Demand for sustainable investments has grown tremendously. But not all green stocks have performed well. In the first part of this series, Personal Wealth looks at what it means to invest in this space.
ISSUES such as climate change and reducing the size of our carbon footprint have become increasingly important today, and not just for environmentalists. Investors have also started to look at investable companies that focus on sustainable living.
These green companies are usually involved in technologies that help reduce negative impact on the environment, such as solar power, wind energy and water treatment. Some of these companies are looking at new ways to reuse or recycle waste products, while others are developing technologies that improve efficiency and reduce reliance on depleting energy sources, like coal and crude oil.
Demand for sustainable investments has grown tremendously. According to the Global Sustainable Investment Review 2014, the total assets under management (AUM) of socially responsible investing (SRI) funds in the US rose 76% to US$6.57 trillion (RM24.3 trillion) at the beginning of 2014, from US$3.74 trillion at the start of 2012.
The report, published by the Forum for Sustainable and Responsible Investment, also showed that the AUM of SRI funds in Asia rose 32% to US$53 billion during the same period.
European SRI funds, meanwhile, saw their AUM grow 17.6% to €127 billion in 2014, from €108 billion in 2013, according to a report by European ESG firm Vigeo. The number of funds rose to 957 in 2014, from 922 the previous year, despite the fact that they make up only 1.7% of the entire European retail fund market.
While most of these sustainable investments are listed on foreign stock exchanges, Malaysian investors can access them via online brokerages. Some of the foreign mutual funds (unit trust funds are called mutual funds in other parts of the world), exchange-traded funds (ETFs) and stocks can be purchased via US brokerage accounts, such as those offered by TD Ameritrade and Schwab, which Malaysian investors can sign up for through their websites.
Alternatively, Malaysian bank-based brokerages, such as Maybank Investment Bank, RHB Investment Bank and CIMB Investment Bank, also offer exposure to foreign stocks.
On Bursa Malaysia, there are several companies that have a green focus. They include Cypark Resources Bhd, Tek Seng Holdings Bhd, Wah Seong Corp Bhd, OCK Group Bhd and Tenaga Nasional Bhd, which are involved in the renewable energy business (see table).
Those who invest in green companies typically do so because they believe in a cause. The question is whether this approach is profitable. Does sustainability equal profitability?
Garvin Jabusch, co-founder and chief investment officer at Green Alpha Advisors, certainly believes so. “We have every opportunity to obtain competitive returns from investing in green assets. The most important innovations in the world have made the economy more efficient. This means more economic output. This generates wealth,” he says.
“Companies at the forefront of innovation will be the most sustainable and profitable in the long run,” adds Jabusch, who manages US$37 million at the Denver-based asset management firm in the US.
What green means
There are a number ways to define a green stock. In the sustainable investment space, terms such as environmental, social and corporate governance (ESG), socially responsible investing (SRI), and green investing are often used interchangeably. This makes the evaluation of sustainable investments highly subjective, and thus unreliable for comparison.
Even within the different funds, investments are made based on varying criteria, according to Jabusch. “What you have here is quite an array of definitions. There are no two [asset management] institutions that view this in the exact same way. So, it is up to the individual manager running the mutual fund or portfolio to define what green means for themselves and their clients,” he says.
To provide greater clarity, Green Alpha Advisors created the Green Alpha Next Economy Index (NEXTX), which tracks the performance of companies in what it calls the “next economy” — companies that are green, self-sustaining, eco-efficient and fossil fuel-free.
The NEXTX benchmarks itself against the S&P 500 and the PowerShares Wilderhill Clean Energy Index, and has returned 99.36% compared with the S&P 500’s 163.1% and the PowerShares Wilderhill Clean Energy Index’s -30.35% between December 2008 and December 2014. Tesla Motors Inc, SunEdison Inc, American Water Works Company Inc and Applied Materials Inc are among the constituents of NEXTX.
Investors themselves may have their own definitions or requirements from the type of green investments they buy into. Datuk Shireen Muhiudeen, managing director and principal fund manager at Corston-Smith Asset Management Sdn Bhd, says what clients ask for in their investment mandates can vary.
“For example, you can have clients who say they don’t want to buy anything that deals with nuclear power, but they are okay with fishing companies that use trawl nets to catch fish. It is up to the client to decide its threshold of what ‘green’ is and is not,” she says, adding that this requires the client to do his or her own homework.
“They first have to look into the earnings contribution of a company and see what proportion of its revenue is from ‘green’ sources. Then, they have to decide whether this is acceptable,” says Shireen, whose firm manages private investment mandates for institutional clients.
For Jabusch, his definition of what is green is pretty straightforward. “When you look at the environmental, social and governance definition, we are more focused on the ‘E’ part rather than the ‘S’ and ‘G’,” he says.
“We try to assemble a portfolio of companies that operate in businesses we hope can contribute to an economy that is indefinitely sustainable, or can go on for a long time without running into systemic risks that could undermine our environment over the long run.”
This article first appeared in Personal Wealth, a section of The Edge Malaysia, on March 23 - 29, 2015.