Investing During a Stagnant Economy: Part 1

Most people think the current stagnant economic conditions will continue for the near future. Where might sustainability investors put their money to work during this kind of climate?

In this issue we'll look at what four experts suggest the best bets are in the public markets. Since the public markets are in the dumps these days, might it not also make sense to look at putting some of your money elsewhere?

In Part 2, in January's issue, we'll look at what's happening in the private side of sustainability investing - in the angel and venture capital markets. Since so many of you are interested in the private side, we'll make it a permanent feature going forward. We'll interview venture capital companies and angel investors about who they are investing in and why and introduce you to some of the companies.

Even if you don't want to or don't have the money to invest in private companies, it's important for stock investors to know what's happening there. And it's exciting to know about the small environmental companies that are changing the world ... and getting funded to do it.

We'll also look at another very interesting area, community investing. In these times, making 4% interest funding sustainable community development looks pretty good!

General Investing News

In response to increased demand for information on corporate governance, Standard and Poors announced a set of new services to assess corporate governance performance. Its new U.S. Governance Services Unit staffed with 15 people offers a Corporate Governance Score, a Corporate Governance Evaluation Service and a Corporate Governance Customized Research research service. S&P will present an annual report card that rates companies on how well they disclose a wide range of information.

S&P also released the white paper, "Global Transparency and Disclosure: Overview of Methodology and Study Results' United States."
The study, which focuses on S&P 500 companies, shows there is a wide discrepancy in reporting and concludes that greater disclosure correlates with lower market risk and higher stock valuations.

Moody's Investors Service, the credit rating agency, is overhauling the corporate governance assessment in its existing ratings. The goal is to include corporate governance in core credit rating analysis.

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The European Commission is backing a Europe-wide, voluntary, accreditation standard for SRI funds. Paris-based European Sustainable and Responsible Investment Forum ( Eurosif ) is expected to unveil the standard by spring 2003. With the many new SRI fund entrants, there is concern that some are using an 'ethics lite' approach, claiming to apply strict social and environmental criteria but actually doing little in reality.

The standard will be similar to the 14-point code launched earlier this year by the Dutch Association of Investors for Sustainable
Development (VBDO). It encourages SRI fund managers to disclose how they choose investments and the methods they use to assess companies. It also asks them to advise companies on the changes they need to make to meet the fund's criteria.

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After adjusting for risk and controlling for investment style, there seems to be no statistically significant difference in returns between SRI funds and conventional funds, according to a study that won this year's Moskowitz Prize, which recognizes outstanding social investing research. On average, SRI funds seem to be a little bit less risky than conventional funds.

Previous studies have not always used the most modern performance measurement techniques, say the authors. In this study, the multi-factor Carhart model, considered the most advanced tool for comparative analysis of fund performance, was employed. Researchers examined 103 SRI funds in Germany, the US and the UK between 1990 - 2001.

"International Evidence on Ethical Mutual Fund Performance and Investment Style," by Rob Bauer and Roger Otten, Limburg Institute of Financial Economics (LIFE), University of Maastricht; Kees C. G. Koadijk, Centre for Economic Policy Research (CEPR), Erasmus University Rotterdam.

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Here's an easy way for environmental investors to distinguish among companies. Look at whether they are an EPA Energy Star Partner.Innovest Strategic Value Advisors studied companies in the commercial real estate and retail food sectors and found that companies that participate in the Energy Star program - with strong energy efficiency programs - outperform laggards in stock performance. The Energy Star program helps businesses become more energy efficient and rewards them for doing so.

"By making energy efficiency a top priority, companies can reduce costs, increase productivity, improve customer satisfaction, increase property values, and enhance their reputation as a responsible corporate citizen," remarks Frank Dixon, Innovest Managing Partner.

In the real estate sector, Innovest found that the six companies with above-average energy management records outperformed the six below-average companies by 3,400 basis points over the last two years. The two top-rated companies were Arden Realty (ARI) and Equity Office Properties (EOP). The bottom two companies were Highwoods Properties (HIW) and Duke Realty (DRE).

In the retail food sector, Innovest found that the six companies with better energy management records outperformed below-average companies by 1,700 basis points over the past two years. The two top-rated companies were J. Sainsbury PLC (SBRY.L) and Ahold NV-ADR (AHLN), and the bottom two companies were Kroger (KR) and Ruddick (RDK). Shaw’s, a J. Sainsbury, won the Energy Star Partner of the Year Award for its $6 million in energy savings.

Active Energy Star partners - defined by the percentage of a company's buildings that qualify for the label - outperformed less active partners by 600 basis points in the stock market and outperformed the nonpartners by 1,200 basis points. Unsurprisingly, Arden and Equity were active partners, while Highwoods and Duke were less active partners.

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The Socially Responsible Housing Investment Program (SHIP) is a fixed income vehicle that's generating good returns while supporting affordable housing.

Administered by the Securities Sales & Trade Group (SS&TG) at Freddie Mac (FRE), SHIP offers collateralized mortgage obligations (CMOs) and mortgage-backed securities (MBSs), also known as mortgage pass-though securities. Low-income housing mortgages are funded from the pool of invested SHIP money, repaying investors a set interest rate. Mortgage prepayments "pass through" directly to investors as additional returns.

At the end of the third quarter, year-to-date returns were 4.85% for CMOs and 8.81% for MBSs. These instruments are available to both institutional and individual investors.

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BP announced it would stop lobbying to drill in the Arctic National Wildlife Refuge and backed out of the Arctic Power lobbying group. A coalition of social investors and NGOs - Green Century Balanced Fund, Walden Asset Management, Trillium Asset Management, World Wildlife Fund, and U.S. PIRG - filed shareowner resolutions for the past three years asking BP to pull out of ANWR. 13% of shareholders, considered high for a first time resolution, voted in favor it.

Jennifer Ruys, BP Director of External Affairs said in an interview with SocialFunds.com: "Our position on ANWR has not changed: it is up to the people and the US government to decide whether there is drilling in ANWR. If they decide that yes, they will allow companies to explore, then at that point, and only at that point, will we make the decision on whether to pursue activities there, based on three criteria."

The criteria are first, if oil development can occur in an environmentally sound manner; second, if such development compares favorably from a performance standpoint with BP's other Alaska prospects and three, with those propects around the globe.

The Green Century Balanced Fund filed a similar resolution with Phillips Petroleum (now merged with Conoco) that received 5% of the vote. Resolutions have also been filed with other oil companies.

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Can nanotechnology help restore the environment? An innovative research program at the University of California/ Santa Barbara brings together ecology, marine science, engineering, and nanotechnology to identify mechanisms to assist the recovery of degraded habitats and species, particularly in the marine environment. Initial research will focus on one of the most pressing ecological problems in the ocean, the global degradation of coral reef ecosystems.

Says Russ Schmitt, professor of ecology, "Due to recent breakthroughs in the theoretical understanding of the ecological bottlenecks to restoration and dramatic advances in the development and miniaturization of technology that can be used to sense and manipulate systems at the nanometer or micron scale, we are poised to bring about a paradigm shift in the approach taken to restore the environment.

Ecotechnology involves the management of species within ecosystems to obtain a desired ecological outcome. Through the integration of electronic materials with biological materials, a host of critical biological processes that occur at very small scales could be monitored and controlled electronically, transforming the researchers' ability to study and manipulate the natural environment.

Over the last 20 years, there has been an increase worldwide in policies and practices to protect natural resource mostly by changing human behavior, improving harvesting practices, and creating marine reserves. These efforts abate the threat, but leave the damaged ecosystem to recover on its own. Slow growth, limited reproduction, and other natural bottlenecks can stretch recovery out for decades or even centuries. Schmitt noted, "We are now able to apply specific technological advances to surmount those restoration bottlenecks."

