The Investment Case for Sustainable Real Estate

22.04.2009 Sustainability is steadily gaining awareness in real estate. While the main focus is on energy savings, soft factors such as social responsibility and living comfort also have to be taken into account when carrying out cost-benefit analyses. Investment products such as funds or special mortgages have recently become available.
Sustainability has become a hot topic in real estate. In the past years, awareness with regard to environmental-friendly buildings has increased markedly. With global warming being on the agenda of governments across the globe, goals for the reduction of CO2-emissions have been adopted (the Kyoto-Protocol for example). Sustainability has also come to the forefront in the private sector, especially in light of the high energy costs witnessed in the past years. Beyond energy considerations, soft factors such as living comfort and corporate social responsibility play an important role in the increased availability of sustainable real estate assets.


Real Estate as Major Energy Consumer
Buildings account for a large share of energy consumption and thus of CO2 emissions. According to the MIT Center of Real Estate, real estate is the largest energy consumer in the US and responsible for over one-third of the world's energy consumption and CO2 emissions. It is estimated that buildings account for almost 40 percent of energy use in the US. It is thus sensible to focus on real estate when aiming to reduce energy use and costs. Over the past 10 to 20 years, national rating systems have emerged in numerous countries around the world. Each standard has specific requirements for a building to be qualified as "sustainable." Whilst an international standard currently does not exist, some rating systems such as the Swiss Minergie, the British BREEAM or the American LEED standards have found acceptance beyond the national borders. Certifications remain voluntary, but many governments have adopted regulations such as requirements for the energy use of new buildings and incentives such as tax advantages that favor sustainable real estate labels. Thus, environmental and political considerations clearly favor sustainable developments.


The Investment Case for Sustainable Real Estate
Demand for sustainable real estate has increased markedly over the past years, as the increase in Swiss Minergie certifications shows. Large institutional investors, including Credit Suisse, have committed to green building. Sustainable real estate also can offer investment opportunities from a purely financial point of view. On the one hand, green buildings are generally more expensive to construct than conventional ones and thus need additional up-front investments. On the other hand, the financial benefits of such buildings include lower energy, water, operations and maintenance costs, as well as improved indoor environment (including enhanced employee comfort, productivity and health).


Cost-Benefit Analyses
Various cost-benefit analyses for green buildings have been carried out. The 2003 report "The Cost and Financial Benefits of Green Buildings" by Gregory Kats, which analyzes the effects of green design on office buildings, provides one of the most comprehensive studies carried out to date. Based on a 20-year discounted cash flow model, it calculates that the average financial benefit of green buildings - approximately 62 dollars per square feet - by far outweighs the additional initial costs of approximately 4 dollars per square feet. The study estimates that energy savings alone are enough to recover the higher construction costs. But the study has some caveats. It attributes a majority of green buildings’ benefits to some socialized benefits such as increased employee productivity and health gains. It also assumes relatively low capital costs. The 2008 study "Doing Well by Doing Good? Green Office Buildings" by Piet Eichholtz found that US office buildings with a green certificates exhibit sales prices and rent levels that are respectively about 16 percent and 2 percent higher than identical non-green office properties.


Investment Conclusion
Hence, there is evidence that green buildings can be attractive investments in financial terms. However, as costs and benefits for sustainable real estate can vary markedly across regions due to the energy price outlook, subsidies, and the type of investors, Credit Suisse recommends evaluating green construction projects on a case-by-case basis. Investment products such as funds or special mortgages have recently become available to play this theme.

L’énergie solaire est très demandée

Par Willy Boder

La salon Energissima, qui s’est tenu à Fribourg du 23 au 26 avril, confirme l’élan du renouvelable désormais fortement subventionné
Installé devant deux grandes parois de panneaux solaires, conçus pour chauffer de l’eau dans des serpentins (thermique) ou produire de l’électricité (photovoltaïque), Stefan Corn ne sait plus où donner de la tête. Les demandes d’informations affluent au salon Energissima, consacré aux énergies renouvelables, qui a fermé ses portes dimanche à Fribourg et connu une affluence de 18 500 personnes, supérieure de 28% à celle de l’an dernier. Conseiller technique de la société vaudoise Agena énergies, forte de 30 collaborateurs, Stefan Corn sourit: «Il y a une très forte demande de Fribourgeois puisque Fribourg est le premier canton à offrir une aide directe à la construction d’installations photovoltaïques.»

