A small investment research firm, Innovest Strategic Value Advisors, has teamed up with some big fund companies to try to persuade investors that concern for the environment can lead to superior returns.
In the latest undertaking, ABN-AMRO Asset Management has launched the Sustainable World Fund, a $100 million fund in the Netherlands that combines ABN-AMRO’s stock selection expertise with the Innovest specialised research methodology.
The Sustainable World Fund will favour investments in companies that score high on a set of environmental criteria such as emissions of harmful substances, hazardous waste disposal and whether products can be easily recycled.
Innovest uses information compiled from publicly-disclosed company data and reports on file with regulatory bodies to determine a corporation’s environmental profile. But more than that, Innovest believes it is necessary to talk directly to companies.
"We like to probe a bit and check," founder Matthew Kiernan said in an interview. "We don’t take a company’s public position at face value." In face-to-face meetings or on the telephone, Innovest will press for concrete examples that back up a company’s claims about what it is doing on the environment.
Kiernan argues that Wall Street analysts are missing the boat by largely ignoring a company’s environmental performance and focusing on short-term financial factors.
"The conventional wisdom on Wall Street is that an investor can pursue outstanding environmental performance or financial performance, but you can’t do both because they operate at cross purposes," Kiernan said in an interview. But he adds: "The evidence is piling up that the conventional wisdom is simply wrong."
In Kiernan’s view, if a company is doing a superior job on the environment then that is a proxy for the quality of management that will be reflected in other areas of the business, including the bottom line and the stock price.
One caveat, Kiernan said, is that he is talking about investing for the long term.
"The approach is really not suited for the day-trading mentality," he said. "It is a Warren Buffett buy-and-hold type of strategy."
Innovest is already sub-adviser to a U.S. fund, the $30 million Mellon Eco-Enhanced Index Fund. That fund applies the Innovest methodology to the Standard & Poor’s 500 Stock Index, with weighting of individual companies in the index adjusted to reflect the "eco-efficiency" of the component companies.
The Mellon eco fund is aimed at tax-exempt organisations such as non-profits. ABN-AMRO fund may roll out its eco fund product, which is available to both individuals and institutions, to other European jurisdictions in coming months.
Kiernan says studies have shown the Innovest method works best in high risk sectors such as energy, chemicals and forestry as opposed to businesses such as software where environment is not much of an issue.
A key difference between the Innovest method and the socially responsible screens used by certain funds is that there is no outright exclusion of companies in a particular line of business.
Kiernan says that, in a world that is moving toward more awareness of potential damage to the environment, the relevance of environmental screening to investments can only become more important. He adds that many executives have come to realise that, "you don’t necessarily have to spend a billion dollars in capital improvements" and in fact the expenditure of "creative and intellectual capital" can save money in the long run.
Innovest was started in 1995 by Kiernan. Its chairman is Jim Martin, former chief investment officer of TIAA-CREF (Teachers Insurance and Annuities Association-College Retirement Equities Fund), the largest pension fund in North America.