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SRI mutual funds that outperformed the S&P 500 this year attribute it to their low technology weighting. The Walden Social Equity Fund (WSEFX), for example lost 4.39% through October 31, placing it in the 8th percentile for one-year performance. Senior Portfolio Manager Robert Lincoln, explained, "In 2000, the technology sector lost 32%, accounting for almost the entire 9% decline in the S&P 500. The average stock actually gained 10.5%. In 2001, technology stocks lost 26%, leading the S&P 500 to a loss of 12% while the average stock lost 2%." Walden overweighted healthcare holdings which have been doing well such as Biomet and Medtronic (MDT). "Walden has over 100% appreciation in Dentsply (XRAY), St. Jude Medical (STJ), and Cardinal Health (CAH)," he said.

Vancouver-based Ethical Funds offered Canada's first SRI fund, the Ethical Growth Fund, in 1986. In 2000, it was the first Canadian mutual fund company to disclose its proxy voting guidelines and proxy voting record. Now it has added seven new funds to give it the distinction of being Canada's first investment firm that offers a fully diversified family of SRI mutual funds. Ethical Funds has $2 billion under management, and even in this economic climate, plans to increase that by 10% in 2003. www.ethicalfunds.com

Citizens Funds (US) has two new funds particularly appealing in a volatile market: the Ultra Short Bond Fund (unique to SRI funds) and the Citizens Balanced Fund (allocated across stocks, bonds, and money markets).

The Sierra Club is lending its name to two new, green mutual funds. Forward Management LLC, owned by the son of late oilman J. Paul Getty, is renaming the $20 million fund the Sierra Club Stock Fund and starting a new one, the Sierra Club Balanced Fund, which will open to investors on January 2. Forward plans to accumulate a family of Sierra Club funds in the future.

There is so little money flowing into large cap funds, that the company decided to reposition it to "reflect how Americans invest now.
And that's focusing on environmentally and socially responsible issues" a spokesperson for Forward said. "We'll be acknowledging corporations that act responsibly. We will likely not have investments in oil or autos at all."

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Solar & Wind News
The UK city, Newcastle upon Tyne,

intends to be the world’s first ‘carbon-neutral’ city. Newcastle, known for pollution and heavy industry, plans to transform itself by 2025 by pioneering the use of hydrogen-fueled vehicles, tidal power, solar energy, energy-efficient homes and creating new forests.

Yakushima, a volcanic island off the coast of Japan known, is also working on an energy revolution - using hydrogen as the sole energy source for its 14,000 people. The island is known for its 1000 year old cedar trees and is designated a UN world heritage nature preserve.

The plan is to generate electricity from wind and from small hydropower generators - it rains 320 inches a year - use that electricity to electrolyze water, and then store the resulting hydrogen. The system is scheduled to go on-line next year. Yakushima Denko Co., a Tokyo-based power firm, is conducting feasibility studies on the plan and has asked the government to make the island a hydrogen energy-oriented special economic zone.

Iceland has been pursuing a hydrogen economy for some time. Iceland uses the steam from its scores of volcanoes and the huge amount of water that drains from its glaciers to generate electricity. Surplus power is used to electrolyze water into hydrogen. The Iceland government and major energy companies such as Royal Dutch Shell are investors in an energy company there that aims to transform Iceland into a hydrogen society in 40 - 50 years. Its first project is to run a fleet of hydrogen buses in Reykjavik.

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Scientific American magazine launched a new award to honor "visionaries from the worlds of research, industry and politics whose recent accomplishments point toward a brighter technological future for everyone." Energy efficiency and renewable energy technologies were among the wide variety of inventors honored with the "Scientific American 50" award.

The Business Leader of the Year Award went to Geoffrey Ballard, founder of Ballard Power Systems, Inc., and chairman of General Hydrogen, for his pioneering work on hydrogen fuel cells. Some of the other winners are:

* Randy Howard, Cargill Dow LLC, a bioproduct company making plastics from corn starch;
* Ken Deering, The Wind Turbine Company, for designing a more efficient wind turbine;
* Manfred Stefener, Smart Fuel Cell AG, of miniature fuel cell developer;
* Eddie O'Connor, Airtricity, for bringing offshore wind to Ireland;
* Spectrolab, Inc. and DOE's National Renewable Energy Laboratory (NREL), for breakthroughs in solar cells;
* Hiroyuki Yoshino, Honda Motor Company, for spearheading the company's progressive position on fuel efficiency and low emissions;
* Fran Pavley, California State Assembly, for legislating carbon-dioxide emissions standards for California vehicles;
* Cambridge Display Technology, for developing flexible solar panels

The full list of winners is on the Scientific American website.

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DOE's Energy Information Administration (EIA) released its year 2000 data for solar and wind energy. California used the most solar and wind power - in fact, it is the only U.S. state that used a significant amount of solar power. For wind power, California was trailed by Minnesota, Texas, Iowa, and Wyoming. Together, the five states accounted for 97.9% of all U.S. use of wind power.

The picture is different for thermal solar energy - solar water heating, for example. Florida leads that category, followed closely by California, comprising 80% of the total.

EIA predicts electricity production from renewable energy sources will grow 2.1% a year through 2025; almost double the predictions in last year's report. It expects renewable energy sources to generate 9% of all power by 2025.

The agency expects energy intensity - the amount of energy used per dollar of gross domestic product - to decline by 1.5% a year, but
projected total energy use remains roughly the same. Natural gas demand is projected to grow by 54% by 2025 and
U.S. dependence on oil imports will increase. Today, imports provide 55% of U.S. petroleum; by 2025, the country will depend on
imports for 68%. http://www.eia.doe.gov

"Renewable Energy 2002" is the International Energy Agency's (IEA: not to be confused with EIA above!) first report on the progress of renewable energy markets in developed countries from 1990 - 2000. Despite growing use of renewable energy, its share of total energy remained fairly steady. It increased by 1.8% a year, but the percentage of total energy only increased from 5.9% - 6%. Wind and solar power are growing the fastest, at annual rates of 22.4% and 28.9%, respectively. http://www.iea.org/stats/files/renewables.htm

Experts say renewables will not be used for large-scale generation in developing countries unless governments introduce subsidies and legislation to support them. It is advancing in rural areas, where about 1 billion people need power, but not commercially. "The renewable resource potential in Asia is large. However, compared to OECD countries, the lack of market support programmes in Asia translates into weak growth," said a spokeswoman for Royal Dutch/Shell Group.

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SOLAR News

Sharp Electronics, the US subsidiary of the Japanese company, entered the US market six months ago and predicts it will take 10% of the domestic solar cell manufacturing market by March. The company is building a solar manufacturing plant in Memphis, TN. to meet anticipated demand. The facility is expected to begin production in spring of 2003, assembling solar modules for all applications, and employing 90 people. Sharp is the world leader in solar-cell manufacturing; its production capacity is expected to reach 200 megawatts (MW) a year by March (one megawatt (MW) powers about 1000 homes).

Shell Solar, on the other hand, is closing two facilities and laying off about 250 people. The company says worldwide demand for solar cells is down this year after four years of 30% plus annual growth, and the industry has more capacity than is needed. Global production stands at 760 MW of peak capacity per year (up from 400 in 2001).

BP Solar announced it will cease manufacturing thin film solar modules and will concentrate on crystalline-based products. In the press release, Harry Shrimp, BP Solar president and CEO, says the company "is positioning itself to continue sales growth of roughly 30% a year." Whereas thin film technology is promising the company is focusing on where the most demand is right now. BP Solar employs 2000 people worldwide and has nearly 20% of global market share and $300 million in revenues. The company is expanding its factory in Australia and plans to double manufacturing capacity by 2004.

BP Solar modules are being mounted on the world's largest solar installation in Bavaria. The power plant will have a total output of 4 MW.

