Green investing has been dismissed as a fad and a bubble, but it is outperforming the market and becoming mainstream, writes Caroline Madden
Much as people like to bury their head in the sand, it's no longer possible to ignore the green agenda. Climate change campaigner Al Gore was in Dublin recently addressing hundreds of business executives and investors and Budget 2008 was distinctly green-tinged.
It was followed by the State's first ever carbon budget and, this week in Bali, the UN climate change conference sees environment ministers from around the globe trying to negotiate a successor to the Kyoto Protocol.
The silver lining from an economic perspective is that eco-friendly initiatives are throwing up a considerable number of investment opportunities.
Green investing has been written off by some as a flash in the pan, dismissed as a niche strategy by others, and compared to the hype of the dotcom era.
But Jean Ryan, eco-fund investment specialist with KBC Asset Management (KBCAM), says that the green investment "theme" is neither a fad nor a valuation bubble - it's mainstream and it's here to stay.
"It's our view that this should be one of the strongest growth themes in markets over the next five to 10 years," she predicts.
"It's a much more tangible concept than the dotcom bubble was. It's not just a green issue anymore. We would see this as a mainstream investment theme."
So how can investors tap into the green theme? Those with sufficient time and resources on their hands can build a portfolio of stocks either by "negative screening" - ie weeding out companies that will be adversely affected by the climate change agenda, such as steel producers - or by "positive screening", which involves cherrypicking a selection of companies that are likely to benefit from the green agenda, such as Toyota, which produces a range of more environmentally-friendly cars.
Alternatively, they can take a "pure play" position by investing in companies that are directly involved in the climate change sector, such as developers of renewable energy technology.
The problem with this DIY approach is that only the very largest retail investor will be able to build up a large enough equity portfolio to reduce the stock-specific risk enough to make this an attractive strategy.
Green funds offer a convenient and practical alternative and, fortunately for the small investor, there is a growing choice available on the Irish market.
KBCAM has been managing alternative energy and water funds since 2000. Originally, these funds were only available to large institutional investors such as pension funds, but they are now open to retail investors in a packaged form through New Ireland's Innovator Fund.
They can also be accessed individually through New Ireland and Bank of Ireland Life. The minimum investment required is €5,000. The funds are invested directly across a diversified range of "pure play" companies.
"There are quite a lot of high net worth individuals investing in them," says Ryan. "People are looking to access new and exciting investment themes."
The demand for these funds is coming not only from green-oriented individuals who are making changes to their own lifestyle, but also from investors with no particular green leanings, but who simply anticipate superior returns. The returns produced on the KBCAM funds dispel the myth that investors have to pay a "green premium" for making an environmentally-sound investment.
In a year when the global markets have been severely shaken, the alternative energy fund has returned 42 per cent so far. Over the last five years, it has delivered a return of just under 24 per cent.
Dolmen Stockbrokers' Green Effects fund has also put in a strong performance this year, producing a 20.5 per cent return on investment. The main objective of this fund is to achieve long-term capital growth and income, but it only invests in stocks that are included in the Natural Stock Index (which excludes companies judged to be unethical).
However, although the fund contains certain eco-industry favourites such as Solarworld and wind turbine developer Vestas, investors might struggle to see the relevance of including companies such as Starbucks and WestPac Bank in a green portfolio. This highlights the fact that the term "green" is not objectively defined and therefore comes in many shades. It also tends to overlap - at times confusingly - with socially responsible or ethical investing, such as FTSE4Good index in London. It's important to check the selection criteria used by fund managers to ensure it is aligned with your own expectations of what a green investment should be.
Irish Life's offering in this space is the Indexed Global Ethical Equity Fund, which is benchmarked against the FTSE4 Good index of companies that meet certain corporate responsibility standards. The fund is therefore focused primarily on socially responsible investing, albeit with a green element factored in.
In terms of accessing it, the bar is raised a little higher than other funds on the market, with a minimum investment of €20,000 required. The fund is available through Irish Life's Signature Bond, which can be accessed through brokers, financial advisers and the EBS.
Another product on the market is the Blackrock Merrill Lynch New Energy fund, which is available through the online bank RaboDirect. The fund invests a minimum of 70 per cent of its total assets in companies active in the alternative energy and energy technology sectors.
This is a volatile, high-risk fund, but so far has delivered in terms of maximising returns: over the last year, the fund has grown by 41 per cent.
As retail investors begin to develop a taste for combining strong returns with a clear conscience, fund managers are only too happy to cater for this demand and new products are emerging regularly.
F&C Investments has just registered a new fund - the F&C Global Climate Opportunities Fund - for distribution to the Irish market. And KBCAM's Climate Change Fund, which has exposure to water, clean energy, recycling and carbon credits trading and which was launched in February of this year for institutional investors, will be made available to retail investors in early 2008.
F&C has been one of the pathfinders in the search for viable retail ethical investment. Its stewardship fund was launched in 1984 to give individual investors keen to consider more than simple financial return somewhere to invest their money.
Hilary Aldridge, one of the managers of the "dark green" Stewardship income and growth funds, said that while demand for ethical funds is growing, investors are also more "savvy" when making ethical investment decisions. "Investors do not want to buy a product simply because it is green, she said. They also want a well-managed, quality fund which can generate good returns while at the same time put their conscience at ease through a range of positive and negative screens and a programme of active shareholder engagement."
Figures from the British Investment Management Association notes that the amount of money invested in ethical funds in the UK at the end of the third quarter of 2007 grew by around a third from a year earlier and now amounts to around £5.7 billion.
While such investment still accounts for just over 1 per cent of all fund investment, the figure is growing at a time when other funds have been reporting outflows. "Undeniably the popularity of these products has increased and this is likely to continue into the future but it is not a case of investors jumping on the bandwagon without doing their homework," Ms Aldridge said.
Research by consultants McKinsey notes that the earl approach of ethical funds - which simply screened out the so-called "sin sectors" such as tobacco and arms trading "tended to force an unacceptable trade-off between social criteria and investment returns".
However, Ms Aldridge notes: "Investors are becoming increasingly well versed on a range of ethical issues from climate change to waste management, arms trading and human rights. They are also wary of companies promoting an ethical and environmentally friendly image to deflect attention from less savoury activities they are involved in - a phenomenon known as 'greenwash'."
Investors swayed by the compelling green investment argument, and weighing up the growing range of market offerings, should bear in mind that green funds are generally long-term investments best used as part of a wider, diversified portfolio.
