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November 2, 2008 9:16 pm
Investing the old-fashioned way, just by looking at a company’s financial statements and deciding how the current share price relates to the fair value of the stock, is so last year.
Instead, the most hard-headed commercially-minded asset managers are talking about a new form of investment process, including a checklist more usually associated with Greenpeace or Oxfam. Climate change, corporate responsibility, human rights – all these come under the banner of sustainable investment, and a broad range of industry participants have simultaneously come to the conclusion this is the way forward.
“It’s not a manifesto for saving the planet, it’s a tool for better assessing risk,” says Charles Cronin, head of the CFA Institute Centre for Financial Market Integrity, EMEA. “It’s just another way of peeling the investment onion.”
The CFA Institute recently released a manual for investors on how to identify environmental, social and governance factors at listed companies, and how to integrate these factors into traditional financial analysis.
Insight Investment, in partnership with world poverty action group Oxfam, is about to launch a year-long programme to promote discussion and research about the role of institutional investors in poverty alleviation and development.
“Responsible investors benefit from better risk management, greater transparency, and an active engagement with companies to promote better management,” says Helena Vines Fiestas, a policy analyst for Oxfam. “Social, environmental and governance issues are also key features of their investment analysis. In this climate, responsible investors offer a real way forward.”
Although Oxfam clearly has an agenda, it is making an effort to engage with investors who are concerned that their fiduciary duty to maximise returns overrides any interest in doing good. The first question to be asked, according to Ms Vines Fiestas, is what role, if any, investors have to play in poverty alleviation, but the second is how to measure their performance in this field.
This is at least a sop to those critics of sustainable investing who claim it is too woolly to be meaningful. Proponents of the concept naturally reject this
criticism. “If you invest in ways that don’t undermine the financial system [ie by having regard to the long term impact of your investment behaviour], that’s economically rational,” says Colin Melvin, chief executive of Hermes Equity Ownership Services, the corporate governance arm of the institutional fund manager owned by BT Pension Scheme. “That economic rationality has been absent for some time.”
James Gifford, executive director of the UN’s Principles for Responsible Investing, says he is also seeing a surge in interest in these issues, and not just for woolly reasons.
“As things become tougher, it’s the commercial fund managers who need to demonstrate to their clients that they have these things under control,” says Mr
One significant driver of the increasing interest in ESG factors is that they are seen as a way of improving risk management. In the current environment, where everything seems terrifyingly unpredictable, anything that helps pin down what is going on is welcome.
“People don’t want any surprises these days,” says Mr Cronin. “The issues are not new, but an ESG framework helps you manage an aspect of risk.”
Whether it is about better risk management, a clear conscience, better returns or good PR, more and more asset managers are jumping on the bandwagon.
Dutch financial services provider Robeco predicts the responsible investment market will grow to between 15 per cent and 20 per cent of global assets under management by 2015, bringing it firmly into the mainstream.
Robeco itself has already demonstrated its commitment to responsible investment by signing up to the UNPRI and the Carbon Disclosure Project, as well as buying an 85 per cent share in Sustainable Asset Management, a Swiss based fund manager specialising in sustainable investment.
Christian Werner, Sam’s chief investment officer, explains the thinking behind his investment philosophy as being driven by concerns around climate change and the environment.
“If we don’t invest in these companies fast, we won’t get anywhere near the solution.” This is the argument that growth will have to come from these sectors if the future of humanity is to be secure, and therefore they provide an excellent investment opportunity. “It’s all about investment and asset allocation,” says Mr Werner. The asset allocation certainly seems to be running his way, as Sam has
just picked up two new mandates from US institutional investors.
Deutsche Bank, which has been on the climate change bandwagon for some time, last month published Investing in Climate Change 2009, Necessity and Opportunity in Turbulent Times by its head of climate change investment research, Mark Fulton.
Not to be outdone, HSBC has instituted a Climate Change Centre of Excellence, whose head, Nick Robins, has co-authored a book, Sustainable Investing: The Art of Long-Term Performance, with Cary Crosinsky, vice president of Trucost, an environmental research organisation.
Goldman Sachs’s global investment research division, the same that came up with the Bric concept (Brazil, Russia, India, China), which was a notable marketing success, is about to launch its latest, less snappily titled, concept, Sustain. This will form the basis of a fund drawing on environmental, social and demographic developments to predict investment success.
Although most of these sustainable investment initiatives are about equities, it is not the only asset class affected by the new ways of thinking. Real estate is also subject to a shift in emphasis, although with property it is much easier to make the case for environmentally friendly management.
This is because much of it is about saving energy, which in turn saves costs.
However, that is not the only way for property investment to be sustainable. Oxford Group has recently launched a closed ended fund investing in renewable energy sustainable property projects in Eastern Europe and Near Asia. Aiming to raise €50m (£39m, $64m), the fund promises to deliver a minimum of 25 per cent per annum over the three and a half year life of the fund.
By investing in areas designated by local governments as regeneration targets, ensuring the planning process integrates developments into local infrastructure with a view to sustainable community building and ensuring the supply chain is also sustainable, Hadley Barrett, Oxford Group’s chief exeuctive, is confident he can meet this goal.
“Even in a falling market, our investment philosophy of adding value to projects rather than price speculation is aimed at creating value for investors,” he says. Whether being green is really profitable in the difficult markets likely in the coming few years remains to be seen.
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