AstroPower (APWR) is on Forbes Magazine's 200 Best Small Companies list. The PV manufacturer ranked 19th in terms of annual sales growth and 147th overall. APWR reported record revenues of $22.5 million for the third quarter, an increase of 26.5% from the previous year. Year-to-date revenue is $63 million, an increase of 35% over the first nine months of 2001. The company expects revenues for the fourth quarter to be $26 - $30 million. Its status was just changed from a growth to a value stock on the S&P SmallCap 600 Index.

Arizona's largest electric utility, APS, dedicated the first phase of its Prescott Airport Solar Power Plant. The new facility has a capacity of 450 kilowatts (KW), to be increased to 1.5 MW by March 2003. APS plans to expand the facility to 5 MW over the next five years, placing it among the largest in the world.

General Electric reports that by 2003, 85% of GE Power Systems' revenues will come from energy efficient or renewable energy solutions. Traditional GE technologies - natural gas turbines, combined-cycle plants, gas turbine upgrades/ service and steam turbine upgrades - now focus on cleaner, more efficient operation. Newer areas of development include network solutions, substation automation, plant optimization and "smart" sensors. These technology sectors are expected to produce about 79% of GE Power Systems' sales next year, with the rapidly growing renewable energy segment - wind, small hydro and geothermal - supplying 6% of revenues. www.gepower.com

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PV Advances.A serendipitous discovery at DOE's Lawrence Berkeley National Laboratory may lead to high-efficiency solar cells that can use the sun's entire spectrum of radiation. While researching the properties of light-emitted diodes (LEDs), researchers discovered the band-gap energy - the amount of energy necessary to free an electron from an atom - of indium nitride is 0.7 electron volts, much lower than the 2.0 electron volts previously thought. Solar cells can capture sunlight at energies equal to or greater than its band-gap energy. With lower band-gap energy solar cells would be able to capture low frequency, red or near-infrared light. Researches believe inexpensive two-layer solar cells can be created with a sunlight-to-electricity conversion efficiency of 50%. Multi-layered cells might be able to achieve over 70% efficiency. The most efficient cells today reach about 33%.

The Australian National University Centre for Sustainable Energy Systems and Origin Energy unveiled the Sliver Cell, a solar cell that uses one tenth of the silicon used to make solar panels, the most costly component. Using the Sliver Cell, only two silicon wafers are needed to convert sunlight to 140 watts of power as compared to the 60 silicon wafers needed now. The technology reduces costs by using much less silicon for similar efficiency and power output, and by needing less capital to build a solar panel plant of similar capacity.

Evergreen Solar's (ELSR) "String Ribbon" technology is another advance in material efficiency, yielding over twice as many solar cells per pound of silicon as conventional methods. The development allows the simultaneous growth of two silicon ribbons, rather than one, from each furnace, doubling the throughput of each furnace.

R&D Magazine honored Astropower for its APx-8 solar cell - calling it one of the 100 most technologically significant new products of the year. The solar cell is smaller (8 inches square) and much faster to manufacture (3 meters/ minute as opposed to 1.5 cm per minute which is considered fast in the industry). "We have the technology to use metallurgical grade silicon, which is inexpensive and abundant," says CEO Allen Barnett. "This allows us to drive down production costs - we believe this is the lowest-cost cell on the marketplace."

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WIND News

The British Wind Energy Association reports that 525 MW of new wind projects, including two offshore farms, won planning permission this year, almost exactly the total amount built during the previous 11 years put together. The government has revealed plans for a further 4000MW of offshore wind and Vestas opened a major plant in Scotland.

With the 1000th turbine in the UK due to be switched on any day now, wind powers' contribution to the supply mix stands at 552MW, equal to the annual electricity needs of well over 350,000 households. BWEA predicts over 300MW in construction in 2003 and 600MW in 2004, bringing the UK wind industry closer to its avowed intention of over 3200MW by the end of 2006. www.bwea.com

The UK government wants energy companies to build offshore wind farms in three areas off the English and Welsh coasts to cut costs and kick-start the renewable energy sector. "The new framework will enable developers to think big. I expect much larger proposals to come forward than the 30 turbine (75 MW) projects leased in the first round," saiys Energy Minister Brian Wilson. "The wind farms will be closer together, enabling developers to share resources and bring down the cost."

Environmental NGOs welcomed the strategy. Off-shore wind power has the potential to supply the UK's electric needs three times over.
Companies like it too: Powergen is reportedly looking at a 500 MW project in the outer Thames Estuary near London, one of three areas. The areas are suitable because they have shallow sandy seabeds which make installing turbines and getting good grid connections easier. The rocky seabed off the coast of Scotland, in contrast, makes it more difficult.

Last year, 13 offshore wind sites received the first licences involving an investment of 1.6 billion pounds ($2.53 billion) to supply 1% of the UK's power needs by 2004-2005.

Germany approved its second offshore wind farm in the North Sea. The country plans to have 25,000 MW of offshore capacity by 2030, from today's zero. Buerger Windpark Butendieck GmbH will build 80 turbines, 3 MW each. Construction will start on the first offshore park in 2003 - the 1,000 MW Borkum-West project 45 km off the North Sea coast. BSH has 30 more applications for North Sea and Baltic Sea projects.

A joint BP and ChevronTexaco 22.5 MW wind farm project in The Netherlands is now selling green electricity into the Dutch power grid.
The US$23 million project is the first large scale brownfield development in Europe and is located on a jointly owned refinery site near Rotterdam. Nine, 2.5 MW Nordex turbines stand 120 meters tall.

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Spanish wind company Gamesa (GAM.MC) is selling its wind parks in Italy and Portugal to Electrabel (ELCBt.BR), a Belgium utility, the sixth largest in Europe. This is Electrabel's first investment in wind energy outside its home market. Electrabel agreed to pay 204 million euros for 175 MW of capacity in Italy and 320 million euros to construct 252 MW of capacity in Portugal. Gamesa will build the turbines with its own technology, part of the company's strategy to move from operating wind parks to constructing and selling them to utilities.

Electrabel is over 40% owned by French utility giant Suez (LYOE.PA). The company is building a 220 million euro, 100 MW wind park off the Belgian coast and runs two others inland.

General Electric (GE) intends to claim 16% of Spain's wind market, boosting it by a third next year. GE has a 12% share (255 turbines) based on its ownership of former Enron Wind.

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Nevada Power Company, the utility for most of southern Nevada, signed contracts for 227 MW of renewable energy. Over half the energy will come from two new wind farms, the remainder from geothermal. Nevada requires utilities to generate a portion of their energy from renewable sources. To help renewable energy get off the ground, the state adopted a temporary regulation in November that allows energy providers to buy and sell renewable energy credits. Energy providers that generate more renewable power than required can sell the excess credits to other energy providers in the state. DOE awarded a $3.22 million grant for renewable energy R & D in Nevada to support projects in solar, wind, geothermal and fuel cell applications.

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Vestas (VWS), the world's largest wind turbine manufacturer with 5800 employees worldwide, saw its stock plunge by 35% in late November. The company reduced earnings projections largely because the US. Energy Bill has yet to be passed, which contains the all-important Production Tax Credit. This has stalled many US wind projects. Vestas put its plans for a new factory in Oregon on hold and is laying off 533 employees.

The Oregon plant would have brought 1000 jobs by 2004 to a region suffering from some of the highest unemployment rates in the nation.
The Portland area is working toward establishing itself as a hub for green businesses.

"In some ways I feel too much weight gets placed on the credit. Clearly you have to have the credit in place to have a deal go forward - I
am very confident that it will be extended," says Randy Swisher, American Wind Energy Association (AWEA) executive director. "The fact that it hasn't been extended yet has less impact on the current wind market than the massive re-evaluation of the credit-worthiness of the
electric industry that Wall Street seems to have undertaken. That has made financing any electric generation project more expensive, including wind, and has helped (when coupled with excess generating capacity in some regions) reduce the interest of utilities in bringing on new generation projects."

Yet, Vestas continues to receive large orders. FPL Energy, the largest US wind farm developer, gave Vestas an $83 million order for 1.8 MW wind turbines. The company generated about half its sales in the US in 2001, but only 9% came from the US and Canada in the first half of 2002.

