Green Investing Gets Easier With Index Funds

Growing public awareness of global warming, coupled with institutional investors’ renewed interest in alternative asset classes, is giving a boost to index providers that screen for green.

"We have to act now," says New York State Comptroller Thomas DiNapoli, who pushed the New York State Common Retirement Fund to invest in green indexes recently. "There’s too much at risk for our planet."

Most large pension fund managers, however, have not shared DiNapoli’s urgency — at least not until now. The vast majority are still sitting on the green sidelines, according to a survey of 39 of the largest pension fund managers in the U.K. conducted this summer by FairPensions, a London-based organization that promotes responsible investing. "Climate change as an investment issue is still very much a niche issue rather than mainstream," says Louise Rouse, director of investor engagement at FairPensions.

The green sector has been hard for large-fund investors to tap. The lack of pure-play green companies — firms in the business of churning out environmentally friendly products and services — makes it difficult for large pension funds to build a sizable green portfolio.

That may be changing, thanks to the recent emergence of green indexes. Jane Goodland, senior investment consultant at Watson Wyatt in London, says there are some 80 different green or sustainable indexes offered by about 20 different companies today, up from virtually none five years ago. Some include Fortune 500 companies with so-called sustainable production methods, while others limit their investments to small-cap cleantech firms.

Under DiNapoli’s direction, the $116.5 billion-in-assets Common Retirement Fund became the first pension fund to invest in green indexes assembled and licensed by HSBC Bank and London-based index provider FTSE. In April 2008, DiNapoli earmarked $500 million for a green investment program and handed the first $200 million to senior investment officer Robert Arnold, head of the public equities group. After extensive research, Arnold invested the sum this August, splitting it between the FTSE environmental technology 50 index and HSBC global climate change benchmark index.

His group also investigated green indexes sponsored by Dow Jones and by KLD Analytics & Research, a Boston-based investment research firm that consults on integrating environmental, social and governance factors into investment decisions. The Dow Jones sustainability indexes, created by Sustainable Asset Management in Zurich in 1999, measure companies on how they conduct their businesses rather than on the products and services they provide, as the FTSE and HSBC indexes both do. The DJS indexes include firms across many sectors, including transportation, pharmaceuticals and even gambling.

The FTSE environmental technology 50 index includes the world’s 50 largest pure-play environmental technology companies, such as Vestas Wind Systems, a renewable and alternative energy company in Denmark, and Suez Environment, a waste management and technology outfit in France. For the three years ended September 30, 2009, it produced an annualized 15.3 percent return.

The HSBC global climate change index, launched in September 2007, covers a broader array of companies, involved in everything from geothermal power production to fuel cells. To qualify for the index, companies must generate at least 10 percent of their core business from climate change technology. The index includes 377 firms with a minimum market capitalization of $500 million. Its annualized return since inception in 2004 through mid-October was 10.59 percent.

Investing in green is not a natural fit for large-fund investors, given the volatility of the sector. "It’s a natural impediment to the actual investment if you’re investing in a space that’s nascent and quite small," adds Michael Underhill, CIO of Capital Innovations, a $2.6 billion independent investment advisory firm in Hartland, Wisconsin.

But the green indexes could change that. If DiNapoli — a member of the P8 Group, a global organization of pension investors addressing climate change — has his way, the trend will continue to pick up steam.

Earth Capital Partners launches $5B environmental fund

By Emma Ritch
Published 2008-12-08 08:17

A new venture capital fund is launching in early 2009, with the goal of raising $5 billion in the next five years to invest in energy security and climate change.

London-based Earth Capital Partners is spearheaded by former Marc Group chief Stanley Fink. The fund is expected to be run by Rufus Warner, formerly of Close Investments.

The group's first funds are expected to focus on solar, waste-to-energy, agriculture, and new technologies. Later funds are planned for infrastructure, forestry, carbon trading and energy arbitrage.

The environmentally focused fund has reportedly secured $250 million in seed investment. Earth Capital Partners expects to attract institutional investors such as pension
funds.

The company said environmentally focused funds are finding it easier to raise money than other funds.

The fund is awaiting government approval.

Other major funds have launched in recent weeks with the expectation that environmental technologies could perform better than other investments during the economic downturn (see Cleantech funds worth $1.9B lead the week [1]).

Among them, U.K.-based Aviva [2] Investors announced plans to raise a €500 million ($625 million) fund for cleantech investing in Europe (see Aviva creates €500M fund for European cleantech [3]). London-based investment firm Climate Change Capital [4] announced that it plans to invest in China for the first time, setting aside RMB 5 billion ($732 million USD) to take advantage of deals during the economic downturn (see Climate Change Capital plans $732M for Chinese cleantech [5]).

And venture capital investment fund CMEA Ventures [6] has launched a $400 million late-stage fund focused on alternative energy.