ENVIRONMENT | Protecting our natural resources
12 March 2008
Business, Investors, and the Environment
By Matthew Patsky and Elizabeth Levy
Green investing, or investing with the environment in mind, is an evolving practice with a rich history. It has grown to include evaluating a company’s environmental profile. Many investors use their investments to promote a green agenda.
Matthew Patsky is partner and portfolio manager, and Elizabeth Levy is senior environmental analyst, with Winslow Management Company, a firm that specializes in green investing.
Investors play an important role in advancing the environmental activities of the companies in which they invest. Green investing, or investing with the environment in mind, is an evolving practice with a rich history. No longer just referring to avoiding companies with historical environmental liabilities, environmental investing has grown to include evaluating a company’s environmental profile to aid in research on topics including projecting future growth, analyzing preparation for upcoming regulations, and assessing risk preparedness. And many green investors are not shy about using their investments to promote a green agenda.
Risk-focused Attention
During the first wave of environmental investing in the 1980s and early 1990s, environmental investors were concerned primarily with evaluating environmental activities from a risk perspective. The massive losses from asbestos-related claims — estimated to be more than $250 billion in the United States alone, as reported in The Economist in 2005 — prompted some investors to include environmental liabilities in their financial analysis, such as responsibility and provision for remediation of sites contaminated with hazardous waste that are deemed Superfund sites by the federal government. Investors began incorporating other environmental data points into their thinking, such as use and emissions of toxic and hazardous chemicals. Research organizations such as KLD and the Investor Responsibility Research Center (now part of RiskMetrics Group) provided investors with data on environmental regulatory compliance and violations, emissions of toxic chemicals, and environmental management programs.
Today, environmental investors consider not only retrospective risk from past activities and emissions, but also future environmental risks, particularly related to climate change. For many environmental investors, as well as many environmentalists, climate change has emerged as an overarching concern that encompasses others, such as fresh water use and shortage, destruction of animal habitats, and air pollution.
For the companies that investors analyze, climate change presents a series of challenges for both current business and future planning. For example, according to the weather-risk management consultancy Storm Exchange, a two-degree rise in average temperature during autumn can result in a 1 percent drop in same-store sales, a key measure that financial analysts use to judge retailers. In September 2007, the temperature was on average two degrees warmer than normal, and October 2007 had the slowest October retail sales growth in 12 years, according to the International Council of Shopping Centers.
Climate and environmental concerns are also affecting the thinking of the private equity investors that buy and sell companies. In January 2007, the Texas energy company TXU Corp. was purchased by Goldman Sachs and private equity firms Texas Pacific Group and Kohlberg Kravis Roberts. Notably, the buyers announced that they had consulted with leading environmental groups Environmental Defense and Natural Resources Defense Council, and they had agreed to cut back a controversial plan to build 11 new coal-fired power plants to a more acceptable plan for three new plants as part of the purchase agreement. With plans for new coal-fired plants having been rejected by governments in Kansas, Oklahoma, Florida, and Washington State by the end of 2007, TXU’s investors’ agreement seems almost prescient.
New Opportunities
But instead of just looking to environmental information to help analyze risks, a new wave of environmental investors are looking at environmental protection as an opportunity, and they are investing in market sectors that barely existed even a few years ago. For example, direct investment in alternative energy-related publicly traded companies, such as through initial public offerings (IPOs) or secondary public offerings, totaled less than $1 billion globally in 2004, according to research firm New Energy Finance (NEF). In 2007, that amount soared to almost $25 billion (see chart). In 2007 alone, this flow of investment dollars directly to companies allowed the expansion of solar cell factories, the environment has had a few interesting consequences for environmental investors. The first is that there are now many more companies in which environmental investors can invest. According to New Energy Finance, between 1992 and 2002, there were 30 IPOs of alternative energy-related companies raising $2 billion; in 2003-2004, 29 IPOs raised $7 billion; in 2005-2006, 92 IPOs raised $13 billion; and in 2007 alone, 61 IPOs raised $17 billion.
As the universe of companies providing environmental solutions has swelled, so has the universe of investors investing in them. A variety of funds are now investing in alternative energy, including exchange-traded funds (ETFs) that invest in alternative energy indices, actively managed mutual funds, and a myriad of private equity funds, many launched in the past two years.
Even more remarkable, it is now possible for investors to make money by investing in these new technologies, which historically has not always been true. For example, the New Alternatives Fund has been focused on investing in alternative energy since 1996, longer than any of the widely tracked alternative energy indices. Between 1996 and 2004, the fund’s performance was essentially flat; between 2005 and 2007, the fund’s shares approximately doubled in value. Many of the indices and other funds investing in alternative energy have shown similar strong performance since 2005.
Using Their Power
Many environmental investors are not shy about letting the companies in which they invest know what is on their minds. The main tool that all investors use to analyze potential investments is disclosure of information by companies. While financial information disclosure is carefully monitored by national and international regulatory bodies, disclosure of environmental information is still largely voluntary.
Groups of like-minded investors frequently join together in requests for this type of information. For example, the Carbon Disclosure Project, representing a group of investors managing $41 trillion, annually asks global corporate leaders to present their greenhouse gas emissions in a standard, comparable format. And in the United States, the Social Investment Research Analyst Network has published a statement representing firms managing $435 billion, including Winslow Management Company, calling on corporations to publish environmental and social sustainability data according to a standard set of reporting guidelines from the Global Reporting Initiative, the producer of the most widely recognized framework for sustainability reporting.
In addition to asking companies to do things, investors can also tell them to do things by filing proxy resolutions to be voted on at companies’ annual meetings. Although the results of these proxy votes are nonbinding, meaning company management can ignore them, large votes can send a powerful signal to management. The Interfaith Center on Corporate Responsibility reports that as of January 2008, it had collected data on resolutions filed with more than 60 companies traded on U.S. stock exchanges for their 2008 annual meetings. The most common requests in these resolutions called for preparation of a sustainability report, reduction of greenhouse gas emissions, and the use of sustainably grown and harvested wood and paper products.
The Demand for Green Investing
Gone are the days when environmental issues were the concerns of only students and activists. It is no longer unusual to hear the terms “emission reductions” or “pollution prevention” from investment committees or the boards of companies in which they invest.
Led by environmentally mission-oriented investors, now even mainstream investors are beginning to recognize the value of environmental information and protection. At ExxonMobil’s 2007 annual meeting, for example, a shareholder-sponsored proxy resolution calling for specific greenhouse gas reduction targets garnered more than 30 percent of the votes, demonstrating the broad array of investors that are now concerned with this issue.
As the world’s governments begin to negotiate a climate treaty for 2012 and beyond, the need and demand for both environmental responsibility and protection from companies will only continue to grow, and so will investor attention.
The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.