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Fuel Cell News

Fuel Cell News

Allied Business Intelligence, a market research firm, predicts that global fuel cell energy generating capacity will increase to near 16,000 MW by 2012 from 45 MW in 2002, an increase of 350 times! In their report, "Global Stationary Fuel Cell Markets - A Detailed Analysis of an Emerging Industry," the authors note a key trend - the stationary fuel cell industry is shifting from R & D to establishing manufacturing plants.

Early adopter markets are wastewater treatment plants, telecommunication back-up centers, and data centers. Industrial markets have started to embrace fuel cell power systems, with the largest growth potential in the small to medium sized industrial markets.

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Honda and Toyota delivered their first fuel cell cars to California customers in November. The City of Los Angeles purchased a Honda FCX (similar to the Civic), a hydrogen-fueled four-seater with a range of 170 miles. The city is leasing it for $500 per month and plans to lease four more in 2003. Lucky City employees will use the cars for their commute and on the job. Honda plans to lease about 30 vehicles in California and Japan ovder the next two years, but has no plans for mass-market sales. Toyota delivered two hydrogen-fueled FCHVs to two fuel cell research leaders, the University of California/ Irvine and UC Davis. Based on the Highlander, a mid-sized SUV, it has a range of 180 miles. The universities plan to get another four next year. The UC campuses have received $2 million in research grants from Toyota over the past five years; Toyota plans to give double that over the next three and a half years.

Federal Express and General Motors are conducting the first commercial test of a fuel cell vehicle in Japan. FedEx will operate the HydroGen3 on its normal delivery schedules in the Tokyo area from June 2003 to June 2004. GM's HydroGen3 is the first fuel cell vehicle fueled with liquid hydrogen to run on public roads in Japan.

Nissan unveiled its first fuel cell vehicle in Tokyo - a hybrid called the X-TRAIL FCV - powered by a UTC compressed hydrogen fuel cell. It plans to start public road testing in Japan.

Fuel cell buses will run between Tokyo Station and the city's new waterfront area in summer, 2003. The government will announce which company will produce the vehicles next month. A hydrogen fueling station is under construction next to the Tokyo Water Science Museum; it will be open to the public and have educational displays. DaimlerChrysler plans to put its model on the market in 10 cities in Europe in the next year or so for a cost of 1.25 million euro each.

The first hybrid fuel cell bus hit the streets in Palm Springs, California in mid-November. The SunLine Transit Agency is operating a 50-foot "ThunderPower" bus, built through a joint venture of Thor Industries and ISE Research. It runs on a 75-kw fuel cell from UTC Fuel Cells and is traveling a 100 mile-long route daily. The bus gets 7-11 miles per gallon, double the mileage of a conventional bus. Batteries store electricity until its needed to propel the bus. The batteries also absorb energy from braking the bus.

The SunLine fleet consists entirely of alternatively fueled vehicles and is the only public facility offering compressed natural gas, liquefied natural gas, Hythane® (a blend of hydrogen and CNG), and hydrogen at one location. UTC is working with the Northeast Advanced Vehicle Consortium to develop a 200-kilowatt fuel cell power plant for buses.

Natural Resources Canada is working with Hydrogenics Corp.'s (HYGS), to put its proprietary vehicle-to-grid fuel cell technology into a transit bus. NRCan is contributing CDN$3 million (US$2 million) toward the project which is scheduled for completion in March 2005. With Hydrogenics' technology a vehicle can be a source of distributed power, providing power to the electrical grid while the vehicle sits idle.

Deere & Company and Hydrogenics Corp are developing a demonstration fuel cell Commercial Work Vehicle - a modified John Deere Pro-Gator Utility Vehicle. The company plans to test it at sites across the U.S. starting in spring, 2003. Deere has a prototype hybrid lawn tractor and an electric E-Gator Utility Vehicle. The company sees off-road equipment as the best opportunity to commercialize significant numbers of electric vehicles.

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Hydrogen Infrastructure.

On November 15, the world's first hydrogen fuel and power station opened for business in Las Vegas. The $10.8-million station provides fuel for vehicles and also produces electricity. This added capability of functioning as a distributed power source means two income streams for future hydrogen merchants, especially useful until fuel sales ramp up. The station is a product of a public-private partnership between DOE, the City of Las Vegas, Plug Power, and Air Products and Chemicals.

The station is located in the city's vehicle service center. There is a hydrogen generator, compressor, liquid and gaseous hydrogen storage tanks, dispensing systems, and a stationary fuel cell. It can dispense hydrogen, hydrogen-enriched natural gas and compressed natural gas. DOE is working with the city and NRG Technologies Inc. to convert municipal vehicles to run on hydrogen.

The California Fuel Cell Partnership commissioned its second hydrogen fueling system in Richmond, CA. in late October (the other is in West Sacramento). Stuart Energy manufactured and installed the fueling system, which uses electrolysis to generate hydrogen. It can fuel a small fleet of vehicles and requires only one or two minutes per vehicle to refuel.

The San Francisco Bay Area and the Los Angeles and Orange counties will have six refueling stations in the next six months. Toyota has one at its national headquarters in Torrance, CA.

Plug Power Inc. and Honda R&D Company, Ltd. are co-developing a home refueling system so that future fuel-cell vehicle owners can supply their own hydrogen.

Air Products and Chemicals' (Lehigh Valley, PA) entry is a portable hydrogen fueling system. The "Fueler" - with fueling hook-ups and dispenser - is mounted to a trailer, making it easily transported. The system is being used at the City of Los Angeles fueling station. Because it contains stored hydrogen generated externally, there is no fixed capacity to potentially limit the number of vehicles to be filled.

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Research Advances

Popular Science magazine awarded the “2002 Best of What’s New” award to the Chrysler Town & Country Natrium, a fuel cell concept vehicle, based on its popular minivan. "Attempting to solve the eternal 'where do we get the hydrogen?' question," the judges said, "Chrysler has the most imaginative solution we've seen." It's powered by sodium borohydride - essentially, laundry detergent combined with hydrogen. Hydrogen is extracted from the sodium borohydride fuel using patented "Hydrogen on Demand" technology from Millennium Cell. The Natrium has a range of 300 miles, comparable to a gas-powered vehicle. The fuel is readily available in the US and can be recycled.

DaimlerChrysler is funding continued development of Millennium Cell’s Hydrogen on Demand system. The automaker plans to introduce a fleet of hydrogen-powered fuel cell vehicles in the U.S. next year as part of a worldwide test program.

DOE is providing a three-year, $3 million grant to the Institute of Biological Energy Alternativesto develop a synthetic chromosome as the first step in developing cost-effective, efficient biological sources of energy. The institute aims to engineer organisms that would generate hydrogen or serve other purposes, such as carbon sequestration.

By replacing ceramic with stainless steel, Lawrence Berkeley National Laboratory scientists are bringing the costs for solid oxide fuel cell (SOFC) in line with the most efficient gas turbine. Stainless steel supported electrodes are stronger, easier to manufacture, and, most importantly, cheaper. The target is $400 per kW, set by DOE's Solid State Energy Conversion Alliance, a government, industry, and scientific group charged with developing affordable fuel cell-based power generators. The $400 target is about a tenth of today's cost.

Other recent hydrogen advances include a system to produce nearly pure hydrogen from methane or propane (MesoFuel, Inc.), a process to produce hydrogen from biomass while sequestering the carbon byproducts (Scientific Carbons, Inc.), and a hydride slurry system for hydrogen storage (Safe Hydrogen LLC).

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Company News

Ballard "under the hood" may become as ubiquitous as "Intel inside." DamilerChrysler and Ford, part-owners of Ballard, use its fuel cell module in their vehicles. Now, Honda purchased 32 Mark 902 fuel cell modules.

