Trucost

Can sustainable investing beat the markets?

October 20, 2010

This week, Newsweek released its second annual  Green Rankings of the largest companies in America, as well as a new analysis of big global corporations. These sorts of cross-industry comparisons of companies are difficult to do, but my sense is that Newsweek has done a credible job, with the help of partners MSCI ESG Research, Trucost and CorporateRegister.com. Given the attention that the list is getting,  it seems like a good time to return to a question I’ve thought about for years: Do companies committed to sustainability represent good investment opportunities?

The stock-market performance of Dell, which tops the 2010 list, is not encouraging: The firm’s shares have fallen by 55% during the last five years, while the NASDAQ is up by 18% during the same time period. Of course, one company’s performance over one time period doesn’t prove a thing. It turns out that over the past year, the top 100 companies on the 2009 Newsweek list outperformed the S&P500 by 6.8%.  While this data point doesn’t prove anything either, it’s interesting. So I arranged an email interview with Cary Krosinsky of Trucost to explore the issue further.

Cary Krosinsky

Cary is head of investor and corporate services for North America for Trucost, which is based in the UK. He’s also the author and co-editor, with Nick Robins of HSBC, of Sustainable Investing: The Art of Long Term Performance (Earthscan Publications, 2008), and he has taught classes on investing and sustainability at Columbia.

Marc: Cary, let’s start by defining “sustainable investing.” Is it different from socially responsible investing?

Cary: Socially responsible investing, or SRI, is too broad an investment category.  SRI encompasses very different things—alternative energy investing on the one hand, funds with a religious mandate on the other, as well as funds investing in a mainstream index such as the S&P 500, and subtracting out alcohol, tobacco and firearms.  We see many different styles of SRI.

Sustainable Investing is the more positive strand of SRI – one that is future-oriented, risk-adjusted and opportunity-directed. It looks at what companies can do to lessen risk, as well as capitalize on opportunities, in order to be ahead of the curve in their respective industries. It helps create long-term value, identifies “predictable surprises,” (as opposed to “black swans,”) such as climate change, diminishing water availability, human rights issues and others that influence investment outcomes.  Innovation emerges as a key driver of value through sustainability, as does the active management of environmental impacts.

Marc: It sounds like sustainable investing means identifying the smartest, most forward-thinking companies. In your book, you write that “sustainable investing funds have already outperformed consistently over the short, medium and long term.” How can you support that claim?

Cary: We found that for the 1, 3 and 5 years leading up to the end of 2007, when looking at SRI funds with this positive, opportunity-focused sustainable investing methodology, that they consistently outperformed their mainstream index equivalents.  When updating this study for a UN Principles of Responsible Investment academic paper in 2009, this still held true, both before, through and after the recent financial crisis of 2008 into 2009.

Further correlation of this has been demonstrated by diverse investors including Paul Hawken, who helps manage the Highwater Global Fund as well as Abby Joseph Cohen of Goldman Sachs.  Mark Fulton of Deutsche Bank spoke earlier this year regarding how the climate change sectors they are tracking have been outperforming their benchmarks since the recent market bottom. Matthew Kiernan, formerly of Innovest, now runs money and is also demonstrating outperformance from this more positive approach. The top 100 performers in the Newsweek Green Rankings which we actively participate in at Trucost, have outperformed the S&P 500, on an equally weighted basis, by 6.8% over the last year. [click to continue…]

{ 4 comments }

Social funds and BP: How embarrassing!

July 11, 2010

bp_logo_color.180105622If you are a shareholder in a so-called socially responsible or sustainable mutual fund, you may also be an owner of  BP, the company responsible for the environmental catastrophe in the Gulf of Mexico.

When BP’s oil rig in the Gulf of Mexico exploded on April 20, the company was a major holding of the Dow Jones Sustainability Index–which calls itself an index of “the leading sustainability-driven companies worldwide.”

BP was also held by Pax World Funds (“sustainable investing is a better smarter, way to invest”), by the MMA International Fund, which is part of a fund group that is “guided by Christian values,” and by the Legg Mason Social Awareness Fund, which, as of March 31, had BP as its single biggest holding.

