Spring is in the air and things are turning green, even on Wall Street. After the recent wave of corporate governance shenanigans and the backlash against financial wrongdoers, observers say they are witnessing the first buds of a “greener” investment focus among professional and individual investors.
The movement towards socially-responsible investing has, of course, been around for some time, spawning investment funds that invest solely in corporations with “green” environmental policies, or good labor practices. But now environmental experts like Judi Greenwald, director of innovative solutions at the Pew Center on Global Climate Change, are detecting a greater focus on these issues on the part of big banks and corporations.
“When you see the big mainstream investors like the big investment banks take notice of these issues, you know you’re on to something,” said Greenwald. “We’re sensing a change among the mainstream guys — they’re focusing on the impact of climate change and on sustainability issues. Things are moving in the right direction, but we’re coming from a pretty low base —there’s still some way to go.”
A number of recent developments appear to be driving the winds of change, experts say.
A group of public pension fund leaders recently asked the Securities and Exchange Commission to require better disclosure by companies about financial risks they face from global warming. And CalPERS, the California Public Employees' Retirement System and America's largest pension fund, is ratcheting up its campaign for improved corporate governance, withholding its support for the re-election of certain corporate officers and investing $1.5 billion in environmentally-sound funds and “clean” technologies.
What’s more, shareholder proxy resolutions against companies like American Electric Power, Cinergy, Southern Company, TXU and Reliant Energy have forced these power utilities to conduct studies of their financial risks from future climate change regulations.
Investors are voting with their feet, and also with their wallets. Investments in ecologically-sound or socially-responsible firms are among the most rapidly-growing parts of the financial services industry according to Thomas Van Dyck, a consultant with US Bancorp Piper Jaffray's Philanthropic and Social Investment Consulting group.
“Numerous studies show that companies with better environmental and management practices show better returns,” Dyck said. “The trend of greener investing is growing fairly quickly and as people see more and more performance with purpose they’ll decide to invest along with their values because they don’t need to give up performance.”
Garvin Jabusch, director of research at Sierra Club Mutual Funds, a family of funds started in January 2001 that invest in selected companies that meet the environmental guidelines established by the Sierra Club, an environmental grassroots organization, says that investments made with social or environmental criteria attached have grown from about $500 million in 1996 to some $2 trillion in 2003.
There are financial advantages to investing in companies good environmental and employee track records, as they tend to be more efficient and willing to adapt, according to Jabusch. “If you invest in a company with a bad management team, one that mistreats its employees and the environment, you might see a higher share price now, but you’ll see a material impact on a firm’s share price once the information comes out.”
There’s movement in the venture capital community too. Across the country, venture capitalists are opening their wallets to upstart firms that are developing "clean" technologies in anticipation of a growing market for products that generate revenue without harming the environment.
In 2003, investment in clean technology ventures rose 8 percent to $1.2 billion, while overall venture capital investment fell 14 percent to $18.2 billion, according to the Cleantech Venture Network, an investment firm that looks to invest in “clean” technologies, which the Howell, Mich.-based group defines as technologies that allow for more efficient use of natural resources and greatly reduce ecological impact.
Venture capital firms are pouring money into clean technologies related to water purification, agriculture, transportation, manufacturing, recycling, air quality and alternative energy such as solar, wind and hydrogen. "We're getting a bigger and bigger piece of the pie year after year," said Keith Raab, Cleantech's president and CEO.
However, some venture capitalists are cautious about the sector, pointing out that there is no clear standout firm, and so investing is risky. Others believe the latest funding boom in the sector is different, noting that a variety of technological, political and economic forces have converged to make clean technologies ripe for investment. And CalPERS’ plan to invest millions in “clean” technologies is a huge plus, they note.
"The fundamental economics suggest there's a good payout for a whole fleet of alternative, renewable technologies," said Kyle Datta, managing director of the Rocky Mountain Institute, a Snowmass, Colo.-based nonprofit that promotes eco-friendly capitalism.
The market for alternative energy is sure to grow as global oil prices rise, fossil fuels become more scarce, states look for more reliable energy supplies and the United States reduces its dependence on foreign oil, investors say. The market is also being driven by increasingly stringent regulations on air, water and energy. On top of that, many corporations are now keen to promote "green" business practices, if only to show they're good corporate citizens.
Much of the drive is also coming from overseas according to Doug Cogan, deputy director of social issues at the Investor Responsibility Research center, an independent firm that conducts impartial research on corporate governance and social responsibilities.
Although the United States has not implemented new emissions standards aimed at curbing global warming, many European nations have moved ahead. This has led a number of Wall Street firms to examine the shareholder exposure to emissions restrictions, Cogan said, particularly in energy-intensive industries like oil and gas.
Elsewhere on Wall Street, some investment rating services, like Standard & Poor’s, are looking into ways to evaluate firms in terms of their corporate governance and ecological awareness, said Cogan. Also, a number of new academic studies show a positive correlation between environmental performance and shareholder value.
“So there are a number of wheels in motion, the question is whether they mean new standards will come to bear,” Cogan said.
“It’s a chicken and egg situation,” he continued. “A lot of big investors and pension funds want the evidence that this is profitable before going ahead, but you also need the big pension funds and banks to move on this before companies also move ahead. So it’s just a matter of who will take the impetus here to move the process forward.”