Coleman Powermate, a leading manufacturer of portable and backup power systems, took a major step toward commercializing fuel cell systems for everyday use - it launched a portable fuel cell power generator. This is the world's first commercial PEM fuel cell generator for end-users. The AirGen fuel cell generator is built around a 1-kilowatt Nexa power module, which uses a Ballard fuel cell.

The AirGen can act as a surge protector, and can provide uninterruptible power when utility power fails. Unlike battery backups, which last minutes, it generates electricity as long as hydrogen is supplied. www.airgen.com; www.colemanpowermate.com

The World Economic Forum honored Medis Technologies Ltd. as a "Technology Pioneer." Medis will present its fuel cell technology for portable electronic devices at the forthcoming Forum in Davos, Switzerland. The company's first product is a fuel cell Power Pack, capable of providing uninterrupted power to users of cell phones, PDAs and other convergent products.

Using the Power Pack, users will, for the first time, be able to charge batteries without hooking up to a power source. Because of the simplicity of design and use of inexpensive materials, the company expects it to retail for only $15 - $20. Medis plans to have them on the market in 2004.

Toshiba Corp., MTI Micro Fuel Cells Inc., Motorola and Casio are among the many companies developing commercial micro fuel cells. MTI and Toshiba will market a fuel cell battery-operated notebook computer by 2003 and 2004, respectively.

Plug Power (PLUG) acquired H Power (HPOW), in a stock-for-stock exchange valued at $50.7 million. The two leaders in stationary PEM fuel cells now have 83 patents and 168 pending patents worldwide. Plug Power expects to have $90 million in cash at closing, sufficient to fund operations into 2005.

DuPont Fuel Cells and DuPont Taiwan, Ltd. signed a deal with Asia Pacific Fuel Cell Technologies (APFCT) to commercialize PEM fuel cells for the Taiwan electric scooter market. The companies anticipate launching fuel cell powered scooters in Taiwan by 2005. APFCT will use DuPont fuel cell components to manufacture the scooters.

Ballard, feeling pressured to significantly decrease R&D cash consumption, announced it will lower overhead by combining three of its four divisions, reducing the workforce by 400 employees. DaimlerChrysler and Ford agreed to provide combined additional funding of US $97 million over the next five years, and to distribute the funding as Ballard needs it, eliminating a requirement that it be linked to a public offering.

"The revised plan provides Ballard with financial resources into 2007 to advance our commercialization plans, along with significant concentration on technology research and product development necessary to ensure our success. Ballard expects to achieve profitability by the end of the plan period," said Dennis Campbell, Ballard's President and CEO.

"An overriding objective of our plan is to complete the transformation of Ballard from a technology-focused research and development organization into a customer-focused production organization," he said. "Our goal is to become the company known for replacing the internal combustion engine."

Then, in mid-December, Ballard announced it would sell 7.7 million common shares to raise another $100 million, increasing its cash reserves to US$383 million. David Smith, a Salomon Smith Barney analyst was one of many analysts surprised by the news and who down-graded the stock. The news came just days after Ballard management led the investment community to believe it would sustain itself through 2007.

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A recent article in MIT Technology Review, "General Motors Pinning its Ambitions on Fuel Cells", discusses GM's plan to use hydrogen-powered cars as powerplants, tapping idle time to supply residential energy, and eventually connecting to the electric grid. Some 600 staff are focused on the research program, Hydronomy, short for hydrogen economy. Says Larry Burns, vp research, development, and planning, "We think if this is successful, it will be a much bigger idea than reinventing the automobile. It will also reinvent our industry."

The radical concept goes beyond integrating fuel cells into car designs. GM is designing a fuel cell chassis, a skateboard-like platform that would be connected electrically to a replaceable body. The chassis would last 20 - 30 years. It could be mortgaged like a house and, instead of buying a whole new car, you would replace just the body. This would make fuel cell cars much less expensive over the long run.
The electronics to do this is available for large stationary fuel cells; GM researchers are working on inexpensive versions small enough for cars.

Cars sit unused in parking lots, driveways, and garages 90% of the time. A parked fuel-cell car can generate cheap electricity and help supply power to a house or even feed the local electric grid. This idea originated with Hypercar Inc., developed and then spun off by Rocky Mountain Institute. Hypercar just announced $2 million in funding.

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Organic Industry News

The outlook for Organic sector companies we cover continues to be very positive. The new organic USDA rule is driving media coverage, educating the public and will lead to long term benefits for the industry. According to The Hartman Group, an industry market research firm, 76% of Americans that eat organic food say they will purchase more as supermarkets carry it. A recent eBrain on-line poll concludes that nearly every American is familiar with organic products, and 58% have purchased at least one organic food item.

Organic food is now a $9 billion industry. Although this is still a tiny segment of the overall food market - less than 1%of the $1 trillion food industry - it is the fastest growing segment with 20% annual growth over the last decade. The U.S. organic food industry crossed a threshold in 2000: for the first time, more organic food was purchased in conventional supermarkets than in any other venue. Organic products are available in nearly 20,000 natural foods stores, and are sold in 73% of all conventional grocery stores.

Datamonitor expects annual sales growth for the organic sector to continue increasing by an impressive 22.3%, bringing the market to $26 billion by 2006. As more conventional supermarkets carry organic products, the overall market share for natural product retailers will decline, but, because of their greater depth and variety of foods, their dollar sales will still grow at 21% a year through 2007.

The category is proving to be recession-resistant because purchases are socially rather than economically driven. Purchasers of organic foods point to its positive health attributes, better taste, and positive environmental impact. 63% of eBrain's participants say they purchase organics because of health or safety concerns. 32% say it is somewhat or very important to eat organic food; 67% believe organic food will become commonplace. 62% say they buy organic products at their regular supermarket, 29% from a farmer's market and 21% from a health food supermarket. 67% say high prices are still a barrier.

For a report summarizing growth patterns in the U.S. organic sector in recent years by market category: http://www.ers.usda.gov/publications/aib777/aib777.pdf

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On December 23, Whole Foods Market (WFMI), the largest natural product supermarket chain in the US, joined the NASDAQ-100 Index®. The company reported another round of outstanding sales for the quarter and for the fiscal year ending September 29. Sales for the fiscal year increased 21% to $2.7 billion. Comparable store sales increased 10%. This is the 12th consecutive quarter of 20% or more sales growth. The company earned $1.40 in earnings per share, a 24% increase over the prior year and at the top end of the upwardly revised guidance.

The results are particularly impressive considering the high price of organic products, the stumbling economy and competition from mainstream supermarkets. Whole Foods plans to add about 260 new stores by 2010. The WFMI store in Woodland Hills, California now has a 108-kilowatt solar system on the roof.

United Natural Foods (UNFI), a leading natural products distributor, completed transactions with two key regional natural foods distributors: acquisition of Blooming Prairie Cooperative, the largest midwest natural foods distributor with $130 million in sales; and merger with Northeast Cooperatives, operating in the northeast and midwest with $120 million in sales. The acquisition offsets much of the loss of their key customer, Wild Oats (see previous Progressive Investor News). UNFI now has a strong presence in the midwest and merged with its primary competitor in the northeast.

UNFI reported net sales for the first quarter of fiscal 2003 of $311 million, an increase of 10.9%. Distribution to independent retailers grew by 11.8% and mass market distribution grew by 21.4%. Sales growth excluding the acquisitions is 16.5%.

Horizon Organic (HCOW), the dominant organic dairy company in the US, announced increased sales of 22% for the 3rd Quarter. HCOW's products are now in 60% of conventional supermarkets nationwide. The company is introducing a new product line, Fruit Jels - an organic, vegetarian alternative to jello-type snacks.