Ce canton fournit, en 2009, des subventions à hauteur de 16 millions de francs, dont 5 millions sont pris en charge par le groupe E, fournisseur d’électricité. Marc Tillmanns, directeur romand de Swissolar, s’en félicite. «2009 est une année exceptionnelle pour la promotion du solaire grâce à des subventions fédérales portées de 15 à 100 millions de francs, sans compter les aides cantonales. Une installation coûte quelque 10 000 francs par kW de puissance, et vous obtenez, à Fribourg, 8000 francs de subventions. Cela met le prix du kWh solaire au prix normal, soit 20 centimes au lieu de 80 centimes.» Les subventions fédérales, qui permettent par une taxe de 0,45 centime le kWh, de vendre au distributeur le courant vert à prix coûtant, vont accélérer le mouvement. Les paysans disposent d’une aide via les crédits agricoles et commencent également à se dire que cela devient rentable de couvrir une étable de panneaux photovoltaïques.

En matière d’énergie renouvelable, la Suisse a pris du retard comparé à ses voisins européens. 50 000 installations solaires sont en place, soit un infime pourcentage par habitant. En Allemagne, cette part est sept fois plus élevée.

Distorsion de concurrence

Qui dit subvention massive dit distorsion de concurrence. «Cela ne me dérange si c’est pour faire concurrence aux énergies fossiles qui posent de gros problèmes de CO2», rétorque Marc Tillmanns. Stéphane Rolle, responsable du secteur «prestations de marché» auprès de l’Association des entreprises électriques suisses, n’est pas du même avis. «Le solaire ne peut être qu’une énergie complémentaire puisqu’elle est inutilisable la nuit. De plus, on subventionne une énergie chère à produire car la technologie n’est pas encore au point. Il serait plus intelligent de consacrer cet argent à la recherche plutôt qu’à promouvoir l’installation d’équipements peu rentables.»

Razzia sur les terres agricoles

Par Angélique Mounier-Kuhn - Le Temps

Une passionnante série d’articles du «Monde» est consacrée au thème de la sécurité alimentaire
A l’occasion du Forum international sur l’accès à la terre qui se tiendra ce week-end à Montreuil, en banlieue parisienne, Le Monde consacre une enquête en cinq volets à un phénomène en pleine accélération à défaut d’être neuf: l’acquisition de terres arables à l’étranger par des pays soucieux de sécuriser leur approvisionnement alimentaire.

Pour empoigner le phénomène, il convient d’abord de balayer une idée reçue. L’avidité pour les hectares cultivables des contrées vastes, fertiles et pauvres du Sud, n’est pas l’affaire des seuls pays occidentaux ou du Nord. «La Chine, la Corée du Sud, les Emirats arabes unis, le Japon et l’Arabie saoudite: à eux cinq, ces pays disposent de 7,6 millions d’hectares de terres agricoles hors de leur territoire», assène ainsi en préambule le quotidien parisien.

Deux raisons encouragent les acteurs pourvus en liquidité, pays ou investisseurs privés, à de telles emplettes: «La crise alimentaire a alerté les gouvernements sur les risques d’approvisionnement futur, et la crise financière a fait de l’agriculture un nouvel actif stratégique pour les fonds d’investissement.»

La Chine a fait de l’achat de terres arables une priorité politique: «Le pays représente 40% de la population active agricole mondiale mais ne possède que 9% des terres arables du globe», rappelle Le Monde. Idem pour le Japon ou la Corée du Sud, dont l’alimentation provient déjà aux deux tiers de l’étranger. Pour d’autres, cette «délocalisation agricole» passe par le troc. Le Libyen Mouammar Kadhafi aimerait ainsi échanger son gaz et son pétrole contre un morceau des vastes plaines d’Ukraine.

Cette convoitise foncière est lourde d’enjeu pour les petits cultivateurs des pays mis en location par leurs dirigeants. «Quid des populations locales directement menacées par cette marchandisation de la terre dont elles vivent?», d’autant que, souvent, les cadastres n’existent pas, interroge Le Monde. Comment faire cohabiter agriculteurs indigènes et investisseurs étrangers? A Madagascar, la concession dans des circonstances opaques de 1,3 million d’hectares au conglomérat sud-coréen Daewoo, a nourri la grogne qui a abouti au renversement, le mois passé, du président Marc Ravalomanana.

