Invest green and save the world

Lin Jinlong, Yeow Xue Ting, Yong Qiao Qing and Zhang Shaojun, Business Times 1 Dec 08;

Green investing is a socially responsible investment which puts investors' money into areas deemed beneficial to the environment

OTHER than adjusting the temperature of your air-conditioner to the optimal 25 degrees Celsius and filling plastic bags to their brim on 'bring-your-own- bag' Wednesdays at the supermarkets, it is also possible now to save the environment by investing wisely.

Green investing is all the rage these days. It is a socially responsible investment which puts investors' money in areas which are deemed beneficial to the environment. One way to engage in such green investments is to put your money into environment-friendly, or green, funds.

What are green funds?

Green funds are professionally managed investment portfolios that comprise stocks which fund managers classify as environmentally responsible. By investing in these funds, one can gain a share in companies that engage in environment-friendly practices. However, as each person's definition of being 'environment friendly' can differ, what exactly qualifies as a green fund is still a grey area.

Typically, two categories of green funds exist in the market. The difference between them lies in the way these funds select their stocks.

The first category takes the direct approach. Funds in this category are made up of companies that produce goods or services aimed at solving environmental problems. They normally invest in alternative energy, recycling and pollution control. For example, LSB Industries provides geothermal and water source heat pumps to multiple markets in the United States. Geothermal energy sources are environment-friendly alternatives to the burning of fossil fuels, a contributor to environmental pollution.

Another example is First Solar Inc, a company which designs and manufactures solar modules that convert sunlight to electricity using thin-film semiconductor technology. Solar energy is an alternative source of energy and helps to reduce the reliance on fossil fuel as an energy source.

Funds in the second category take the 'best-in-breed' approach. These funds seek out various sectors or industries for their respective industry leaders in terms of employing environmentally-conscious business practices. Unlike funds that take the direct approach, funds in this category may invest in an oil company, for example, as long as it is considered the cleanest oil company of the lot.

Achieving two green objectives

In a 2007 research survey by the Yale School of Forestry and Environmental Studies, it was reported that 70 per cent of Americans felt that the government did not give adequate attention to environmental problems, while 81 per cent felt that it was a personal responsibility to protect the environment. Environment-friendly investments can achieve two objectives. Investors will be injecting capital into companies that help slow down Earth's degradation. Also, the more investments go into companies that engage in green practices, pressure is put on others to clean up their act in order to attract further investments. Therefore, by investing green, investors are also indirectly pressuring more companies to think about Mother Earth.

Recent trends in green investments

According to a recent study done by Allianz Global Investors, 49 per cent of 1,003 investors polled said they were likely to invest in a company or mutual fund that seeks to provide solutions for environmental problems in the next year. In addition, 17 per cent said they have already made such an investment.

In the same survey, 71 per cent considered the environmental technology sector a 'buy' - the most attractive sector out of the six surveyed. Most importantly, 54 per cent of the investors agreed that environmental investing will be an important focus for them in the future.

The green phenomenon has grown so much that, now, state treasuries and other institutional investors have also started to put their money into environment- friendly investment vehicles. In February, the state of Pennsylvania announced that it would invest US$15 million in environment-friendly funds as part of its Keystone Green Investment Strategy.

With such heavyweight investors gaining interest in these funds, the impact of green investments on the world seems set to continue growing.

The investment management industry has responded quickly to the increasing demand for green investment. As at last December, a total of 158 investment funds were classified as 'environment-friendly' in Bloomberg's financial database. Seventy-seven of them were set up before December 2004, three in 2005, 12 in 2006, and 66 in 2007, a significant jump relative to the previous two years.

Advice for green investors

Green investments appeal to investors who want to practise social responsibility by being environment-friendly. For them, it is good news that such funds perform on par with the overall market.

However, one should select a green fund wisely. Before picking the right one that matches your beliefs, it is important to research, examine carefully the fund's holdings, philosophy and strategies, and also watch out for commissions, fees and other costs of investing.

Lin Jinlong, Yeow Xue Ting and Yong Qiao Qing are final-year students at the Nanyang Business School, Nanyang Technological University. Zhang Shaojun is an assistant professor at the school's banking and finance division.