Climate changing in favour of SRI

By Owen Walker
Published: August 31 2008 19:42

The traditional view of an investment approach that takes account of environmental, social and governance issues has been one of compromise: conscience- burdened investors having to forgo returns for the warm inner feeling that their investments were not being used to manufacture weapons.
But things have changed: investors no longer worry about settling for lower returns in order to satisfy their scruples.

Fund management style has evolved so that investors – in particular pension funds – are moving away from blocking out companies involved in certain industries and are looking to engage with them instead.
The largest growth area for this kind of investing has been climate change funds. The increasing acceptance that the environment is under threat from human activity has also meant more general socially responsible investment funds have attracted greater interest.
Lord Stern’s 2006 report for the UK government into the economics of climate change predicted the value of low-carbon energy markets would be $500bn (£271bn, €340bn) by 2050, so it is no wonder many funds are seeing the green light.
Emma Howard Boyd, head of SRI and governance at Jupiter, says the company’s green fund managers believe they are “currently seeing the most interesting juncture in 20 years in terms of green investing”, despite economic volatility. She says this is due to attractive valuations and a huge uplift in activity and interest.
According to Ms Howard Boyd there are three key drivers for this: governments taking more action, consumers demanding sustainable products and businesses looking to exploit this opportunity. She says this triumvirate is positively engaged, resulting in a virtuous circle.
William Page, chair of State Street Global Advisor’s socially responsible investment team, has been keeping his eye on international agreements on climate change quotas such as the Bali roadmap. He believes they could directly affect investments.
“Potential legislation may include incentives for the development of environmentally sustainable products and services across the economy. Not only is there a need to respond to and combat the effects of climate change, there is also a need to adapt,” he says. “We believe demand will increase for services that, for example, enable better agricultural yields and more efficient management of natural resources. Legislation will soon require carbon dioxide emissions to carry a defined price. With CO2 recognised as an internalised cost to doing business, companies with greater CO2 emissions will be penalised.”
The recognised need to tackle climate change has led to the launch of funds focused on investing in green technology. Craig Mackenzie, director of the Carbon Benchmarking Project at Edinburgh University and an ESG consultant for Hymans Robertson, describes the buzz being generated around two such funds – from BlackRock and Pictet Asset Management – as being similar to the dotcom boom.
“Lots of pension funds are really interested,” he says. “One attraction for those funds is there is no muddying the waters with ethics. There is no ethical judgment involved.”
Pension funds looking to invest ethically have often found themselves in a legal minefield. The ruling in the Cowan v Scargill case of 1985 has been widely seen as setting a precedent that pen sion funds should invest solely for the purpose of getting the best returns for members rather than taking an ethical stance.
This view was challenged by a report on behalf of the United Nations in 2005 by lawyers Freshfield Bruckhaus Deringer, which suggested that failing to take ESG issues into account might constitute a breach of fiduciary duties. However, this has not been tested in court and Cowan v Scargill continues to act as a powerful deterrent.
But investors can get around this by using positive engagement rather than negative screening, according to Tim Currell, head of sustainable investment and corporate governance at Hewitt,. “Where SRI would usually exclude tobacco stocks because it would seem immoral, an ESG approach would take a view on the litigation risk when assessing whether or not to invest,” he says.
Mr Currell believes green investment is now less about trying to change the world, and more about seeing how the encompassing green agenda will affect investments.
“Climate change is the biggest issue of the moment,” he says, “only a fool would think about investing without considering the impact.”
Owen Walker is assistant editor at Pensions Management. This is an extract from Pensions Management’s SRI survey, found in September’s issue.
Copyright The Financial Times Limited 2008