Dans le deuxième volet de son enquête, Le Monde s’est rendu en Afrique de l’Ouest, au Mali. Sur le papier, ce pays est si bien loti en terres fertiles qu’il pourrait devenir exportateur de riz. «Mais faute de moyens, l’Etat compte sur les capitaux étrangers pour mettre des terres en culture, et construire des routes et des canaux d’irrigation.» Le plus gros locataire, une société liée à l’entourage de Kadhafi – encore lui – a contracté des baux trentenaires qui préoccupent les paysans maliens: «Les hectares des Libyens sont au début des canaux d’irrigation, ils seront servis avant nous.»

Dans le cas des Maldives, l’acquisition de terres étrangères est bien plus qu’une affaire de sécurité alimentaire. Elle est une question de survie. L’Archipel aux 26 atolls et aux 1200 îles se prépare au pire: son «engloutissement à venir sous l’effet de la montée des eaux provoquée par le réchauffement climatique». L’an passé, le gouvernement a créé un fonds souverain dont l’ambition est d’acheter des surfaces chez ses voisins afin d’accueillir un jour les réfugiés climatiques en puissance que sont devenus les Maldiviens. «L’idée a soulevé un certain scepticisme au regard de l’imbroglio juridique que constitueraient de telles acquisitions foncières sur un sol étranger», relève Le Monde .

L’Empire State Building en vert

Par Pierre Veya - Le Temps

L’Empire State Building, symbole de la ville de New York, va subir une rénovation écologique exemplaire. Sa consommation d’énergie va baisser de 38 %
C’est le symbole de la ville de New York. L’Empire State Building, construit en une année à peine, au début d’une année noire, 1930, l’immeuble qui fut pendant longtemps le plus haut de la planète, devient le gratte-ciel le plus écologique de tous les Etats-Unis. Conçue en huit petits mois, la transformation coûtera 20 millions de dollars, investissement rentabilisé en trois ans, grâce aux économies d’énergie évaluées à 4,4 millions de dollars par an. En 2013, au terme du chantier, l’Empire State Building consommera 38% d’énergie en moins.

Le programme des travaux, annoncés alors que débute une réfection importante des façades Art déco qui ont rendu célèbre ce monument du capitalisme triomphant américain, est exemplaire dans sa conception. Les propriétaires, la famille Malkin n’ont pas cherché un «coup d’éclat», sans retour économique. Les ingénieurs ont appliqué un principe d’économicité stricte: la performance énergétique à atteindre (38% d’économies d’énergie, un éclairage réduit de moitié, etc.) devait être rentable. Pour y parvenir, ils ont bénéficié du soutien de la Fondation Clinton Climate Initiative et des conseils des maîtres de la frugalité énergétique du Rocky Mountain Institute.

En étroite collaboration avec des entreprises spécialisées, les ingénieurs ont déterminé plus de 60 mesures. Les plus importantes consisteront à isoler les 6500 fenêtres de l’édifice, à améliorer l’efficacité du chauffage, de la ventilation et à placer des milliers de capteurs électroniques pour gérer les flux énergétiques du bâtiment. Le chantier est complexe, aux dimensions d’un bâtiment qui comporte 102 étages, 73 ascenseurs pour une surface de 2,6 millions de m2, abritant au plus fort de la journée plus de 13 000 personnes. Pour minimiser l’impact de la pollution due aux transports prévus pour alimenter le chantier, les vitres seront isolées in situ, par la pose d’un film isolant entre les deux verres. Les locataires ont été associés aux travaux et ont mesuré leur consommation afin de les aider à réduire, par toute une série de mesures, leurs besoins énergétiques. La firme suédoise de construction Skanska, qui occupe l’un des étages rénovés, est parvenue à baisser sa consommation d’électricité d’un tiers, sans réduction de son activité ou de son confort. Pour le maire de New York, Michael Bloomberg, la rénovation de l’Empire State Building est le nouvel étalon architectural de la cité: «Cela montre au reste de la ville que les immeubles existants, quelle que soit leur taille ou leur hauteur, quel que soit leur âge, peuvent réduire de manière significative leur consommation d’énergie.» En pleine dépression économique, comme au premier jour de sa construction, l’Empire State Building fait un pied de nez à sa propre histoire, marquée par de nombreux déboires financiers qui ont ruiné ses premiers propriétaires. La famille Malkin, elle, est confiante: les loyers pourront être augmentés grâce au surplus de confort pour un coût énergétique moindre. «Le public en général associe l’écologie à des renoncements et à des coûts supplémentaires. Nous sommes en train de prouver le contraire: pas de compromis et un retour sur investissement.»

