By Elisabeth Rosenthal
Friday, November 14, 2008
Until recently, green investment funds were mostly a niche for individual investors. But now investing with the idea of improving the environmental actions of corporations, not just maximizing profit, is catching on among big pension funds and foundations, particularly in Europe and even in a few outposts in the United States.
This is particularly challenging in the rocky global markets today. The pioneers in this field, however, are not backing down. They hope to make a big difference by leading the way in redirecting investment toward companies that do the least environmental damage and those that try to limit their output of carbon emissions thought to contribute to global warming.
The leading advocates in this movement include the Norwegian Government Pension Fund-Global; ABP, the huge Dutch government pension fund; and the pension fund of the British Environment Agency. In the United States, the California State Teachers' Retirement Fund, one of the largest pension funds in the United States, is one of the few American funds that has taken on a similar mantle.
Howard Pearce, director of the pension fund for the British Environment Agency, said, "Quite simply, we decided that we should do this because our investment strategy was not linked to our mission."
But most institutional investors, including a number of foundations already committed to environmental goals as part of their giving, have resisted the movement, or taken only small steps, out of fear that it would hurt earnings.
These include the Bill and Melinda Gates Foundation, universities like Harvard and Yale, and even the United Nations pension fund.
"From the environmental perspective, the great nonplayer is the investor community," said Matthew Kiernan, founder of Innovest, a global sustainable investing company. "The attitude is, 'We don't cut down any trees.' But money is the oxygen for all the other sectors."
Proponents of green investing say companies, foundations and governments can fight climate change through their investments even more effectively than through charities and other activities.
Some big investors are even going out of their way to divest publicly from companies deemed environmentally lax. More commonly, however, they try to put pressure on management through private meetings and shareholder resolutions to modify their effect on the environment.
"This can be the most important voice that they have - the money talks," said Frederic Hauge, chief of the Bellona Foundation, the largest nongovernmental environment organization in Norway, which pushed the Norwegian pension fund to act. This pension fund is the largest state fund in the world. Pension funds hold an estimated one-third of equities in the world.
Hauge and others emphasize that they are not suggesting that investors entirely avoid companies engaged in necessary but polluting industries like oil, mining and cement. They say investment funds can be directed to companies producing energy and engaging in other carbon-intensive activities in the most sustainable way possible.
In Britain, the Environment Agency's pension managers last year shifted contracts worth hundreds of millions of dollars away from U.S. fund companies like Capital International and State Street Global Advisers because they did not pursue what the agency considered adequate environmental standards.
Last month, the Norwegian global pension fund, which introduced a new sustainability strategy at the end of 2004, divested itself of the mining company Rio Tinto over its practices in Indonesia. This was the latest of seven companies the fund has sold for environmental reasons.
The California teachers' fund, known as Calstrs, with a $169 billion portfolio, has declared climate change its signature issue and has pushed companies like Exxon Mobil and Southern, a giant utility in the southeastern United States, to fully disclose their climate-changing emissions.
To encourage greater involvement on this front, three years ago the United Nations released Principles for Responsible Investing, a pact in which signatories pledged to integrate environmental issues with investments. Membership doubled to 381 in 2008, representing $14 trillion in management assets.
But its effect has been limited.
"The momentum is really huge, with the number of signatories increasing year on year," said James Gifford of London, the executive director of Principles for Responsible Investing. But he added that "many are, in fact, in early stages, doing things like looking for people with experience in green investing when they hire fund managers."
Advocates of sustainable investing say they are disappointed that many organizations professing support for environmental goals have done so little.
"You'd think the first movers would be the universities and the foundations, but there's been little movement there," said Paul Hawken, the former owner of the Smith and Hawken garden retail chain and the founder of the Natural Capital Institute, which tracks sustainable investing in the United States. "You see solar panels on the libraries, but you don't see them in the portfolio."
There is no requirement for foundations or pension funds to publicly list investments. In the interest of focusing investment decisions on achieving the greatest return, many foundations and universities have erected a wall between their investing arms and their donations for good works.
When asked about sustainable investing, Amy Fritsch of the Bill and Melinda Gates Foundation said "we have a two-entity structure."
The foundation, the richest in the world, distributes money and grants for projects separately from the management of its investment portfolio, which is run by a separate group, BGI, which did not return telephone calls.
Josh Poupore , a spokesman for Harvard, said the university was "doing so much across the board to promote sustainability on campus" but "unfortunately can't talk about what we're doing in investments."
The United Nations pension fund did not return more than half a dozen calls for comment.
The idea of social investing originated in the 70s and 80s, as companies divested themselves of companies that supported the Vietnam War or apartheid in South Africa. Over the past decade, as concerns about the environment have risen, there has been more interest among private investors.
But foundations and pension funds often have an obligation to maximize returns. They say they fear lower returns on green investments. Pension fund pioneers in the field say the two goals are not necessarily incompatible.
"We have the same return expectations as from our conventional investments," said Jack Ehnes, the chief executive of Calstrs, which has a billion-dollar sustainability investment program. "We are using our portfolio as leverage to tackle climate change."
Rob Lake, who manages a large European national pension fund that could not be identified because of its public investing policies, emphasized that his primary legal responsibility was still to the people invested in the fund. "We're not trying to become some $217 billion deep green fund that invests only in wind farms," he said. "But we think there are huge potential opportunities and risks in climate change."
For example, he noted, companies that do not prepare for the possibility of more restrictive carbon emissions standards could take a huge hit in earnings in the future, harming those who invested in the companies.
Even for those committed to green investments, choosing acceptable companies is a big challenge.
Last year, ABP, the $350 billion Dutch fund that is a leading state pension fund in Europe, hired a consultant to review all of its investments - nearly half a million equities, real estate, infrastructure holdings - and it has started a $1 billion fund to invest in alternative energy.
About five years ago, the United Nations started the Global Compact for businesses promising to improve their actions in human rights, labor, the environment and fighting corruption. This year, the Global Compact had to throw out 700 companies that failed to undertake concrete measures. An additional 150 companies are on probation.
That leaves many investment funds on their own.
"Active engagement and shareholder involvement can be very effective," said Gifford of the UN program Principles for Responsible Investing. "But that takes significant resources and few do it well."
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