What is Environmental Investment?
By
Victor Bivell
Eco Investor
June 2008
Many people
confuse ethical investment, sustainability investment and environmental
investment. These are the three main types of environmental investment
that have arisen over the past 30 years, and while each has a contribution
to make to the environment, they also have key differences as investment
strategies.
Ethical investment
was the first approach to develop; it has some history in the 19th century
and began more formally in the 1970s and 1980s. Ethical investment is
based on a process called negative screening - filtering out those investments
that are seen to be harmful and therefore not consistent with an investor's
or fund manager's values. The most common activities screened out are
tobacco, alcohol, armaments, human rights abuses, animal cruelty, and
pollution, among others.
The second
form of environmental investment to emerge was environmentally positive
investment. This is based on identifying activities that are beneficial
to the environment. The sector began to gather pace in the early 1990s
and the Environmental Investment Directory of Australia, which I authored
in 1992, was I believe the first public listing of environmentally positive
investments in Australia. A few years later the term "positive screening"
began to gain currency and more recently the terms 'clean technology"
or "cleantech", and "clean energy" have also emerged to describe major
sub-sets of environmentally positive investment.
Sustainability
investment was the most recent to emerge, in the 1990s and early 2000s,
and has developed with the growing use of sustainability reporting. Sustainability
investment is also known as "best of breed" investing. It is based on
identifying those businesses that are the most sustainable in their industry
based on sustainability criteria such as business principles, utilization
of resources, treatment of staff, approach to customers and suppliers,
governance issues, contribution to the community, and others. These are
sometimes summarized as "ESG" - environmental, social and governance factors;
and "CSR" - corporate social responsibility.
All three strategies
make a contribution to the environment, and can be employed successfully
as investment methodologies. Ethical investment screens out investments
that harm the environment, sustainability investment identifies businesses
that make the most efficient use of their resources as part of a long-term
perspective on the environment, and environmental investment identifies
those investments that have a positive effect on the environment.
However, the
public often confuses these strategies for two reasons. The first is that
the demarcation between them is not always clear and some crossover is
normal. So some ethical and sustainability strategies may also utilize
positive environmental screening to varying degrees. However, the commitment
to environmental issues varies considerably between fund managers. Some
ethical fund managers only employ negative environmental screens, while
the more committed also use positive screening. Likewise, some sustainability
fund managers seek the best of breed businesses across every industry
sector, while the more environmentally committed will use negative screening
to filter out unsustainable industries and activities and positive screening
because environmental technologies are often required to achieve resource
efficiency.
The second
reason for public confusion is a degree of "greenwash' in the marketing
of the ethical and sustainability sectors and some of their financial
products. The environment is often the part of ethical and sustainability
investment the public is most interested in. So fund managers may emphasize
this aspect of their industry and funds in their marketing, giving environmentally
positive investments a higher profile than they actually have in the funds
themselves. When investors think they are getting a positively screened
environmental investment, fund managers can be disinclined to disabuse
them or to explain the differences between the three strategies.
The key difference
between environmental investment and ethical and sustainability investment
is that environmental investment is focused solely on environmental issues,
whereas both ethical and sustainability investment incorporate a much
wider range of issues of which the environment is only one. At a portfolio
construction and stock selection level, ethical and sustainability investors
have a far larger universe of stocks to choose from, many of which are
unrelated to the environment. In a typical ethical or sustainability portfolio,
the environmentally positive component is a minority and more often a
small minority of the assets.
In essence,
sustainability and to a lesser extent ethical investing are diversified
investment strategies. Sustainability funds are likely to have holdings
across all major industry sectors, with only the most committed managers
negatively screening for harmful activities and positively screening for
environmentally positive activities. Some also invest in companies that
may be environmentally controversial or harmful.
Ethical investors
will also hold many mainstream investments across most if not all major
industry sectors. A typical portfolio includes banks, insurance companies,
property trusts, manufacturers, infrastructure, etc, and some managers
may also positively screen for healthcare, education, housing, the environment
and other socially beneficial activities.
In contrast,
environmental investors have a much smaller universe of stocks to choose
from. Environmental investment is theme investing - like many other themes
on the stock market such as resources, gold mining, healthcare, pharmaceuticals,
information technology, infrastructure, media etc.
However unlike
some of these other themes, environmental investment is not as easy to
define. In a broad sense, environmental investment does include ethical
and sustainability investment, but because this can lead to confusion
there is a need for a more specific definition solely for environmentally
positive investment.
Because the
focus is on business activities that are environmentally positive and
address environmental problems and issues, the definition formulated and
used by Eco Investor Magazine is "Investments that solve environmental
problems".
This "problems
and solutions" approach to defining environmental investment is identical
to that used in many other investment sectors. For example in the pharmaceuticals
sector each pharmaceutical addresses a specific disease, condition or
health issue.
There are a
large number of environmental problems around the world. Among the well
known are global warming, pollution, waste management, native forest destruction,
habitat destruction, species extinction, feral animals, weeds, land salinity,
declining wild fish stocks, water availability, and water quality. Many
other problems are less well known or are specific to certain parts of
the world or circumstances.
Not all environmental
problems have immediate solutions, some at present have only partial solutions,
and even where there are solutions these can still require time or further
development to resolve the problem.
Examples of
clearly defined environmental problems and full or partial solutions include:
Environmental
Problem - Solution
Global warming
- Renewable energy, low carbon fuels
Native forest
destruction - Plantation timber
Waste and landfill
availability - Recycling
Habitat damage
- Eco tourism, environmental engineering, site rehabilitation
Declining wild
fish stocks - Aquaculture, mariculture
Chemicals in
food/ ecosystem - Organic agriculture
Vehicle pollution
- Improved technology, public transport, rail, electric vehicles, bicycles
Environmental
investment is about the business activity of devising, commercializing
and selling environmental solutions for commercial gain.
While many
ethical funds and sustainability funds make a useful contribution to the
environmental, by themselves they are not sufficient to solve environmental
problems. For example - ethical and sustainability funds may invest in
a property trust because it is energy efficient, but the electricity flowing
to the properties owned by the trust may still come from a coal fired
powered station, adding to the problem of global warming.
An environmental
fund using the "problem and solution' approach would look for a power
station that is powered by renewable or low carbon fuels, or that has
a new technology to improve coal efficiency.
Another way
to highlight the differences between the three strategies is to draw an
analogy with human health. Ethical investment and negative screening are
similar to a person avoiding those things in life that damage their health
- tobacco, drugs, gambling, violence, reckless behavior, too many late
nights, etc. Sustainability investment is similar to a person doing all
the right things to stay fit and healthy - plenty of sleep, good diet,
regular exercise, social involvement, etc. Environmental investment is
similar to what happens when the person gets sick - they go to the doctor
for a diagnosis and a remedy or pharmaceutical for that condition. Thus
environmental investment is a form of diagnostic environmentalism or medicinal
environmentalism.
So all three
investment strategies - ethical investment, sustainability investment,
and environmental investment, help the environment. Most ethical and sustainability
investment can be classified, in the positive sense, as light or medium
green. Environmental investment, because it focuses on environmental problems
and addresses their causes, is at the deep green end of the environmental
spectrum.
This article
was also published in The
Australian newspaper
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