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FT REPORT – FUND MANAGEMENT: ‘Greenwash’ muddies the waters

By Fiona Harvey, Environment Correspondent, Financial Times
Published: Feb 04, 2008

Green is good, but is good green? There is a large and growing number of “green” funds in the market, some of which are also marketed as ethical investment funds, and some not. But many investors are unaware of the stark differences that sometimes exist between funds that are ethically managed – good – and funds that seek to capitalise on the business opportunities of climate change – green.

“Very loose language is used by general ethical and SRI [socially responsible investment] funds [in regard to whether they are invested on environmentally sound principles], and a lot of confusion persists [between green and ethical funds]. We all tend to get landed under the same umbrella,” says James Vaccaro, managing director of Triodos Renewables , a member of the Triodos family of companies.

In part, the confusion arises because of the sheer number of such funds now available. “The number of green and ethical investment options is growing all the time and there’s more choice available now than ever before,” says Mark Robertson of Ethical Investment Research Services . “Over the last few years, we’ve seen a huge increase in the amount of money invested ethically.”

The environmentally focused funds available in the UK include some of the biggest names, such as Jupiter’s veteran Ecology Fund; HSBC, which has a Climate Change Fund; Allianz with its Global EcoTrends Fund; Schroders’ Global Climate Change Fund; F&C’s Global Climate Opportunities Fund; and a host of others.

Ethical funds and green funds are often lumped together for historical reasons, says Ian Simm, chief executive of Impax: “In the 1990s, you had to be ethically or SRI-minded to want to put your capital in this [green] market.”

But investors who imagine that their ethical funds are also saving the planet, or that their green funds are managed with socially responsible principles in mind, might need to think again.

Ethical or SRI funds usually start off from a position of negative screening. They filter out companies that are involved with certain activities that some investors find morally questionable: armaments manufacturers fail to make it through most of these filters, for example, as do tobacco companies.

But such funds may include many companies that green investors would prefer not to be associated with, says Mark Hoskin, partner at Holden and Partners, an independent financial adviser specialising in ethical investment products. For instance, there would be nothing to prevent most ethical or SRI funds from investing in oil companies such as Shell or BP.

Some green investors balk at such sectors, and want to see their money rewarding companies taking risks in developing the “low-carbon economy” that scientists say must replace our thirst for fossil fuels.

Prime targets for green investment include renewable energy, waste management companies and companies with technologies in water efficiency and energy efficiency.

The picture becomes even more complicated, however. Shell, BP and some other fossil fuel energy companies are also active in markets such as renewable energy. These green activities make up only a tiny part of the oil companies’ turnover, but they are buttressed by efforts to reduce greenhouse gas emissions from other parts of their business.

Do these factors make such companies acceptable to the green fund manager?

That depends on the fund. Investment criteria vary as widely among green funds as between green and SRI funds. Mr Hoskin points to one of the latest entrants, the Virgin Climate Change Fund. The fund, managed through GLG Partners, bills itself as “an environmental fund with a difference”, whose managers “cherry pick companies which have the potential to deliver the highest economic returns, and then identify those with the best environmental credentials”.

Between 75 per cent and 100 per cent of the fund will be invested in companies that have an environmental footprint that is smaller than the average for their sector, with up to 15 per cent invested in companies that adopt environmental practices and up to 10 per cent in companies providing environmental goods or services.

But Mr Hoskin says this is the wrong way about, and that this approach makes a mockery of selecting companies on a green basis: “It’s complete greenwash.”

Scott Mowbray of Virgin acknowledged that the fund could invest in oil or mining companies that made a large contribution to greenhouse gases, but defended the strategy. “Our fund is different in that it operates in the real world rather than investing in companies that are green. [It is] about investing in companies that have a lighter footprint,” he says.

Is green investing a passport to higher returns? Virgin notes: “Analysis shows environmentally aware companies can deliver a better investment return.” But other studies have found little difference between companies managed on greener principles and their unreconstructed fellows.

That said, the greenest sectors of the economy are experiencing a growth spurt, fuelled by the urgency of tackling climate change. Mr Simm says overall growth in environmental sectors such as alternative energy and water technologies runs at about 20 per cent a year.

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1 Comment on “FT REPORT – FUND MANAGEMENT: ‘Greenwash’ muddies the waters”

  1. #1 derek whatling
    on Feb 6th, 2008 at 06:23

    Oil and gas sector companies are at the moment the companies that keep industry in business. There can be no escaping the fact that fossil fuels, hydrocarbon extraction is, when used, environmentally ‘sub-optimal’.

    However, these companies have also invariably contributed to enhancing, mittigating or offsetting their environmental footprint. For example, in considering biodiversity impact, at least at site level, and social impact within processes like environmental impact assessment and social impact assessment.

    I would hold that these companies are good ethical investment companies and do far more, albeit because of the sensitive nature of the business, for green related issues than many other so called less environmentally sensive industries.

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