Think Hard Before Going Green

Foreword from ShareInvestor

This article “Think Hard Before Going Green” by Serene Cheong was first published in The Business Times on 31 Mar 2008 and is reproduced in this blog in its entirety.

Investors must consider the theme’s risks and weigh a firm’s impact on the environment before taking the plunge, says Serene Cheong

The spiralling costs of food and raw materials today may be more than just a passing phase, particularly with the concerns over erratic environmental impact in China, rise in global temperatures and decreasing agricultural crop output.

But amidst the gloom and doom, there is a silver lining.

It comes in the form of “green investments”, and it promises to allow the pursuit of economic progress against the backdrop of sustainability: by consciously aligning investment choices with concern for the environment.

Green investment, as its name implies, can be loosely defined as investments in products or services that help companies cope with their negative environmental impact.

While the media limelight has been focused on green assets for some time now, the increasingly mainstream concept is often mistaken for environmentally responsible investing (ERI). In reality, while the two investment approaches may overlap, ERI mainly focuses on sifting out companies with poor practices while green investments concentrate on companies that improve the environment.

So what exactly qualifies as a green investment?

The answer is not clear-cut. Though much controversy surrounds the debate as to what can be considered truly green, a green firm is widely accepted as one that does good for the environment, within its financial goals, and focuses on the bottom line. Some examples include companies that practice water purification and anti-pollution activities, or produce clean energy and biofuels.

Now, going green seems to be a good way forward with the European Union and China’s increased emphasis on greener and cleaner practices. Opportunities to cash in on green assets abound locally, with easily accessible products that cater to investors of differing sophistication and risk-return appetites.

Still, as attractive as the sector might be, investors should tread cautiously and familiarise himself with the relatively new investment theme to avoid pitfalls.

Green Equity

To some, investing in green equities enables the shareholders to support a firm’s financial pursuits while being conscious of their carbon footprint.

Many green companies are listed on the Singapore Exchange. One such example is Wilmar International, an Asian palmoil firm providing the oil used in food products and for biodiesel feedstock. The company recently posted a fourth-quarter profit of $394.2 million, a nearly four-fold increase from $98.8 million a year ago.

Investors should also pay attention to concern that high demand for crude palm oil could push plantation owners to carry out illegal clearance of rain-forest to make way for new agricultural land.

In addition, global activists are rallying against the use of food crops as biofuel feedstock for fear of skyrocketing food prices and possibly wide spread starvation among the poor.

A firm’s overall positive and negative impact on the environment must be weighted before coming to a conclusion.

Investors who wish to jump onto the green bandwagon should consider the theme’s inherent risks, especially since green firms tend to be in early stages of development with high outlays for technology and infrastructure.

Green Funds

A fund is a convenient vehicle as it offers exposure to a basket of stocks across a number of industries, locations and market capitalisation.

In the case of funds that focus on climate change, the underlying investments may comprise companies in sustainable energy (solar, wind or hydro), energy efficiency, waste management or greenhouse gas emission reduction.

In theory, climate change funds are supposed to provide a more stable investment approach than individual equity as they invest in companies from all over the world, thus reducing unique sectoral and geographical risks.

So far, investor response, however, is understood to be lukewarm.

Two climate change funds are currently offered locally – the DWS Global Climate Change Fund by Deutsche Bank and Schroder Global Climate Change Fund.

Feedback from several personal financial consultants is that climate change funds are unpopular with local investors as the funds are too thinly traded and lack fluctuations in fund value during market boom or bust periods.

“Despite all the hype about green investments, investors ultimately park their assets in a product with the goal of reaping the highest profits possible, regardless of its social and environmental impact,” said a personal wealth manager with a local bank.

To make matters worse, green funds have been providing comparatively lower returns for the high level of risk compared to other funds that focus on China, India or small and mid-cap firms, he added.

Both DWS Global Climate Change Fund and Schroder Global Climate Change Fund are currently rated nine out of 10 for level of risk on fundsupermart.com.

“Domestic investors are treading very carefully as equity markets took a beating in recent months, so the last thing they would do is to plunge straight into an unfamiliar green sector,” said a private wealth associate with a German bank.

He added: “Investors will naturally zoom in on the profit-making funds, and from historical prices you can see that green funds do not fulfil that. They are investing to make the most money, not do an act of charity.”