A guide to green investment
Investing in clean energy.
Money is pouring into the clean energy investment sectors, which include renewable forms of electricity generation such as wind, biomass, tidal, wave and solar as well as companies involved in energy efficiency and waste and waste reduction treatment. According to the research firm ?New Energy Finance?, investment in these sectors increased globally by 41 per cent last year to $117bn (?59bn), of which just over half was used on new projects.
Many fund managers say the green investment boom began about 18 months ago. Al Gore's eco documentary film 'An Inconvenient Truth' served as a powerful catalyst, and also increasing scientific evidence of a man-made global warming has convinced many investors that anything that could combat climate change, or reduce energy consumption, could and would make a lot of money.
Such was the fever pitch around this 'market noise' that people started talking about a 'green investment bubble'. HSBC's climate change benchmark index, we have noted, which tracks the stock market performance of about 300 companies in the clean technology sector, has recorded doubling in the past two years, peaking in November and easily outperforming the rest of the general market.
Of these new recorded projects invested in last year, in the case of about half of them, about $24.8bn was spent on wind farms, according to 'New Energy Finance'. Much of the remaining $29.7bn went on various bio-fuel projects ($14.5bn), biomass and waste treatment projects ($7.1bn) and solar projects ($5.9bn). Investment in solar companies was virtually double of that that spent on the same processes in 2006.
But despite the rising oil prices touching $100 a barrel recently and a greater political will to tackle climate change, the clean energy sector has suffered particularly badly from the current credit crunch. It is almost down by a fifth since its November peak, according to the HSBC index, as investors seek to put their money into safer places rather than riskier companies pioneering new or unproven technologies.
Farley Thomas, the global head of wholesale investments department at HSBC, says: 'There has been a lot of hot money flowing into the energy production part of the clean technology sector. It's fair to say that this year there has been a bit of a slowdown after a strong run.'
The solar power centred industry has fared worst, with shares of companies down by about 40% this year. Bruce Jenkyn-Jones, director of investment at environmental fund manager Impax, says: 'In the second half of last year, a mini solar bubble developed. Clearly people holding solar energy stocks this year would have got their fingers burnt. You can't just blindly invest in renewable orientated companies.'
But many fund managers are quick to stress that they think the sector will recover. Michael Liebreich, the chief executive of New Energy Finance, says: 'Particularly with the new US president likely to sign up to the climate change agenda, the underlying fundamentals look more positive than ever.'
GREEN INVESTMENTS, THE FUTURE
Investment houses have become to see the environment as more than just a few niche products.
As environmental and green investment has moved into the mainstream, it has had to shake off a whole range of misconceptions and misunderstandings.
One of the first steps was to distance itself from the birkenstock and bike brigade. Although there is a clearly moral aspect to this investment approach, the sector is about much more than social responsibility. No-one is now ashamed to point out there is a huge economic opportunity too.
Also, ethical investors understand that there is a lot more to environmental investing than just climate change, although that's a big part of it. It is also about scarcity of resources, recycling, energy security, efficiency, cost reduction and government policy.
And, most recently, there has been a realisation that the environmental investor's universe is no longer merely restricted to the small, innovative start ups with an exciting but unproven technology, but with all the investment risk that it implies.
We have seen a fundamental shift in the way that all companies, big and small, operate their businesses and are planning for our sustainable future. Green investing is no longer a niche market, but we would anticipate, the biggest single investment idea of the next decade. But, pure play environmental investments are not necessarily the best way to cash in on the dramatic changes sweeping the business world.
No one has understood this better than MONEY CAN BE GREEN, with a range of funds that increasingly plays to all these emerging themes. MONEY CAN BE GREEN has focussed on three key subsectors: alternative energy and energy efficiency; water treatment and pollution control; and waste technology and resource management.
Major American bank, JP Morgan Chase became the third big banking group in the United States to issue strict guidelines that restrict its lending and underwriting to industrial projects likely to damage the environment.
A 10-page document covers climate change, sustainable forestry, illegal logging and the protection of natural habitats. The firm said it has also adopted the Equator principles, a set of principles and guidelines established by Citigroup and nine other investment firms investing in major industries including mining, oil and gas and forestry. The policy document follows similar pledges from Citigroup and the Bank of America.
Many environmental activists, have in recent years, been targeting the big banks as partner efforts to lobbying the federal government. JP Morgan developed its policy in conjunction with several environmental groups including the Rainforest Action Network and Friends of the Earth.
The Rainforest network had previously organised demonstrations at JP Morgan branches and at the firm's annual shareholder meeting in New York, which made them sit up and take notice.
Ilyse Hogue at the pressure group The Rainforest network said: "Banks have remarkably vulnerable brands and advocacy groups determined that this was a very ripe area. They are not dependent on one revenue stream and it's easier to shift them towards more environmentally friendly investments. There is a world of difference between talking to Citigroup and talking to Exxon Mobil."
The activists are arguing that not only are banks doing the right thing by refusing to lend to harmful projects in the future, but they are also avoiding the risk of costly litigation at some time in the future. A historical precedent exists here...
