Ethical and environmental investment criteria have been the domain of religious institutions and political activists. Their funds had high standards, but low profiles. However, with politicians and consumers now calling for more renewable energies, a new brand of fund focusing on environmental trends might turn an old idea into the next big thing.
 | Earning money by protecting the environment - a new breed of environmental trend fund combines profits and good intentions |
The path to (financial) hell is said to be paved with good intentions, but Bozena Jankowska’s message to the ones who think concern for the environment does not pay could not be any clearer: “The whole objective with these funds, as with any fund, is to make money for our customers and clients.”
Jankowska runs the Allianz RCM Global EcoTrends fund. Working in the City of London, she is responsible for a one billion dollar portfolio comprising companies dealing in renewable energies, pollution control, and clean water. Good intentions don’t rank among her investment criteria: “If a company doesn’t perform, we sell it”.
High Risk - High Growth
Investing in environmentally friendly technologies has become part of the mainstream market. The sector still has to deal with a number of risks, such as the novelty of technologies, the relatively small size of companies, and the impact of political decisions.
The sector's growth, however, is impressive. According to Ethical Investment Research Services (EIRIS), the pooled fund size for socially responsible investments (SRI) - that is investments based on social and environmental factors in addition to traditional financial criteria - in the United Kingdom has grown from some 230 million euros in 1989 to nearly 9 billion euros in 2005. Figures from SRI World Group, a research and consulting firm, indicate that the volume of total investments worldwide using at least one social investment strategy has grown from 40 billion dollars in 1984 to over 2 trillion dollars in 1999.
 | Wind power plants are among the most viable investments in the alternative energy market due to their reliable and mature technology. The World Energy Council estimates that market capitalization for all renewable energy companies worldwide was approximately 30 billion dollars in 2005 and might reach 1.9 trillion dollars by 2020 |
One thing the figures do not tell is how investment strategies evolved. Successful fund managers like Jankowska make a point about being different from previous generations of ethical investors. “Classical SRI funds actually look at a company’s environmental, social and governance performance. Thematic funds like EcoTrends strictly focus on the technologies and growth opportunities companies provide,” says Jankowska. “We have been moving away from purely ethical investments towards sustainable trends.”
The EcoTrend fund reflects this evolution and aims at stocks that profit from recent technologies and trends like the European Union's goal of cutting CO2 emissions by 20 percent during the next decade and increases in renewable energy usage. These goals are quite likely to translate into growth for solar panel producers like Conergy and wind power companies like Vestas, two companies that feature among the Allianz EcoTrends fund's top ten stocks.
Avoiding the "sin-stocks"
Classic socially responsible funds, also called ethical funds, work quite differently. Firstly, they avoid what is called “sin-stocks,” that is shares in companies linked to alcohol, tobacco, pornography, nuclear energy, fur trade, and others. On the other hand, they do not usually focus on specific growth markets and their portfolio can be made up of companies from virtually every sector provided they do well on a number of social and environmental aspects like labor conditions, energy efficiency, shareholder rights, responsible lending practices, and others. How these criteria are combined varies from fund to fund, but once a company passes the twofold screening process, it is eligible.
The idea is that socially responsible investment, as defined by the various criteria, translates into long-term growth and profits. Recent studies from the UK and Australia show, however, that SRI funds perform pretty much like conventional funds. Socially responsible investment in its classical sense is thus an interesting add-on for fund managers to attract new clients, but not always the motor for growth it had been thought to be.
In the end, it depends on the client. For those who want to invest in companies with good sustainability records, Allianz RCM offers the Global Sustainability Fund and the European Sustainability Fund. Both funds apply similar restrictions: no company that derives more than five percent of its income from alcohol, tobacco, nuclear energy, or pornography can feature among their stocks. Oil and gas companies, chemical companies, or mining companies, however, are eligible.
Good things don't come for free
“What we do is identify how companies incorporate sustainability criteria in their business strategy so that they are better at innovating," explains Jankowska. "We check if they are benefiting from environmental and social trends, producing services and products that are able to preempt environmental legislation, managing environmental liabilities, managing human resources, recruiting the best talents in the industry, improving energy efficiency and use of materials efficiently and so on.” The concept is laudable, but it can be a hard sell, especially to investors more interested in short-term growth than long-term investment.
For Andy White, a sustainable investment advisor at Innovest Group, it is their strict guidelines that limit the performance of some SRI funds: “The stricter your thresholds, the more limited your investment choice is and in turn your likely investment return is going to be equally limited.” An argument that is seemingly shared by number of investors. Since its inception in 2001 the Allianz Global Sustainability fund has grown to just 16 million U.S. dollars in investments.
The Allianz EcoTrends fund, first launched in May 2006, has already passed the one billion dollar threshold. It addresses investors willing to take higher risks in exchange for potentially higher profits. And while it has no ethical background, money invested goes into green technologies and thus benefits the environment.
Good intentions, it seems, do not have to be such a bad thing after all - they just have to be financially sustainable.
editor: Thilo Kunzemann
publishing date: March 16, 2007