Les visiteurs de l’Empire State Building ne s’apercevront pas des changements opérés, à cette petite différence près que le célèbre éclairage de la flèche du gratte-ciel, tout de bleu et blanc, pourrait devenir parfois vert et non plus rouge en cas d’événements spéciaux.

Le réalisme de New York contraste avec les visions grandioses annoncées par la Chine et ses fameuses nouvelles villes vertes. La première d’entre elles, dont l’inauguration devait coïncider avec l’Exposition universelle de 2010, est Dongtan, près de Shanghai. Une ville modèle, recyclant ses déchets, produisant toute son énergie de manière renouvelable, bref la ville du futur, qui aurait compté jusqu’à un demi-million d’habitants au plus fort de sa croissance. Or, comme le raconte Christina Larson sur le site spécialisé Environnent 360, de l’Université de Yale, l’éco-ville de Dongtan sombre corps et biens. La ville, qui aurait dû être en plein travaux en 2009, n’est plus qu’un mirage. Rien n’a commencé et, sans le dire, les grandes firmes d’architectes et d’ingénieurs qui s’étaient précipitées pour réaliser les rêves de l’Empire du Milieu quittent la Chine sur la pointe des pieds. Les visions futuristes des architectes ont manifestement plus servi la propagande de certains élus que la politique environnementale. Le tout sur fond de corruption et de multiples arrestations. Une autre éco-ville, Huangbaiyu, qui devait transformer un petit village du Nord-Est en un autre modèle du développement écologique pour des populations rurales, fait la démonstration par l’absurde des dérives d’un urbanisme proclamé sans concertation. Là où de grands noms mondiaux de l’architecture ont travaillé pour concevoir le village du futur, les rares réalisations se révèlent inadaptées et totalement inabordables par les paysans censés y vivre. Ces échecs ne surprennent pas les experts chinois. Ils savent faire la distinction entre les visions enrobées des dessins d’experts internationaux prestigieux attirés par nuées entières par le grand laboratoire chinois et la réalité d’un pays qui applique depuis peu seulement des normes contraignantes en matière de construction. Singapour en a tiré les leçons: son projet de ville modèle aux environs de Tianjin progresse grâce à sa meilleure intégration dans le tissu local. Des risques de mésaventures sont tout aussi élevés dans certains pays pétroliers, où des projets de villes futuristes naissent dans le désert mais sans que l’on sache exactement sur quel substrat économique tout cela repose. Avec l’Empire State Building, l’économie durable (green economy) fait sans doute un bond plus modeste mais bien plus important que des visions sur papier qui finissent souvent dans les sables.

U.K. to Offer Electric-Car Incentives

By NICHOLAS WINNING Wall Street Journal
LONDON -- The U.K. government said Thursday it will offer consumers £2,000 to £5,000 ($2,998 to $7,495) to put towards buying electric and hybrid cars as part of a wider £250 million drive to promote more environmentally-friendly motoring.

In a joint statement, the U.K.'s Department for Transport and the Department for Business, Enterprise and Regulatory Reform said the incentives would be available when the new cars arrive in showrooms, which is expected from 2011.

The government is beginning talks with the automotive industry and financiers to work out how best to deliver the incentive, the statement said.

"The scale of incentives we're announcing today will mean that an electric car is a real option for motorists as well as helping to make the U.K. a world leader in low carbon transport," Transport Secretary Geoff Hoon said in the statement.

The strategy also includes plans to provide £20 million for charging points and related infrastructure to help develop a network of electric car cities across the U.K., the government said.

"Low carbon vehicles will play a key role in cutting emissions," Business Secretary Peter Mandelson said. "We want the British motor industry to be a leader in the low carbon future, and government must direct and support this, through what I call new industrial activism."

In a newspaper interview earlier this month, U.K. Prime Minister Gordon Brown promised an environmentally-friendly budget on April 22 to kickstart a "green recovery" -- including the mass introduction of electric cars on U.K. roads.