Banks are now saying they would be developing new financial products to promote emissions reductions, researching the financial implications of the rising cost of carbon and deploying investment capital to businesses that might reduce or mitigate greenhouse gases.
It has also listed certain "no-go" criteria ruling out investment in forests where critical habitats are being endangered. In addition, it has said it would not finance companies or projects that knowingly engaged in illegal logging.
ETHICAL INVESTMENTS
Ethical Investments: The Problem
Investments are being made in your name every day. Some of them may or may not be consistent with your personal ideals and values. But, by making financial decisions through your choice of mortgage, bank or building society accounts, investments, pensions or insurance, you can influence how your money is invested, and this is how MONEY CAN BE GREEN are well equipped and experienced to help you.
Whether it is your bank or building society account or your pension and/or insurance policies that you hold, the large institutions are deciding in which activities and companies to invest your money on your behalf, largely through investing in stocks and shares. Their primary aim (and rightly so) will be to select financially sound companies, which they anticipate will bring high returns for you, the client.
But, and this is a big but, these investment firms have not traditionally concerned themselves with how companies make their profits, and whether their activities benefit or damage the environment and the communities in which they are operating. Thoughts as to whether they pay their employees a living wage, the working conditions and a range of other ethical issues. More and more ethical and green consumers now understand that companies should incorporate these ethical matters into their overall business strategy. Ethical Investment: A Solution
Helping to reflect your values
Investing in green funds with specific ethical and environmental criteria is one important way of expressing your values in terms of your financial positioning. These funds are always managed by specialist fund managers and specialist researchers who avoid investing your money in the more negative companies, and do seek out progressive companies which they consider will also give you good performance in terms of return.
Ethical investment enables you to make a positive contribution to goals such as environmental protection, fairtrade and human rights whilst still receiving competitive returns. Ethical Investment Approaches
There are three broad approaches to ethical and socially responsible investments that different funds can combine in various ways. Any or all approaches may be right for you the client.
Negative Screening - The most commonly recognised form of ethical/SRI, negative screening involves avoiding companies that do not meet the ethical standards by which the SRI fund is run. Most ethical funds, for example, will not invest in tobacco production.
Positive Screening - Seeks to invest in those companies with a commitment to responsible business practices, products and/or services. This commitment can come in a large number of forms, such as the adoption of more sustainable environmental principles or with a strong programme of community involvement and ethical supply chain management in developing nations. Funds might invest in areas like environmental technologies.
Dialogue and Engagement - Approaches are applied by some fund managers, to encourage more responsible business standards, when there is a strong business case for change. This may not alter stock selection and mainly takes the form of dialogue between major investors and companies, and may extend to voting practices. This approach can be done separately to or in combination with screening. Fund managers will engage on areas such as inappropriate remuneration and climate change. This approach is also known as active shareholding.
Remember to discuss all the options with MONEY CAN BE GREEN To assist with your decision-making, you may find it helpful to speak to your financial adviser. If you do not currently have an adviser, it makes sense to contact one who specialises in ethical and socially responsible investment.
Lets give an example.
An arms manufacturer gets a large order and therefore needs to increase borrowings from its Bankers in order to meet the requirement. Can you honestly say that your Bank does not lend your money to finance the order? Tricky question... If a company agrees to finance or support a violent or brutal dictatorship, could you be linked to the transaction? If there is a serious chemical spillage, might you be seen as supporting this catastrophe? These are issues that need to be explored.
These are important questions, and every day hundreds of thousands of people who do not apply ethical or social screening to their money are allowing their funds to be used to finance companies and projects they do not support. If your Bank, Insurance, Pension or Investment Company were to ask you if you would mind them using your money to finance a heavily polluting company, of course you would say no. But let's face it, when was the last time you were asked? We at MONEY CAN BE GREEN ask these question.
Much of the problem with investing lies in the fact that when the savings, investments or pension payments of thousands of people are pooled together, the money is invested on the stock market. This money is going to be invested in companies with the sole aim of maximising the return at any cost. This is your money and your future, but how can you be sure that your future is not being rapidly destroyed by your own investments? The economics of the 'quick buck' can be so destructive. They work against all the laws of sustainable growth, of working within the limits of the planet's resources and the clear natural law that if we destroy our planet we destroy ourselves.
Ethical, or Socially Responsible, Investment offers the opportunity for investors and savers to avoid the companies whose activities they would not want to support, and invest in those operating within a moral framework that reflects their own moral stance.
The first ethical investment fund in the UK was launched in 1984 by Friends Provident as a direct result of their Quaker roots. 23 years later there are dozens of funds from many of the UK?s leading fund management groups.
Whatever your concern, People, Planet, Animals, Faith, there is now an ethical fund that will match your views. The concept of ?ethical? is going to vary between individuals, and "another man's meat is another man's poison", will inevitably apply. In our experience there are certain key moral issues that are deemed to be beyond the pale for all investors, but beyond that it is possible to apply more personalised and bespoke views upon the manner in which one's money is invested. This includes, for an increasing number of investors, not just avoiding certain activities but actively investing in a positive way; to support companies contributing to a sustainable future.
