanta’s the clear leader in the industry, but we could see more of these facilities come online here in the US and both of these are great companies.

Another place on which we’re focused is autos, though it’s tough to be invested in anything auto-related these days. But there’s a company we think is really interesting, Fuel System Solutions. They make conversion kits for cars that allow them to run on compressed natural gas (CNG). It’s a much cleaner-burning fuel.

What’s really interesting to us is that not much CNG is used in the US–technically 0 percent, though there are some cars that do use it. But in Argentina about 23 percent of vehicles burn it, and in some parts of the Middle East more than 70 percent of vehicles run on CNG.

We think this could be another big thing with this administration, as they have to help out the auto industry we think it will put some pressure on them to switch their fuel capabilities to include CNG. Obviously, that’d be very big for Fuel System Solutions.

Another company is we like is LKQ Corporation (NSDQ: LKQX), which stands for Like Kind Quality. Their biggest business is recycled auto parts. When you get in an accident and go to your auto shop, they call and get quotes for parts, and they can get recycled auto parts for much cheaper price than the original equipment manufacturers.

How this works is, to be a preferred vendor for insurance companies, the garage will try to use alternative parts first to keep costs down. LKQ is by far the biggest provider of recycled parts in the country, and recycled parts continue to take market share.