He outlined measures to make the U.K. a world leader in producing and exporting electric cars, hybrid gasoline-electric vehicles and lighter cars that consume less gasoline. Other green measures include relaxing planning laws to allow the building of more wind farms, the report said.

The U.K. government is also considering whether to follow many of its European counterparts by implementing a vehicle-scrappage plan that would offer consumers a financial incentive to swap their old car for a newer, less polluting model.

Write to Nicholas Winning at nick.winning@dowjones.com

Green Joblessness

Spain shows the follow of eco-employment policies.

From today's Wall Street Journal Europe.
To little fanfare this month, BP closed a solar-cell factory in Madrid, laying off 480 workers. But wait, aren't "green-collar" jobs the wave of the future -- the kind of employment that will only grow and "can't be outsourced," as President Obama likes to say?

Spain happens to be the country that the President often cites as his role model for the Green Jobs Revolution. It's also the source of an important new study that explains how expensive these jobs are -- and why Spain's renewable-energy business is a bubble waiting to burst. The study, released last month by researchers at Universidad Rey Juan Carlos, uses data from the Spanish government and European Union to demonstrate that each job created in Spain's renewables industry costs as much as 2.2 jobs elsewhere in the economy.

The study's authors calculate that jobs in Spain's solar, wind and hydroelectric power industries were subsidized to the tune of more than €570,000 apiece from 2000 to 2008 -- a total exceeding €28.6 billion. And that figure only includes the extra cost to energy consumers of being forced by the government to buy renewable energy at prices several times higher than market rates for conventional power. The authors didn't calculate direct subsidies, such as grants to build solar farms, because the government doesn't even know how much money it has handed out to the renewables industry. But the direct-subsidies tally is at least €1.1 billion.

Some commentators have reported that Spain has lost 2.2 jobs for each job created by solar, wind or hydroelectric power producers. But the study instead is talking about opportunity cost -- the jobs that weren't created because resources were used inefficiently, or what the French economist Frédéric Bastiat meant by "what is seen and what is not seen."

Yet these "lost" jobs have a real impact, particularly when employment rolls are shrinking elsewhere. They're also politically pernicious, in that it's easier to point to a new green-collar worker than to the two or three people who remain unemployed because other jobs were crowded out.

What hasn't been reported in much detail from the Juan Carlos study is the way Spanish renewable-energy policy created an enormous investment bubble that may already be bursting. In many ways, this is the most important element of the report.

Since 2004, Spain's Socialist government has essentially guaranteed a huge return on any investment in solar, wind or hydro. It's done so by requiring electricity distributors to buy all renewable energy produced in the country, at prices that at times have been 10 times higher than market rates. This is known as a "feed-in price," and it has cost Spanish energy customers an extra €28.6 billion this decade.

Initially, the government set a regulated price for solar power of 575% of market rates for small producers and "only" 300% for larger ones. The result was a series of inefficient solar farms small enough to get the higher subsidy but often owned by the same companies. And not just by power companies: "builders, real estate companies, hotel groups and even truck manufacturers" got in on the action.

In 2007 the government finally tweaked the subsidy schedule to level the playing field for larger solar producers. Yet within four months, regulators realized that the mandated prices were still so generous that 85% of all solar-powered generating capacity due by 2010 was already in place. To rein in the market, Madrid passed still another law that sharply reduced incentives to build new solar capacity.

Firms had one year to get in under the old system, and, boy, did they work overtime to make it: Government data indicate that 83% of Spain's solar capacity was installed in those 12 months. That jump came after solar capacity had already grown by 118% in 2005, 308% in 2006, and 458% in 2007. In all, solar-power capacity in Spain grew by more than 20,000% from 2004 to 2008, a rate surpassed perhaps only by Zimbabwe's inflation.

If that's not a bubble, we don't know what is. And while it will be a few months longer before the effects of the new, stricter solar regime can be measured, it's not hard to predict sluggishness -- if not an outright bust.

Madrid's chosen method of curtailing solar-power growth is to set a quota for new installations, one that equals about 15% of the growth seen in 2008. That means the jolly green job fairy will soon be leaving: Two-thirds of the roughly 50,000 jobs created in renewables have been in construction, manufacturing and installation -- exactly the kind of growth that couldn't be maintained, and which Madrid is explicitly trying to curb now. Trade unions say the new law has already led to 15,000 solar job losses in just a few months -- and that was before the 480 that BP cut.