Green Mountain Coffee Roasters (GMCR) third quarter sales rose by 5.7%, and 4.4% for the fiscal year, shy of analysts estimates. The company roasts and sells (mostly wholesale) premium specialty coffee with some organic and Fair Trade product lines. Sales of Fair Trade coffee rose by 22% over the previous year. GMCR signed an exclusive agreement with Wild Oats to provide all its bulk coffee under a co-branded label. Since this November, Wild Oats stocks 22 varieties of GMCR's organic/ Fair Trade coffee in its 73 stores. GMCR also announced a 10 year agreement to roast, sell, and distribute six Fair Trade certified coffees under the Newman's Own Organics label.

GMRC made it onto the Forbes' 2002 list of the “200 Best Small Companies" for the third consecutive year. The company signed a Memo of Understanding (MOU) with US. AID to create The Coffee Alliance - to focus on developing sustainable solutions to improve the quality of coffee and the quality of life in coffee growing communities. The oversupply of coffee on world markets has driven prices to historic lows, causing great hardship to coffee producers and workers, particularly in Central America and east Africa.

Chiquita Brands International (CQB) released its second corporate responsibility report, "Our Continuing Commitment," analyzing its environmental, social and financial performance for 2001. The report can be downloaded in English and Spanish (www.chiquita.com). Chiquita completed a financial restructuring in March, which brought a change in ownership, a new board of directors and a new chairman and chief executive officer.

In SustainAbility's latest report, "Trust US: The Global Reporters 2002 Survey of Corporate Sustainability Reporting," Chiquita's first corporate responsibility report ranked as the best in the food industry and number three of U.S. companies. SustainAbility is one of the world's leading sustainable business consultancies, based in the UK. www.sustainability.com/trust-us

Chiquita is working with the Rainforest Alliance Better Banana Project, setting stringent environmental standards on all its banana farms in Latin America, and is working with Social Accountability 8000 (SA8000), an international labor standard, on ethical labor standards for all its Latin America banana farms. "While the road is long, Chiquita has traveled far in a few short years, says Stephen Coats, executive director, U.S. Labor Education in the Americas Project. He is impressed with their progress and with the transparency of its corporate responsibility.

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In the UK, the government released its long-awaited "Strategy for Sustainable Farming and Food." The strategy is the response to the Curry Commission, created to redirect farming policy toward organic practices after the foot and mouth outbreak. Over the next three years, the government will spend £500million to:

* pay farmers to farm more sustainably. Subject to successful piloting, to be rolled out nationally in 2005.

* take a 'whole farm' approach to management and regulation, auditing farms and assisting them in their sustainability efforts

* fund small regional food producers

* create a network of demonstration farms to spread best practices

* create a new animal health and welfare strategy that includes combatting illegal meat imports.

* produce an educational campaign to encourage people to eat a healthier diet.

An independent implementation group led by Sir Don Curry will oversee process. Ben Gill, president of the National Farmers' Union, welcomed the strategy but warned that it will be too late for farmers if action is postponed. While German farmers' incomes have risen by 34%, UK farmers have seen a fall in income of 42% and more than 15,000 people left the farming industry last year, he said. John Turner, one of the union founders warned the changes would be superficial unless the underlying problems are addressed - market concentration that allows a few very large corporations to dominate the food chain.

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The council of Vedic City, Iowa’s newest city, is considering a resolution to make the sale of any food that is genetically modified or not grown organically illegal in city limits. Mayor Bob Wynne attributes an outbreak of allergic reactions to city residents to crop dusting on nearby farms. It would still be legal for someone to purchase non-organic food from outside the city limits and consume it within the city.

All 12 elementary schools in the Palo Alto Unified School District, California offer organic lunches.

The Organic Consumers Association is launching a global “Clothes for a Change” campaign asking major clothing retailers and manufacturers to stop using genetically engineered cotton.

India - The Indian Ministry of Agriculture recommends that state governments earmark 50% of government farmland for organic farming. The Madhya Pradesh government has set aside half its farmland for organic farming and identified a village in each block as an organic farming village.

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Partner Conversation:
How to Invest in this Stagnant Economy: Public Markets

Each month, our feature article is a "conversation" between 3-5 seasoned SRI analysts and advisors on a topic important to sustainability investors. This month, we interviewed four people:

Eric Prouty, Principle & Senior Technology Analyst, Adams, Harkness & Hill. AHH is an institutional investment bank focused on emerging growth companies in technology, healthcare and consumer sectors. The Energy Technology Team covers growth businesses from distributed generation to next generation vehicles.

Jack Robinson, Managing Director, Winslow Management Co., Green Growth Fund. The fund invests in small, "environmentally effective" companies -companies that have a beneficial or benign environmental impact. Alternative energy stocks compose 18% of the fund's holdings - wind companies make up 6% of the fund.

Ken Scott, Portfolio Manager & Social Research Analyst, Walden Asset Management's SmallCap Innovations Funds. The portfolios invest in companies that offer innovative solutions to environmental and social challenges, or have innovative corporate cultures.

Terry Foecke, Principal, Materials Productivity, Inc., a 20-year old clean manufacturing consulting firm. Terry uses his understanding of what goes on inside companies to analyze green investments for private clients and for two environmental mutual funds managed by Riverbridge Partners.

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First, we interviewed Eric Prouty, Adams, Harkness & Hill

PI: What companies come to mind for investing during a stagnant economy?

Eric Prouty: AHH

In a choppy stock market, the more risk-averse investor should stick with companies that are profitable now and generate healthy cash flow. If you are willing to take a little more risk, look at companies that may not be generating cash flow, but are well capitalized. The point is they need to have enough money on hand to get them through these dry times.

Here are three companies that are profitable now. We believe all of them can do very well even in a difficult economic environment. They have very clean balance sheets and good cash flows.

Itron (ITRI) is a leading company in the "advanced utility technology" space - it is one of the world's largest automatic meter reading companies. Many utilities are moving toward this now. Instead of paying for someone to come to your house and read your water or electric meter, there's a little radio transponder on the meter. Someone rides by on a bike or in a car and picks up the meter signal. Meter readers aren't cheap and it's not an efficient way of doing things. It saves utilities a lot of money this way. In a tough economy, a product that saves money and has a good return on investment does well.

It's important for the environment, because it helps optimize the flows of water, electricity and natural gas to use these resources more intelligently. In many places, water isn't even metered. You pay a flat fee and use as much as you want. That doesn't sponsor conservation! As water becomes scarce we have to take control of resources. Automatic readers allow utilities to compile usage data, do potential load control, and load management operations.

Intermagnetics General (IMGC) is what I call a "steak in the sizzle story." When you slide into an MRI machine, you're sliding into a big superconducting magnet - that's what takes the image. IMGC makes superconducting magnets for MRI systems - a profitable health care business that's not very sensitive to big economic swings. It's a cash cow, supporting the development of its superconducting materials business.

Intermagnetics is a big player in superconducting wire. 8-12% of electricity is lost traveling through transmission lines between the power plant and the end user. Using high temperature superconducting cable there are zero losses and you can move much more electricity through the same size pipe.

So, with IMGC, investors get a nicely profitable, medical-related, not particularly cyclical business that is generating all this cash, and they also get this option on the high temperature superconducting part of the business.

Another company, American Superconductor, is the "pure play" in the area. I prefer Intermagnetics for the same reason I'd give for any development stage company. High temperature wire is years down the road - American Superconductor is burning through lots of cash - they have almost no cash flow in the balance sheet. That's not the kind of stock that does well in this kind of economy.

IMPCO Technologies (IMCO) is a smaller company ($64M market cap) and is the leader in the "alternative fuels industry." It converts engines that run on diesel or gasoline to natural gas or propane - cars, buses, forklifts, and diesel generators. If you're working in a warehouse, you don't want diesel forklifts driving around. You'd rather have propane.

We believe the trends for this company are very good because of its clean air solutions. They have contracts in emerging markets like India, China and Mexico, where the air is very polluted. This international business overcomes the stagnant US and European economy. They'd get a huge boost if the economy turned but the company should be profitable regardless.

PI: Where would the fuel cell companies fall as investments in this economy?

