Investment Managers Pushing Companies to go Green

Is this good for utilities' bottom lines?

Ken Silverstein | Apr 01, 2011

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If portfolio managers push companies to be socially aware are they doing so at the expense of their investors? It depends on whom is asked but the notion of patronizing companies that have aligned themselves with broader and more subjective values has been getting a lot of attention lately. 

 

The buzz is centered on environmental, social and governance issues -- matters that touch at the very heart of the utility business. The thinking behind such shareholder activism is that by channeling their investment dollars to those enterprises that allocate them to green fuels and technologies, they will make a difference. Corporations would thus adjust their business strategies accordingly. 

 

“During the last three years of prolonged financial and economic turmoil, investors voted with their dollars, showing that they understand the value incorporating environmental, social and governance factors in the investment process,” says Cheryl Smith, chair of the Social Investment Forum.

 

The group says that about $1 in every $8 under professional management is involved with a “socially responsible investment.” That equates to about 12.2 percent of the $25.2 trillion in total assets under management that is tracked by Thomson Reuters Nelson. The value of those investments have risen by 13 percent “in the current economic downturn,” it says. 

 

The institutional investors such as pension funds are the primary holders of those assets. They control $2.3 trillion of the $2.5 trillion in those socially-minded funds. 

 

Critics point out that those large funds manage the monies of ordinary citizens who rely on them to retire. Pubic pensions, for example, invest the money of school teachers and fire fighters. Individual investors, by contrast, have much less sway with corporate boards and company managers. 

 

Professional money managers, though, have a fiduciary obligation to achieve the best results in the most prudent manner. And by extension, forcing companies into questionable and unproven energy investments might very well run counter to their assignments. Critics maintain that the verdict is still out as to whether socially responsible investments do any better or any worse than those that follow fundamental market analysis. 


“We respectfully disagree with that view,” responds Rick Wetmore, a certified financial analyst with Turner Investments, in a blog. “We think the stronger counterargument is that environmental, sustainability and governance issues can have a huge impact on a company’s profitability and share price, so that to ignore those issues is itself a dereliction of fiduciary responsibility.” 

 

Economically Prosperous

 

Indeed, doing good and achieving investment returns do equate. International Shareholder Services says that the issue has expanded beyond one of regulatory compliance to one that is now a business imperative. Two-thirds of global institutional investors that it surveyed said that good governance is both the right thing to do and that it also gives enterprises a leg up. 

 

The evolution is occurring because activists, regulators and investors have united to make companies live up to higher standards. Major U.S. firms that include Wal-Mart, General Electric and Dow Chemical have championed the cause of sustainability. The efforts, they collectively say, are not just environmentally beneficially but also economically prosperous. GE, for example, says that its "eco-imagination" campaign is lucrative.

The United Nations has established its Principles for Responsible Investment Initiative, which works with multinational corporations and mainstream investors to better integrate environmental, social and governance issues into valuations and investment processes. The group has more than 3,000 companies that participate, all of which have agreed to report their activities and progress. 

“Time and again investors have seen how environmental, social and governance issues can affect investment performance, and there is now a critical mass of institutional investors who know good management of these issues is an important factor in the long‐term financial success of their investments,” says Don MacDonald, chair of the initiative. 

 

While corporate altruism has its cynics, the reality is that businesses must now appeal to a broad range of constituencies. By being good citizens, they are endearing themselves to their own corporate families and to the communities where they serve. In turn, they are validating their corporate images and adding value to their enterprises.

 

 

EnergyBiz Insider has been named Honorable Mention for Best Online Column by Media Industry News, MIN.

Follow Ken on www.twitter.com/freehand1200

 

energybizinsider@energycentral.com.

 

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Comments

Reaching the goal

Publication needs buzz, buzzwords and punchlines.  Good business needs reliable.

Socially responsible investors need to do something other than hunt the trendy fire line.  There are smaller looking ways to accomplish the purpose.  That is why Futura resurrected sawtooth roofing with additional solar benefits, and it is intended for low profile commercial buildings, about as prosaic a structure as we build.

Still any improvement there has serious implications for the environment and economy and we must attend to both, at the same time.

subjective

the key word in this story is right up top and it is "subjective." what is socially responsible? Does it include ethanol? Does it include energy efficiency or demand response? To answer the question of how these funds do compared to others is difficult. You have to define exactly what is socially responsible. Is it investing in best available technologies for coal? That's why these things can't be tallied up and made nice and clean. I think the investment managers should look out for their shareholders first and foremost. It's too subjective to play the game any differently. 

Performance of Socially Responsible Investments

If these socially responsible or green funds are publicly traded then just conduct an analysis of their performance vs. S&P500 to determine if there is appreciable difference.

ETHANOL

Speaking of great socially responsible investing, how's that ethanol thing working out?

What is undeniable is that any business model that is fundamentally dependent on subsidies is unsustainable.

Could end our competitiveness

While we are engaged in "socially responsible" investment, we need to make sure we understand the endgame results we expect and what results may be realistic.  While we are investing in expensive, low capacity factor power such as wind and solar, what is our worldwide market competition doing?

Let's look at China since they are our principle global market competition and much has been made of their investment in wind power and other renewables.  (By the way, the renewable they are building most is hydro which floods massive areas of land makings the environmental responsibility quotient a bit questionable.)  Anyway, let's look at the US EIA projections.  Comparing the projections for the year 2035 versus the actuals from 2007:

Coal:  Capacity 1233GW in 2035 vs 496GW in 2007.  Generation 7795 billion KWh vs 2422 billion KWh in 2007.

Nuclear:  Capacity 75 vs 9.  Generation 598 vs 63.

Hydro:  Capacity 368 vs 145.  Generation 1262 vs 430.

Wind:  Capacity 374 vs 6.  Generation 374 vs 6.  (I believe the generation numbers are incorrect.  At 30% capacity factor typical of well sited, land-based wind farms the numbers should be more in the realm of 983 vs 16 billion KWh.)

Solar:  Capacity 6 vs 0.  Generation 16 vs 0.

Other renewables:  Capacity 45 vs 1.  Generation 321 vs 2.

Let's compare the growth in wind, the one China is most praised for and the one we get slapped around most for, against China's coal projections. 

Wind:  Capacity growth 368GW.  Generation growth 967 billion KWh.

Coal:  Capacity growth 737GW.  Generation growth 5373 billion KWh.  (By the way, China refused to commit to carbon capture on their coal units while we, on the other hand, seem to be intent on shutting all of ours down.)

While I certainly agree we cannot just trash the planet and need to control acid rain, NOx, mercury, and particulates--all of which are hazardous without question--we also need to recognize that an investment program in low capacity factor, expensive technology  raises the cost of electricity which affects trade competitiveness. So these "socially responsible" investments may well pay the Chinese communist government a lot more than it does us.  They are probably laughing all the way to the (currency controlled) bank.

I wonder how socially responsible an investment program is when it causes massive unemployment and hopelessly deep national debt.  Maybe I should check to see if the local community college has courses in Mandarin.