Some people might be tempted to conclude from Spain's experience that renewable-energy policies must simply be drawn up more tightly to avoid this kind of boom and bust. They'd be wrong.

Spanish policy shows that green dreams like renewable energy are achievable only through massive transfers of money from productive sectors to those seeking to get rich quick thanks to government mandates. And that the few jobs created greatly depend on maintaining impossible levels of growth. Even in Mr. Obama's Washington, you can't print enough greenbacks to pay for these green jobs.

Time to look at alternatives

Sean Hawkshaw, KBC Asset Management

It's that season when most of us take time out to make plans for the year ahead. We look back at the past twelve months and see how we've done and usually make some resolutions for how we might do better in the coming year. For pension fund trustees this might be a very good time to look at investment strategy and opportunities offered by alternatives.

The very mention of the word alternative tends to make many fund managers break out in a cold sweat as they tend to equate it with risk. But this is far from reality. Alternative investments, particularly in areas such as energy and water, are rapidly becoming the mainstream and instead of increasing risk can actually reduce it.

Take energy for example. A normal pension fund with a standard equity investment strategy will find that oil price rises have a negative impact on its value. Increased energy costs hit the profits of most industry sectors placing a downward pressure on stock prices. However, alternative energy stocks in areas such as wind, solar or bio fuels respond positively to oil price rises.

And the performance of the alternative energy sector is not necessarily dependent on high oil prices continuing. Worldwide energy policy is also driving growth in the sector. The EU has set a target of increasing the share of renewable energy in primary energy from 6% to 12% by 2010. And the share of electricity from renewable sources is targeted to rise to a 21% share of the market by 2012.

In the transport fuels area the EU has set a goal of biofuels achieving a market share of 5.75% by 2010. This will require compound annual growth in the sector of more than 35% in the coming years.

In the US, a range of tax credits to incentivise biofuels producers is already in force while the latest Energy Bill has targeted a near doubling of biofuels production to 7.5 billion gallons by 2012. Biofuels are already big business in the US where ethanol is the primary biofuel with the production of ethanol making up about 3% of the US annual gasoline usage.

Government concerns in relation to security of supply as well as exposure to price spikes mean that the alternative energy sector should continue to offer strong growth prospects for the foreseeable future. And what makes it particularly attractive from the point of view of a pension fund is that it is relatively uncorrelated to the performance of other assets. Global energy demand continues to grow and this will drive the alternative energy sector.

Another relatively uncorrelated alternative investment is water. Indeed, it is now known as “blue gold” among many investors. Finite supplies of fresh water mean that major investment is required in both delivery and distribution systems as well as in recycling facilities and the development of new supply sources. It is currently estimated that the US requires investment of $150 billion in its water infrastructure by 2016 while China's government plans to spend $125 billion by 2010 to build wastewater treatment plants and upgrade water distribution infrastructure. Furthermore, if is forecast that desalination facilities will account for 6% of the world's fresh water supply by 2015, up from 3% today.

Among the more interesting facets of this sector is the fact that many of the companies operating within it are large blue chip European and US concerns with strong track records behind them. This further reduces the risk for investors.

A number of funds concentrating on assets in these sectors are coming to the market at the moment and should be high on the list for discussion by all pension fund trustees. The argument is not that funds should invest massively in these areas but that they should consider taking strategic positions within them. This will reduce overall risk and deliver the potential for higher returns overall.

All in all, a good new year's resolution for pension fund trustees and managers this year would be to take a fresh look at alternatives.

KBC's own alternative energy fund has shown growth of 13.4% in the period from January 1 to end December, 2006. This compared very favourably with the MCSI growth of 5.3% during the same period. Water is already showing strong growth with the KBCAM Eco Water fund delivering 14.8% growth between January 1 end December, 2006.

Sean Hawkshaw B.B.S., M.B.S. is Director - Chief Executive, KBC Asset Management Ltd. He has 21 years' industry experience and 15 years' service with KBCAM. He is currently vice chairman of the Irish Association of Investment Managers. Sean also serves on the board of the Irish Auditing and Accounting Supervisory Authority (IASSA).