Eric Prouty: AHH

All the fuel cell companies are development stage companies - they are not earning money yet and are burning through cash. Ballard Power is the exception. The company has hundreds of millions of dollars on their balance sheets. If things stay tough for a couple of years they can get through it. They just announced a corporate reorganization - laying off hundreds of people, consolidating some of their product lines - to make their cash last longer.

If this article was on what companies to invest in anticipating a stock market rebound, my answers would be very different. Then I'd pick a bunch of the really beaten up companies that no one cares about anymore that will go up significantly if money starts flowing back into the market: Capstone Turbine, Fuel Cell Energy.

PI: Which direction do you think the economy's going?

Eric Prouty: AHH

I think it's going to bounce along the bottom for some time. I think we've hit the bottom but there's certainly no sign of a rebound.

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Next, we interviewed Jack Robinson, Winslow Management.

PI: How would you invest during this stagnant economy?

Jack Robinson: Winslow

A company that can grow in a stagnant or slow-growing economy should also do well in a high growth economy. If we go into a depression or significant down cycle (the chances of that happening are modest) you wouldn't want to hold equities in much of anything except maybe gold or silver - and that's not a sustainable investment.

If you invest in cyclical companies today - those dependent on the economy to grow their revenue - then you're betting on the economy. We don't know what the economy will do. Economists and money managers are notoriously bad at predicting economic growth. There are signs that it's doing a little better, but what will be the impact if we go to war? You can make a fairly bearish case depending on how that turns out.

You reduce the risk in your portfolio when you don't bet on the economy. You eliminate that variable - all that noise - from your decision-making. Focus on companies that are able to grow both their top and bottom lines, or meet their milestones if they're not yet profitable - then you should have a portfolio that will perform well in most scenarios.

PI: You've got to be well diversified.

Jack Robinson: Winslow

Yes, but generally we would avoid economically sensitive categories. Heavy manufacturing, for example, whether it's automobiles or aerospace, is very stagnant right now. A lot of money is going into housing but we don't know if that will continue. Software is another stagnant area.

The good news is that in green investing there are lots of exciting opportunities. In the Healthy Living Category, Whole Foods, United Natural Foods, Horizon Organic and Gaiam are continuing to grow. The lifestyle category is a growing trend. Gaiam, for example, appeals to people who are looking for balance in their lives - this is a wonderful niche that's easily growing at 25% a year.

Horizon Organic is a $100M company that has the potential to be a $1B company, no matter where the economy goes. People, more and more, care about their health. Of course, there are plenty of companies in the space that aren't doing so well, but these four companies are leaders.
These are the kinds of companies you want to have over the long haul.

PI: Some mutual funds like your Green Growth Fund hold these stocks. But the funds are so much down for the year.

Jack Robinson: Winslow

That's the time to buy! If the fund hasn't changed its stripes and it's something you believe in and has worked over the long term, then get in now.

PI: The Energy side is less clear than the Healthy Living side. The Energy side has been killed, whereas the Healthy Living side has held up.

Jack Robinson: Winslow

Keep this in mind: all four of the Healthy Living companies are profitable. There was a time when they weren't doing so well. If we looked at those four companies 7 or 8 years ago, they were just emerging and coming into their own…. Just like the alternative energy sector is today.

Now, some of the alternative energy technologies are starting to be economically competitive. Wind is a great example. The wind turbine stocks are beaten down, but the wind industry grew 40% in Europe last year. It's running into a problem in the US because the investment tax credit wasn't renewed in time, so it's been sort of a throwaway year.

The problem is that these companies over-expanded because they expected huge growth in the US market, which hasn't materialized yet. Vestas stock just took a huge hit because, although the company is profitable, they planned for 50-60% growth, when its going to more like 25%. So it fell way short of expectations. They are cutting back but they will still grow. It's a growing pain. In fact, they just announced a huge order from FPL.

If you look back at Whole Foods and some of the mistakes they made early on, you'll see that every emerging growth company stumbles at some point. It's inevitable. And many of them stumble more than once.

PI: Eric Prouty says in this kind of economy he'd focus on profitable or at least well-capitalized companies, rather than smaller, emerging companies.

Jack Robinson: Winslow

The trick is do they have enough money to reach profitability and will they reach profitability when they say they will? Companies tend to be more optimistic because they are so entrepreneurial. Quantum, for example, has unbelievably interesting fuel cell-related technology for the transportation industry. It's not profitable yet, needs to raise more money and announced they are going to raise more money. Since GM own 20% of them and they announced a $20M or so extension of one of their contracts with GM, they shouldn't have any trouble raising the money.

PI: What's so exciting about Quantum?

Jack Robinson: Winslow

They don't make the actual fuel cell; they make everything else you need that goes into a fuel cell car or truck. Their key unique technology is a high pressure, ceramic tank to hold the hydrogen. You need a lot of hydrogen on board to go very far. The ceramic tank weighs a fraction of a metal tank (the alternative). The more weight you have the more energy you need to drive it. The Toyota fuel cell car has a Quantum cylinder on board. Quantum works with every major automobile company in the world.

The solar energy space is experiencing a situation similar to wind energy. Here again the industry over-expanded and over-promised feeling they could grow at 50% a year in a 25% growth industry. They are in the same mess for the moment - over-exuberant on the revenue growth. They will get through this and as their revenues and their profitability begin to pick up, their stocks will rise. There will be many companies that won't make it, that are forced to merge or be acquired. That's the nature of technology in this space.

But it's a very, very interesting area. If you do your homework, there's really a lot of money to be made in this space.

PI: So, you'd invest in Vestas now, but what about Astropower?

Jack Robinson: Winslow

Yes. Vestas is the alternative energy company we think we do well under these economic conditions. We invest in Astropower but it isn't one of our larger holdings. I don't think they've come to grips with the fact that they can't grow at 50%. They need to fully embrace realistic expectations and reset their internal business plans to meet them. There's nothing wrong with 20% growth!

PI: Why don't I hear any of you mentioning Evergreen Solar? Are they too small?

Jack Robinson: Winslow

Yes, they are very small and they're a little late to the solar party. Their technology is interesting but so was Apple Computer's. Being early with new technology is really pretty important. There are lots of large companies producing PV cells and systems. And they're not commercial yet.

PI: Would this be a good time to consider a water company?

Jack Robinson: Winslow

Absolutely! People are going to drink water and they want to know what's in their water. Last week, there was a write-up on the quality of water on various airlines. You certainly don't want to drink water in an airplane unless it's bottled water.

Vermont Pure (VPS: AMEX) is the largest public US water bottling company and the most important one in the Northeast. It's a small, Vermont company with almost $100M in sales and a fair amount of debt. I think the stock is way undervalued. In comparison, Sparkling Springs is a somewhat larger company that sells bottled water to eastern Canada, Europe, and the US northwest and was just acquired by Danon (one of the large food companies) for 3.5 times sales. More than likely, a company like Danon, Coke or Pepsi might acquire it at some point.

Water filtration companies are another good bet. There's a small company in Connecticut called Cuno (CUNO: Nasdaq) that makes filters that's a very interesting company. Their filters are for the home or are being built into refrigerators. The stock's done quite well. They are a technology-driven company - they continue to develop new, better and cheaper products. They really are a leader in the space. Trojan Technologies is a Canadian company in the water space. You can only buy it with Canadian dollars.

PI: Eric Prouty likes Intermagnetics. What's your take on them?

Jack Robinson: Winslow

It has an interesting superconductivity product, but they're primarily a magnetic imaging company. They've got a health-related business, which is fine, that is driving the profitability of the company. So, it's not a pure play and superconductivity is a long way off in terms of being commercial.

PI: Any other interesting energy companies?

Jack Robinson: Winslow

IMPCO gave birth to Quantum and bled a lot because of it. Now that they've spun it off, they aren't bleeding. They are merging with an Italian counterpart and they'll be the world leader in this concept of converting gasoline engines to natural gas engines.

