For money managers, green is in
'If we are not evaluating the environmental risks of the companies we're investing in, then we're not doing our fiduciary duty'
From Friday's Globe and Mail
February 22, 2008 at 7:40 AM EDT
After fund managers at Inhance Investment Management Inc. learned that a company in its investment portfolio might be using more than its fair share of a local water supply, Inhance investors immediately filed a shareholder resolution asking for a change in the water-use policies of the company in question.
Shortly after, that company launched a water conservation strategy - a program that also allowed it to maintain its operating license.
"We see ourselves as responsible owners of companies," says Dermot Foley, vice-president of strategic analysis at Vancouver-based Inhance.
"For every company we invest in, we analyze their track record on how they treat the environment and the communities they operate in, and we keep an eye on their activities so we know of any significant changes that might have environmental implications."
Green is definitely in these days among the institutions managing the world's wealth.
From investment management firms such as Inhance to pension funds and Canada's big banks, "sustainable investing" - a term often interchanged with socially responsible or green investing - is no longer just viewed as a nice thing to do. It is now a serious part of their corporate mandates.
"There is no question about it: The sustainable movement in investing is picking up momentum," says Michael Jantzi, president of Jantzi Research Inc., a Toronto-based investment research house that focuses on evaluating companies' environmental performance.
"Companies used to say that they weren't interested in green or socially responsible investing because they had to first consider their fiduciary duty to their investors and shareholders," Mr. Jantzi notes. "Now they're saying, 'The world has changed and if we are not evaluating the environmental risks of the companies we're investing in, then we're not doing our fiduciary duty.' "
Institutional and individual investors are clearly nodding their heads in approval. According to the Social Investment Organization, a non-profit group in Toronto, socially responsible investments in Canada grew to more than $503-billion in 2006, from about $65-billion in 2004.
(Socially responsible investing takes into account more than environmental criteria; it also looks at factors such as how companies treat their employees and their communities.)
There are also more sustainable stocks and funds to invest in today, Mr. Jantzi says. "We're seeing new entries in the market such as water funds and clean technology funds." Most of the major banks have launched some kind of sustainable fund, he says.
Patrick French, vice-president and managing director at BMO Nesbitt Burns, the brokerage arm of Bank of Montreal, says today's sustainable investments are different from the ethical funds and green stocks that came out in the early 1990s.
Those funds used "negative screening" that tended to rule out entire sectors such as mining or oil and gas, he notes.
"What is happening now is positive screening. For example, a money manager and pension manager would look at a company operating in the oil sands and acknowledge that they have clean environmental practices," Mr. French says. "A good example is Suncor [Energy Inc.], which has oil sands operations but is also into alternative energy with its wind power business."
Steve Swaffield, managing director at Vancouver financial services firm Canaccord Adams Inc., says investment firms and fund managers today are scrutinizing sustainable investments in much the same way they analyze any other type of investments. Consequently, they are getting better returns than with pure ethical funds.
Instead of focusing only on companies' environmental practices, investment firms are now also looking at how well a company is managed, the strength of its business plan, and other factors that would dictate how well it would fare as a business in the long run.
For a number of Canada's banks and investment firms, the environment is also a key deciding factor in whether to lend or invest money in an overseas project.
John Wiebe, president and CEO of the Globe Foundation, a Vancouver not-for-profit organization that promotes business solutions to environmental issues, points to the Equator Principles, a set of environmental and social guidelines that many banks in Canada and around the world have adopted over the past five years.
Under the Equator Principles, companies or countries that apply to banks for infrastructure-project financing must first prove the projects will not have a negative impact on people and the environment.
Kaz Flynn, vice-president of corporate social responsibility for Bank of Nova Scotia, says that after Scotiabank adopted the Equator Principles in 2005, it had to put together new loan manuals and hire consultants to train its employees on the new lending practices.
"If we are looking at a project and things aren't completely in sync with the Principles, then we can't do business with that customer," Ms. Flynn says.
Mr. Foley at Inhance says investment firms and banks are embracing sustainable investing partly as a response to their customers' demands.
At the same time, many such institutions are jumping into sustainable investing because their own cultures have shifted to become more environmentally conscious. In addition to reducing the use of paper, water and energy in the office, these firms are promoting investment in firms with a similar environmentally friendly mindset.
"There's a convergence of companies' desire to encourage sustainability and investors' desires to invest in sustainable companies," says Mr. Foley.
"It's the sweet spot where everyone is feeling good because they're doing something that's good for society and good for business."
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