The views expressed in this article are the opinion of KBC Asset Management Ltd and should not be construed as investment advice. The prospectuses for these funds are available from KBC Asset Management, Joshua Dawson House, Dawson Street, Dublin 2. Past performance may not be a reliable guide to future performance and the value of investments may fall as well as rise. KBC Asset Management Ltd is authorised by the Financial Regulator under the Investment Intermediaries Act, 1995.
KBC Asset

Hedge Funds in the SRI context – steps taken and the potential leaps ahead

by Erik Eidolf | March 30th, 2009

The increasing embracement of SRI and ESG criteria is rapidly changing the mainstream investment industry. Traditional banks and fund managers are responding to their client’s SRI awareness by creating solutions that seek to cater to this surging demand. Many are unaware that this is also affecting hedge funds in meaningful ways. Since hedge funds tend to be active investors and employ adaptive investment strategies to the prevailing market conditions, they have excellent prerequisites to embrace SRI/ESG factors as part of their investment strategy. “You better start swimming or you’ll sink like a stone!” The mid-1960s proclamation of Bob Dylan rings very true today, with capital markets having recently been shaken to their core. Hedge funds were not spared. Despite some having fared substantially better than traditional investments, hedge funds on average did not achieve their absolute return targets in 2008. However, as hedge funds are exposed to alternative risk premia that are not accessible through long-only vehicles, their risk/return characteristics will remain superior and exhibit low correlation to traditional investments. It is our conviction that hedge funds will continue to have a place in diversified institutional investment portfolios, just as we are equally convinced that SRI is gradually becoming an integral part of the financial industry. As institutional investors increasingly incorporate SRI, these investors will require the ability to express these requirements across all their investments, including hedge funds. Many large institutional investors struggle with the need to maintain portfolio diversification whilst implementing SRI across the whole portfolio. In short, there is a pronounced and growing demand for hedge funds that offer products managed in accordance with SRI principles; and still a limited supply. This is changing, and at Harcourt we are proud to play an active role in this development in our quest to get hedge funds to increasingly embrace SRI. As the hedge fund industry manages assets in access of US$1.4 trillion (HFR, December, 2008), they can play an important role in emphasizing the importance of ESG/SRI in the capital markets. The growing interest in sustainability investment, we believe, has, amongst other things, been driven by the apparent challenges the world is facing. With estimates that the world’s population will grow to 9bn by 2050, the dramatic redrawing of the demographic landscape will occur in conjunction with increased globalization and resource consumption at a rate far surpassing long-term capacity. This exploration of resources (be it human, natural, or economic) will not only have far reaching consequences on our environment and society, but also on the capital markets. These challenges are undeniable and something we all can relate to, hedge fund managers being no exception. How these challenges are drastically changing corporate and investor behaviour in terms of both risk and opportunity are the two main drivers why hedge funds are increasingly starting to incorporate ESG/SRI information into their investment strategies. There are two main approaches by which hedge funds can do this. Either the hedge fund can adjust its “standard” investment strategy by limiting its exposure to a (predefined) list of approved SRI compliant instruments. Alternatively, the hedge fund can use ESG/SRI criteria as input into taking long and short positions in instruments based on how well ESG/SRI is reflected, or will be reflected, in the value of such instruments. In the first approach, the hedge fund (preferably with the SRI investor) will need to assess whether the approved list of instruments enables the manager to utilize the same type of investment strategy and investment philosophy in the constrained list. As hedge funds, unlike traditional long-only funds are able to go short, they are often more flexible and able to express the same strategy in a limited universe of instruments. As with a long-only mutual fund manager, the critical aspect for the SRI investor is to assess the manager skill of the hedge fund within this constrained universe. One major benefit for the SRI investor is that the hedge fund doesn’t change its investment approach but merely adjusts it to instruments deemed SRI compliant. This makes it easier for the hedge fund to embrace ESG/SRI criteria based on the existing investment process for which it has a track record. The second approach requires the hedge fund manager to fully integrate ESG/SRI criteria into their investment approach by using ESG/SRI input in evaluating instruments and as a catalyst for going “long” good companies and short “bad” companies. This approach is likely to become more commonplace in the future as ESG issues are increasingly reflected in how the financial markets evaluate instruments. The latter approach is, however, likely to be more volatile than the constrained universe approach as ESG is not the sole catalyst for valuation changes of instruments. It is important to note that going short has a limited profit potential, whereas the risk of loss is unlimited. Shorting is therefore difficult to put into practice and requires a proven skill-set by the hedge fund. Further, given the complexity to short, it is likely that the hedge fund also on occasion will lose money by being short bad companies. This risk/return effect is obviously a key issue for the SRI investor to be aware of and to assess accordingly. In our experience it is possible to successfully incorporate ESG/SRI criteria in virtually any type of hedge fund strategy. As hedge funds are flexible and active investors they are suitable to explore the ESG/SRI trends prevalent in the markets. In light of these trends, we have for instance seen a large number of environmentally focused hedge funds focusing on wind energy, renewable energy, water etc. These thematic hedge funds have been around for a few years. The key issue for hedge fund managers when it comes to ESG/SRI is, of course, whether it is viable to incorporate it into their existing investment strategy without putting limitations on the risk and return objectives. In other words, all else being equal, it has to perform as well as non-ESG/SRI. One common critique is that any limitation to the investible universe will hamper the possibility for return generation. This issue has been subjected to many academic studies and mostly they come to the conclusion that it is rather manager skill and investment style that ultimately determines the performance effects of incorporating SRI. As this goes hand in hand with manager skill being one of the most crucial aspects for a successful hedge fund, we believe that truly skilled hedge fund managers that create vehicles that incorporate SRI will prevail. Indeed, even SRI screened and SRI approved universes today often are extensive, which provides a tradable SRI compliant universe of companies with big diversity within. A large tradable universe has a higher likelihood to enable hedge funds to express their strategy in an SRI/ESG compliant context without hurting performance.
The positive developments within the SRI industry are leading to an increasing diversity of SRI-related investment opportunities in various asset classes. The UK Social Investment Forum (UKSIF) recently published a discussion paper on “Sustainable Alternatives” and looked at SRI related solutions that exist within hedge funds and alternative asset classes.
The report confirms a broad diversity and predicts that the number of such investment solutions is set to rapidly increase. This means that institutional investors will increasingly be able to create truly diversified investment solutions, using all asset classes, which are in compliance with SRI criteria. All these trends paint a very positive picture, but a word of caution seems appropriate. As for any new market trend, new players enter constantly. Some of those are valid and have truly institutional-quality processes and products. Many of them do not. As such, it is difficult to separate the high quality players from less serious ones. SRI investors are therefore encouraged to get thoroughly educated and conduct rigorous due diligence on each offering related to SRI hedge fund investing. One of the key challenges for the SRI industry has been the lack of a uniform definition. However, as the awareness and true understanding of SRI increases, we see signs of harmonization of SRI approaches and policies. This process is largely facilitated with initiatives such as UN PRI, even though there is still a long way to go before a standardized framework is defined. We believe this is the single most important issue for the SRI industry to focus on going forward. At Harcourt, we are proud to be a signatory UN PRI and we strongly support that initiative as it forms a critical aspect in getting more hedge funds to incorporate SRI.
Erik Eidolf is executive director at Harcourt Investment Consulting