That's important because there are parts of the world where there's plenty of gas around that's even cheaper than gasoline - so, you can afford to convert and burn a lot cleaner. In the case of Mexico City, which is suffering mightily from the air pollution from vehicles, there's a lot of conversion going on. This company is profitable. It's not a high growth company because it's somewhat sensitive to the economy, but they are a market leader.

Ballard is clearly the leader in fuel cells for transportation. They continue to make progress and they have a huge amount of cash. By raising another $100 million they should have no trouble getting to profitability in the next five years or so.

Fuel Cell Energy is the leader in stationary fuel cells but their top line progress has been disappointing. Fuel Cell's product isn't close to being economic. They need to get the volumes up so that costs will come down.

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Ken Scott at Walden takes a very different approach.

PI: What's your take on the direction the economy is going?

Ken Scott: Walden

We're cautiously optimistic on the economic outlook. There's a risk of a double dip recession - the risk is greater than it was several months ago but it's still relatively small.

PI: How do you recommend investing now?

Ken Scott: Walden

We approach that answer from an asset allocation perspective. We are neutral in our outlook on stocks and believe bonds are not very attractive right now. You remain diversified. Plan for the long term, set your financial goals, determine the rate of return that's needed, consider your tax situation, liquidity needs and risk tolerance, and then develop an appropriate asset allocation and stick with it.

Small cap stocks aren't as attractive as they were a couple of years ago, but they are still an appropriate investment for a portion of your portfolio. That's where most sustainable investors are going to find opportunities that are in line with their sustainable investment objectives, so we caution those investors to maintain only a portion of their assets there, and to be well-diversified by sector and by specific companies. There are significant risks associated with those stocks - price volatility and company-specific issues that can arise.

PI: If only a small portion of your portfolio is in sustainable-oriented stocks, where's the rest of it?

Ken Scott: Walden

There are several ways to achieve your investment objectives as a sustainable investor. One is to screen out the types of companies that don't meet your criteria (weapons, tobacco, nuclear are some common screens). Another method is to look for companies that embrace your values and are also sound financial investments. Lastly, you can dialogue with companies you invest in to use your leverage as an investor to encourage better practices. Our clients use all those levers.

We focus our small cap investments in themes (Best Employers; Building Community; Education; Healthy Living; Resource Conservation; Waste Reduction; Workplace Equality; Medical Care); we believe in the long-term potential of the themes. Rather then recommend particular stocks we find companies that best represent the themes. We also don't emphasize one theme over another. We try to keep each theme in the 5-25% range of the total so we have diversity across themes.

We're not trying to make bets on or emphasize a sector or company over another, except that the company is in the portfolio. So, when you look at the overall growth rate and valuations in the aggregate of the companies they are equal to those in the small cap market. The themes drive the potential for high performance. We keep each stock at no more than 2% - if it increases out of proportion to the whole, we sell the excess. We don't have a "favorite top 10 holdings;" we use a portfolio approach. We look for a bunch of companies in each theme.

Sustainability investors should look for a broad range of companies. Companies affect the natural environment in two key ways: they use resources (land, water, energy, materials) and they generate waste (measured by volume, toxicity etc). We believe that companies offering products/ services or have manufacturing practices that significantly reduce resource consumption or limit production of waste will benefit relative to their peers in the long run.

PI: What do you think about Evergreen Solar?

Ken Scott: Walden

When I look at their goals as an organization, and I look at their cash flow, income and balance sheet, it's tough to see how they will have enough cash to get them past the next 5 months or so. They need to attract outside capital to fund their growth in the very short term. One of the key criteria for innovations companies and folks should keep this in mind - you have to make sure the companies can sustain themselves in the short, mid and long term - long enough to sustain their innovation - their emerging growth technology. It's a cash crunch issue. Evergreen has a great product, they seem like a good management team, and they're in expansion mode. If they get the financial assistance they need, their long term is promising. We're avoiding them right now, but we are invested in Astropower and Spire.

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Lastly, we interviewed Terry Foecke.

PI: Is there a theme - a type of investing that you would do during in this economy?

Terry Foecke: Materials Productivity

I'm either looking for companies that offer a dividend so that I get paid to wait or who have something that is making money and growing its earning power, and I think is going to explode upward as the economy heals. They're not cyclical as much as they've been caught in the whirlpool, but they've been getting better and better, and as we come out of this they're going to go up fast.

A gas utility, Atmos Energy (NYSE: ATO) with about $1B market cap is a dividend play - the yield is at 5.25%. They are a natural gas distributor in the Pacific NorthWest. We're invested in a string of them - there's not much difference between them - you pick between production and distribution. I picked this company because even though natural gas prices are rising a lot, they have very fair prices. They're growing nicely too. I think natural gas is a transition fuel - that's why I'm putting my "green" marker on them.

Now I'll tell you about four companies that are caught in the whirlpool but are building earnings power. Mettler-Toledo (NYSE: MTD): about $1.5B market cap is the result of a merger of a Swiss and American company several years ago. They make precision measuring instruments. To increase eco-efficiency, reduce waste generation and make better products, companies have to measure their processes more accurately. This company is in all the major segments, they're dominant in several segments, and they're growing nicely.

They go beyond just weighing and measuring things accurately, they also integrate it into a facility's information system. That's fantastic because it gives people feedback - there's excess waste generation, for example, just because people aren't monitoring it. They're the enablers that work right in the guts of the system.

Cuno (CUNO: Nasdaq): is a small water filtration company, about $500M market cap. In general, I'm not a big fan of water filtration as a sector because they don't solve the problem at its source. They let people keep doing what they've been doing and then they clean it up for them. What's different about Cuno is they have the biggest R&D budget in membranes; they are developing better membranes to filter water better and to help manufacturers use less water and less materials.

Other companies that use membranes aren't investing in R&D. Cuno looks at the whole system - their goal is source reduction - they consult with customers and figure out how to optimize their fluid use.

This company is swirling in the whirlpool, not going down or up. People need that. They have a recurring revenue stream because membranes need to be replaced. Cuno will jump out of the box when the economy starts to turn and their sector should pick up early.

Power Integrations (POWI: Nasdaq): is also on the small end - $500M market cap. When you turn off your TV or any appliance that has a display it still uses power. This "Vampire" or "Standby" power amounts to about 10% of total electricity use. POWI makes a chip that improves efficiency by 90%. Their big challenge - which they've overcome - has been to make the chip cost-competitive.

And just a few months ago, President Bush signed a decree that all government purchases must reduce standby power as much as is technically feasible.

They use a similar technology to improve power conversion from AC to DC. They make that big transformer on your laptop or cellphone charger smaller and more efficient so you use much less energy recharging them.

I just visited them last week. They have a wall clock that shows how much energy they save for every dollar of revenue. They calculate they save $2 of electricity for every dollar of product - it's up to several hundred million dollars saved. They're selling a lot of product and it's picking up fast. I think people that buy the stock now will see really nice returns in the next 2-3 years.

Cabot Microelectronics (CCMP: Nasdaq): market cap is just over $1B. They make slurry used in the manufacture of integrated circuits. When you've made all the circuits they have to be smoothed out using slurry. Iron oxide has traditionally been used and that makes up about 60% of their business.

Their new slurry - for the next generation of electronics - is a booming business. It's counter-cyclical right now because the new circuits that are coming out need to be built right now. New circuits have very fine lines, which means they are small and can do more things. Copper is the material of choice because it can be very small and more energy efficient. It's a better way to build a circuit.

What really turned me on to these guys is that they recently went to all their customers around the world who buy this slurry - whose processes generate lots of waste water, sludge and garbage like that -and offered to show them how to recycle the material internally. Cabot is presenting them with a complete package to make a better product and optimize the resources needed to make it. They're enabling more energy efficient chips, they're a growing business, they're in electronics - it's always great to find a nice enabler in electronics, so they're in.

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