Brett Arends’s ROI: ‘Green’ profits in your 401(k)? Think Japan more than Scotland

Confused? Don’t be. Japan is a global hotbed of green technology. Researchers at MSCI, the index data company, looked at who was filing for green technology patents last decade. Japanese companies were way out in front of everyone else. It wasn’t even close. Japanese public companies had filed for more than twice as many low carbon patents as U.S. companies. South Korea came third, and everyone else, including all those “greens” in Europe, were also-rans. (You can download the paper here.)

Especially interesting for investors is that Japan seems to be the home of “sleeping giants” of green tech: Companies that have poured a ton of money into low-carbon technology that is only now starting to ramp up. The standout from MSCI’s research is Toyota  TM, -2.52%, which has filed more low-carbon patents than anyone else on the planet. It makes more cars than any other company in the world, and is rapidly increasing its output of electric and hybrid vehicles.

But right now—I am not making this up—Toyota is valued on the stock market at one fourth of the value of Tesla  TSLA, -8.85%.

Or, to put it another way, Toyota’s $290 billion market value is less than one times annual revenues. Tesla’s $1.2 trillion market value is…er…24 times revenues.

How do you like those odds?

This isn’t a recommendation about Toyota stock specifically. Few ordinary people want to pick stocks in their 401(k) or IRA (and probably even fewer should try). It’s about the broad range of Japanese stocks. 

We shouldn’t really be surprised that the Japanese are taking the climate crisis seriously. The country has struggled for the kind of issues, such as overcrowding, and a shortage of domestic energy, that may become more common if the future works out badly.

The iShares MSCI Japan Equal Weighted ETF EWJE, -0.38% invests equally across 300 companies and charges just 0.15% a year. The Franklin FTSE Japan ETF FLJP, -0.84%, which invests in the more common size-weighted index of stocks, charges 0.9%.

There are other reasons to be bullish on Japanese stocks as well. It was already out of fashion among big money investors, which typically means it’s going to be more of a bargain. Meanwhile the number crunchers at fund company GMO think it’s a steal—and a rare one in a world where everything else is expensive.

Let’s not forget that Japanese companies in the main are loaded up to the gunwales with cash. Many of them have no effective debt—they have more money in the safe than they owe in the bond market. The biggest issue for stockholders for years, the lack of dividends, is slowly changing. Japanese companies in total have grown their annual payouts by 300% in the last 20 years, according to FactSet—faster even than U.S. companies.

There’s a broader point here, too.

If we’re worried about the environment, what are we supposed to do?

Some put their faith in politicians and the voters who choose them. Others trust boycotts, and mutual funds that shun companies that pollute. There are reasons to be skeptical either will work. 

But others may want to tackle the crisis from the other end—by investing their money in the people and companies who are solving problems, and finding new ways for the world to do much more with much less. They may figure that is the only viable answer.

The downside is that it’s difficult to pick winners in advance. I read a lot of research papers on green tech and green investing. Many of the ideas are so niche or convoluted I’d be reluctant to recommend them to anyone, except maybe an enemy. But betting on Japanese stocks offers plenty of ways to win.