Let’s Keep it Clean: Technology

By Richard Rapacki Jr. from Brighton House Associates

The analysts at BHA have continued to see an increase in the number of private equity investors with a specific interest in the clean technology sector. This has been the case since early last summer when exploding oil prices made clear the need to develop clean sources of energy on a large scale in a short time frame. More recently, from the beginning of January through mid-March, nearly 20 percent of private equity investors interviewed have expressed interest in the clean technology sector.
Last week, the percentage increased from 20 percent to over 30 percent. While this increase cannot be explained by any specific market trend, it does highlight the fact that clean tech is an up and coming area and many investors have identified it as such. A good example is a European fund of private equity funds that is looking for clean tech, U.S.-focused, venture capital funds. It feels that there is huge opportunity in this sector and it wants to get into the space sooner rather than later.
Analysts have also noticed that several investors are open to hearing from private equity funds with any strategy provided they have exposure to or are focused on clean technology. Another fund of private equity funds in the U.S. specifically said that its main focus is exposure to the clean technology sector and that its strategy search took a backseat to that. This is different from the past when investors usually narrowed their investment focus by strategy first and then by sector.
As the world continues to deplete the Earth’s precious natural resources, the effects will be felt not only by consumers and corporations but also by investors in and managers of private equity funds that believe there is an opportunity to capitalize on clean technology.