It would be misleading to imply that all ethical funds contain only companies about which investors would have a positive reaction. In reality, the average ethical fund contains many of these positive investments, but these positive holdings (often in quite small companies) are balanced by companies deemed to be ?ethically neutral?. Criticism of ethical funds is often based upon highlighting these ethically neutral companies but any comparison of an ethical fund against a non-ethical stable mate will highlight to an ethically aware investor that while the ethical fund is hardly a perfect solution, it is significantly better than the alternative fund, inevitably investing into those companies with appalling records in numerous areas of concern.
By applying socially responsible or ethical criteria to the use of your money within the 'system' you are making a stand for change. As long as campaigning continues on the sidelines, very little change will come about. The heart of our current system is money, and the pursuit of profit. Whilst there is nothing wrong with looking for growth from one's money, many draw the line at financing activities they do not support. By being part of the system, but at the same time applying moral criteria to how your money is used, enables change can take place more rapidly. Investing ethically is now one of the fastest growing areas in financial planning (funds in the ethical sector have grown from ?1Bn in 2000 to over ?5Bn in 2007).
As more people make a stand, the speed of change will continue to accelerate. The recent development of the engagement approach adopted by both campaign groups and city fund managers highlights a further opportunity for the socially aware investor to make a difference. Investing in companies using an Engagement policy allows managers to encourage companies to improve their social and environmental impact. Engagement isn?t going to turn an arms manufacturer into a wind turbine manufacturer, but it has been shown to make a significant difference to a corporate stance in an area where there is an opportunity for significant change; reducing a company?s carbon footprint or moving to a Fair Trade supplier
Time has also proved that investing ethically is in no way any handicap to investment performance, it is actually a significant benefit. In a recent paper released by Standard Life investments, they have proven that investing ethically has actually boosted the return on their ethical fund, over and above the equivalent non-ethical funds and against the appropriate Indices. The full paper can be found on our web site.
After nearly 20 years advising on ethical investments, it is still interesting to note that far too many investors with social, moral or environmental concerns have yet to make the link between their areas of concern and their money. The link is, in reality, quiet simple; if you do not actively choose to invest in a socially responsible fund, most, if not all, of your concerns will be compromised by your investments. So, the next time you are reviewing your financial arrangements, - banking, pensions, life assurance savings, ISAs, PEPs, etc ? take a step back and look at whether your are financing companies whose activities you are against, and whether you are actively investing in your future, of that of your children, to make a positive difference. It is your money and your choice.
Does it make a Difference?
If one recognises that the most influential part of modern life, like it or not, is the money system, then until this changes, animals, humans and the environment will continue to be abused in the name of profit. Socially Responsible Investment aims to maximise long-term profits balanced with concern and respect for wider social issues.
It is easy to feel that an individual cannot influence the money system, but we believe this is wrong. The faster Socially Responsible Investment grows, the greater the pressure on the investment institutions, Banks and insurance companies to move away from those areas involving socially irresponsible practices. The rapidly increasing concern amongst the public over the treatment of animals, people and the environment is, we believe, making companies involved in these areas less viable as a long term investment. In other words, the economics of Socially Responsible Investment are now more widely recognised as a sound long term investment strategy. The combination of consumer and investment pressure can bring about lasting change - change which will benefit people, animals and the environment.
Sound Financial Strategy
Investing in an ethical and socially responsible way is now acknowledged as a sound medium to long-term strategy. Whilst there will be those who are happy to make easy money at the expense of others, the rapidly increasing trend for individuals, charities and companies is to seek profit responsibly via ethical investment. After all, who would disagree with investing in companies that have good employment records, manufacture products that people want to buy at a fair price, and on which a good profit is made? It is important to remember that much of socially responsible investment concerns the positive sides of business life such as respect for the community (local and global) and for the environment. In these troubled times, an enlightened attitude to our responsibilities to future generations is imperative in business, if a company is going to survive.
Performance
Ethical funds have, overall, performed well compared to their unscreened counterparts. Indeed, in a speech to the 1998 AGM of the UK Social Investment Forum, John Denham MP (then Parliamentary Under Secretary of State for Social Security) confirmed that "research currently underway in this field appears to suggest that ethical funds have performed better than other alternative investment approaches".
It is becoming increasingly accepted that the socially responsible companies will prove to be an even better financial investment in the future. The rigorous screening processes involved in ethical investment can help to identify companies that, in the long term, have a great potential to do well. The proportion of smaller companies included in such a portfolio is an advantage, as the high performance of smaller companies over the long term is well documented. It must be remembered, however, that past performance is not necessarily a guide to future performance, and that the price of units can fall as well as rise.
How can I invest Ethically?
Many of us at some time in our lives will need at least one of the contracts listed below and any of these can be linked to a socially responsible fund. By choosing the contract you need and then selecting the fund which best suits your beliefs, you will be joining a growing core of people who are making a positive statement with their money. The contracts available include:
- Stakeholder & Personal Pension Plans
- Additional Voluntary Contribution Plans
- Company pension schemes
- Pension transfers
- Life assurance
- Regular savings
- Lump sum investments
- Personal Equity Plans & ISAs
- Critical Illness Protection
- Discretionary Fund Management
- Mortgage related plans
