Like Bo Jackson and others, Angelo Calvello is a “multi-sport athlete”.  The early and outspoken advocate of portable alpha and originator of the term “alpha-centric” has now established his thought leadership credentials in the emerging field of green investing.  He is the author of the forthcoming book “Environmental Alpha” (Wiley: 2009).

Calvello was one of several speakers addressing a standing room only crowd of nearly 400 people at Bloomberg’s New York headquarters at the inaugural CAIA Green Investing Symposium (organized by the New York chapter of the CAIA Association, and co-sponsored by the New York Society of Securities Analysts, the Connecticut Hedge Fund Association, and the Yale Center for Business and the Environment).

More than just a social issue, he describes climate change as the “mother of all investment themes.” In a refreshing departure from the usual (albeit important) socially-grounded view of climate change, he remained agnostic with regard to even the dirtiest of energy technologies (e.g. coal).  Instead, he focused his remarks today on how to generate returns given the realities of climate change.

The drivers of those returns, according to Calvello, can be categorized as science, economics, policy, and technology.  He divides “environmental investing” into 5 categories: clean technology, sustainable property, LULUCF (Land-Use, Land-Use Change, and Forestry), carbon, and water (although he acknowledges that water does not have a direct effect on green house gasses).

So what is environmental alpha?  Although environmental investing may show potential for outsized returns in the future, it could all just be environmental beta.  But Calvello argues that such a new field exhibits inevitable market inefficiencies.  He points to the complex choice of a wind farm location as an example of the type of investment that relies on emerging and uncommon knowledge.

Reducing dirty energy use by 50% before 2050 (as global policy makers have discussed) would require about $45 trillion dollars – or about 1% of GDP per year.  And that, according to Calvello is the heart of the investment opportunity.

“Backburner” no more

Rob McAndrew fondly recalls the heady days of 2006 and 2007 when carbon trading was the cat’s meow.  But as he said today, “in the midst of a global economic downturn, it’s no surprise that carbon trading has taken a back burner.”

But McAndrew, the SVP of the Chicago Climate Exchange, is bullish again.  He says his email is once again full of people wanting to know more about how to make money in the burgeoning market for carbon credits.  He listed off a series of trading strategies used by players in this space.

With 35 billion tons of carbon being dumped into the atmosphere every year, he says that the global market for carbon credits could reach a few trillion dollars by 2020.

If 2009’s carbon auctions are any indication of the future direction of this market, this is no pipe dream.  In June, the US Congress passed the “American Clean Energy and Security Act” that established the cap and trade system of carbon off-set credits.  And with the EPA estimating that it will cost between $13 and $20 per metrics tonne to pollute, carbon trading looks set to go from “backburner” to “boiling over.”

In advance of carbon emissions becoming a tangible cost, some institutional investors have already begun to calculate the carbon footprint of their holdings (e.g. Sweden’s AP2 pension fund).

Chile: The next Saudi Arabia?

Abigail Laufer is the CEO of hedge fund Virid Capital Management.  For her, the climate change investment opportunity comes from the quest for a lightweight, easy-to-charge battery.  One recent battery IPO, for example, listed at $13.50 and is currently trading around $23.00.

Another way to play the battery thesis: buy lithium.  Apparently, Chile is the world’s biggest producer of this important ingredient in the ubiquitous lithium-ion battery.  As Laufer muses, this could mean that someday the US is no longer beholden to Middle Eastern oil interests, but is instead reliant on a South American lithium cartel.

More Googles?

Steven Orlov has been investing in the environmental space for over 15 years.  So he’s learned to be a skeptic.  As he told the audience today, “sex sells.”  He argues that many environmental investment opportunities “appeal to your wildest dreams.”   But in the end, many of these opportunities don’t actually live up to their own hype.

Still, that doesn’t mean there won’t be several blockbuster environmental investment opportunities in the near future.  As fellow panellist and self-described serial entrepreneur, Howard Berke, told the audience, “there are several more Googles to come.”

Sunny Biofuels

Several speakers here discussed the emergence of fuels made from various biomasses (corn, wheat, etc.).  John Cusack (not the actor), a consultant and professor in the area of sustainable investing, says he can predict exactly how a new biofuel project will perform – he simply measures its distance from the equator.

So before you start to process Yukon potatoes into biodiesel, think again.  Sun, it turns out, may be the developing world’s trump card in the race to create economically viable biofuels.

Mother Nature isn’t the only one who dictates biofuel success.  Cusack says that different government policies can create serious market anomalies that work against the very objective of the biofuel in the first place (less greenhouse gas emissions).  He tells the story of a friend of his who can make more money by shipping his New Jersey-made biodiesel to Spain (where there is a requirement for it to be included in diesel fuels) than he can be selling locally.  As he points out, “imagine how much fuel the ship uses to get there…”

Food or Fuel: A False Choice

But can we feed ourselves and fuel our cars using the existing food production?  Bruce Kahn of Deutsche Bank Climate Change Advisers says we need to increase global food production by 50% to 12 quadrillion kilocalories per annum.

Last year, many biofuel skeptics argued that rising food prices were the result of more food being diverted into our fuel tanks.  Kahn says that’s not true.  He says that only a small proportion of food is used in the production of biofuels.  The bigger issue, he says, is the growing amount of food diverted into the mouths of our livestock.

So how could we possibly increase our food output by that much?  By increasing the global yield per acre to the level enjoyed by farms in the developed world (e.g. Iowa corn farmers).  The gap between the current state and the Iowa-corn-farmers-around-the-world is called the “yield gap.”

And there’s bad news on this yield gap:  Even if Iowa farmers took all of their high-yielding technologies and processes to every corner of the agricultural world, we’d still be short most crops (except wheat).  Far from being just a social policy issue, Kahn concludes that this yield gap will amount to a driving force behind a variety of specific investment themes in the next 30 years.  (See the DB Climate Advisors Website for more on those).

Kudos to all sponsoring organizations for helping to steer the climate change debate away from simply being a geopolitical concern and creating a policy-agnostic investment dialogue on the often divisive issue of climate change.