These are not anomalies. When Cary Krosinsky, an editor of a book called Sustainable Investing: The Art of Long Term Performance, tallied up the holdings of about 350 socially responsible investment (SRI) funds from around the world, he found that at the end of 2008, BP was the second biggest holding, in terms of how much money the funds had collectively invested. The five biggest holdings were Royal Dutch Shell, BP, Nokia, Vodafone and HSBC Holdings.

Does this look "sustainable" to you?

Does this look "sustainable" to you?

What’s more, BP and Shell aren’t the only oil companies held by the social funds. The biggest holding of a mutual fund called the Sentinel Sustainable Core Opportunities Fund–which says it “screens for fundamentally strong, well-managed companies with sustainable business models and a commitment to corporate responsibility”– was, as of March 31, believe it or not….Transocean, the world’s largest offshore drilling contractor, which operated the Deepwater Horizon rig for BP.

While no mutual fund manager could have foreseen the oil rig explosion, you’ve got to wonder how a fund with the word sustainable in its name could have as its biggest holding an offshore oil drilling company. I emailed Sentinel to try to probe their reasoning a bit. You won’t be surprised to hear that they declined to be interviewed.

So what does the BP-SRI connection tell you? At the very minimum, it suggest that any investor in a mutual fund that calls itself socially responsible, sustainable, green, blue or any other color would do well to dig deep beneath the magazine ads and website fluff to understand what the fund is really all about. (Disclosure: I’m a small investor in Calvert and Domini Funds, and a believer in the SRI idea.) Some SRI funds still focus on feel-good, negative screens that shield investors from weapons, tobacco and alcohol, and don’t get much more analytical than that. (See Socially Responsible Investing’s Silly Screens) [click to continue…]

{ 5 comments }

Jeff Hollender: Greenwashing is getting worse

March 20, 2010

img_JeffreyToday’s guest post comes from Jeffrey Hollender, the founder, executive chairperson and chief inspired protagonist of Seventh Generation, which makes safe and environmentally-responsible products for the home. Jeff is energetic and multi-talented–he is an entrepreneur, the author of several books, including a brand-new one, The Responsibility Revolution, which he wrote with longtime journalist Bill Breen, a lively blogger at the Inspired Protagonist and an activist who sits on the board of Greenpeace USA. (He’s also a good guy and always has been, at least according to my wife; they went to high school together.) I’m looking forward to reading Jeff’s new book and will review it soon. In the meantime, here’s an edited and expanded version of a recent blogpost that he wrote about the challenges that face consumers who face an onslaught of green and sometimes misleading marketing.

As companies step up their spending on green marketing, the confusion about what’s truly green is getting worse.

For consumers, it’s a challenge to cut through the clutter and decide whether to buy green products or support green companies.

Here’s a guideline that is easy to follow:

We should absolutely not support green products from companies that use them to distract us from their larger negative environmental and social impacts. We need systemically green companies to address the challenges we face, not business-as-usual companies that hold up one green hand while hiding another toxic, CO2-emitting, waste-producing one behind their backs.

Two examples: [click to continue…]

{ 1 comment }

A low carbon mutual fund?

July 22, 2009

You want a car that gets good gas mileage and you want energy-efficient appliances (or at least I hope you do). But do you want a low-carbon investment portfolio?

The Green Century Balanced Fund is betting that you do. The Boston-based mutual fund says it is the first U.S.-based fund to disclose its carbon footprint, which is 66% less than the carbon intensity of the S&P500 Index.

GCFLogo

Let’s be clear what we’re talking about here. This isn’t an accounting of how much energy the mutual fund company uses in its offices or how often its staffers get on planes. It’s an analysis of the tons of carbon emissions per million dollars of revenue that are generated by the companies held by the Balanced Fund, compared to the firms in the S&P500.

Why would you care? Not merely because you want to invest in mutual funds and companies that are greener and cleaner than average (although, again, I hope you do) but because those funds and companies will over time outperform their peers—an arguable but much iffier proposition.

[click to continue…]

{ 5 comments }