Investment portfolios turn green

Business Times 28 Apr 08;

Socially responsible investing is gaining favour among high net worth individuals, reports OH BOON PING

INTEREST in environmentally-friendly investments is rising in Asia, and could gather momentum in the months ahead. According to the Merrill Lynch Cap Gemini World Wealth Report 2007, environmental and socially responsible investing (SRI) are no longer niche categories as high net worth investors become more aware of social and environmental concerns.

Globally, SRI assets under management totalled US$2.29 trillion in 2005, while socially screened separate accounts have increased 10-fold since 1995, reaching US$1.5 trillion in 2005.

Last year, Dutch bank ABN Amro polled some 300 clients across Asia and found strong receptiveness towards green financial products related to climate change and global warming.

Eight in 10 respondents are considering investing in a green investment product in the next 12 months while four in 10 indicated that they would allocate 5-10 per cent of their investment portfolio to green investment products.

Fortis Investments also notes that there are 'clear signs of interest from investors in specialty products such as SRI funds'. Rositsa Shivacheva, senior investment specialist (SRI), adds that 'funds with global themes and more innovative product structures have continued to gain market share'. The firm says annual growth in such investments in Europe and the US ranged between 30 and 40 per cent in the last two years .

Citi Private Bank says the trend arose as weather and environmental issues are increasingly in the spotlight due to the wide-ranging ramifications of climate change on the environment and the global economy.

'As public anxiety escalates, investors are paying more attention to this recurring theme and seeking investment opportunities as a result of the way in which governments, regulators, corporations and individuals are reacting to the perceived threats,' says Nigel Sze, managing director and Asia-Pacific head of investments at Citi Global Wealth Management.

Mr Sze believes that climate change will impact a diverse range of industries. 'The obvious one would be the energy sector where investors consider companies in alternative energy sources, such as wind and solar power, as well as biofuels, as worthy considerations,' he says.

He believes that Asian high net worth investors are increasingly aware that social responsibility and investment returns need not be mutually exclusive.

Even though the number of SRI instruments is still very limited, Mr Sze expects 'this product line to continue expanding in conjunction with the growing awareness (of) the potential risks of environmental issues'.

According to Roger Groebli, regional head of equity at ABN Amro Private Bank, SRI has drawn a great deal of attention in recent years as 'growing evidence of climate change is also pushing renewable energy sources even further into the limelight'.

'So far the performance of alternative energy stocks, such as hydro, wind and solar energy, have been quite rewarding, outperforming the MSCI by almost 20 per cent. While valuation has been moving up in tandem, this segment will remain attractive in the long run,' he says.

The Dutch bank believes that alternative energy sources, especially those that have environmentally-friendly features, will remain popular for some time, driven by climbing oil prices and other factors.

'Nuclear energy, in particular, has seen rapid expansion recently, evidenced by the price of uranium which has doubled over the past 12 months,' he says.

Citi says its wealth management team organised a number of small group seminars on climate change-related investment strategies for its high net worth clients last year. The investment options include structured products linked to baskets of shares in companies which are expected to benefit as global warming ensues. There are also funds focused on companies that could benefit from climate change technologies, water treatment/ distribution, and alternative/clean energy sources.

Says Mr Sze: 'We offer mutual funds that identify companies with strong commercial potential providing technology, products and services designed to alleviate and help overcome the effects of climate change. Such funds that allow clients to gain exposure to the climate change theme are usually recommended for long-term equity investors.'

Still, there are challenges such as a lack of transparency by Asian corporates on environmental, social and governance (ESG) issues despite tougher enforcement trends and greater customer oversight, said Ms Shivacheva of Fortis Investments.

'This issue has become particularly prominent in the last few years due to the trend of European/US companies outsourcing manufacturing to increasingly complex global supply chains,' she says.

Fortunately, Chinese corporates in certain sectors are starting to show greater willingness to disclose and engage in ESG-related issues and investors as a result are starting to gain access to more direct environmental, social and governance-related metrics.

On environmental issues in particular, Ms Shivacheva notes, governments in Asia have begun to understand that environmental problems are likely to undermine economic growth. The Chinese government, for instance, has raised its budget for environmental protection by 31 per cent to US$14.47 billion in 2008.

'Finally, our task as a sustainable asset manager is to ensure that investors' capital is allocated to those innovative companies in Asia that will become the winners as a result of the increased demand for products and solutions in the environmental areas such as renewable energy, water and waste management, and profit in the long-term from the increased spending on environment and infrastructure in the region,' adds Ms Shivacheva.