Cutting edge where conscience meets profit
Environment-linked funds have metamorphosed from niche product to full-blown fad. And experts say there are good reasons for that. Green is, quite literally, the new colour of money.
The increasing prominence of the climate change debate has pushed investment products with environment or sustainability-related themes, all but invisible just a few years ago, into the limelight. Companies active in sectors such as renewable energy and water treatment now find themselves courted by a host of financial institutions and their customers - especially in Asia.
About two years ago, the Dutch bank ABN Amro was one of the first to recognise sustainability as a 'mega investment trend for clients', according to head of equity research for Asia, Roger Groebli, and launched a fund tied to firms in the water industry. While it was well received in Europe and the Middle East, in Asia ABN Amro wasn't even able to recoup its marketing costs.
'The fund did not pay off because the awareness among clients and the industry was simply not there,' said Mr Groebli. 'It was an investment theme ahead of its time.'
Fast-forward 24 months and it's a very different story. According to Mr Groebli recent offerings tapping into water and alternative energies such as ethanol and solar 'have been doing extremely well'.
Ananth Shenoy, managing director and head of managed investments for Citi Global Wealth Management Asia Pacific, believes Asian investors have concentrated more on sustainability issues 'given the wide-ranging ramifications of climate change on the environment and the global economy'.
'As public anxiety escalates, investors are more aware of this recurring theme, and they're seeking opportunities created [by] governments, regulators, corporations and individuals reacting to the perceived climate change threat,' he said.
Figures from a Merrill Lynch Cap Gemini 2007 report indicate high-net-worth individuals in Asia allocate 10 to 15 per cent of their investment portfolio to sustainability strategies, compared to 6 or 7 per cent for their counterparts in other continents.
The world's financiers have taken notice. HSBC has launched a global 'sustainable and responsible investment' platform with a dedicated research team to ferret out more environment-related assets for clients. Popular demand recently convinced Barclays Global Investors to launch a second exchange-traded fund designed specifically for 'socially responsible' institutional and individual investors, which 'maximises exposure' to companies with 'positive' environmental characteristics.
Mr Shenoy said clean energy and clean technology investments topped US$70billion last year, a 43 per cent jump from 2005.
The trend isn't based solely on a burning desire among banks or the investment community to save the earth. 'Asian investors, even though they believe in sustainability, want to see performance.' And analysts and observers across the spectrum agree that environmentally conscious corporations tend to outdo their peers,' Mr Groebli said.
Perhaps the world's most prominent green advocate, former US vice-president Al Gore, warned an ABN Amro-sponsored event in Singapore last month that institutions or individuals practising 'short-termism' by failing to integrate environmental concerns into their assessment of a company's value were bound to pay a financial price eventually.
'Environmental externalities are growing ... and their impact on every investment is going to be more and more important,' Mr Gore said.
Regulatory trends that threaten some firms' revenues - the growing hunt for less carbon-intensive fuel sources doesn't bode well for the world's petroleum giants, for example - open windows of opportunities for others. Mr Shenoy sees companies focusing on wind and biofuels as particularly 'worthy considerations' for investors, based on the likelihood of governments trying to draw on alternative sources of power and the additional revenues renewable energy projects can often drum up through the carbon credit market.
Mr Groebli said firms with Asian infrastructure interests were also worth watching, given the healthy account surpluses and sizeable reserves of emerging giants such as China. He expected spending to surge on water treatment and supply in particular as countries moved to pre-empt the shortages - or flooding - that many argued rising temperatures had already brought to India and Malaysia.
While there's no shortage of rising stars in the sustainability landscape, analysts are still urging investors to exercise caution. ABN Amro, for example, hesitated to introduce climate change products 'because it's a bit of an overstretched expression, now everybody's going after [it]', Mr Groebli said. As with any trend a fair number of 'black sheep' have emerged to capitalise on the hunger for green investment opportunities, many pushing small companies with minimal liquidity that are easily subject to market manipulation.
'Certainly there are a lot of companies with a lot of substance, but the more attractive, the more popular [a stock is], the more cautious you have to be; don't just blindly invest in anything,' Mr Groebli said. 'Not everything that has a 'green' label and an ISO certificate is really green and will guarantee you sustainable performance.'