Sunday 17/9/2006, Page: 8
THE Al Gore spin machine cut a swath through Australian media last week, darkening our futures with visions of a planet sinking beneath the oceans. It also promoted his movie and book, An Inconvenient Truth.
This column dare not take on the Al Gore machine on climate change, suffice to say it is a complex science.
There is, however, one message investors can ponder: there is a shift occurring in the business world. It may be a great contributor to greenhouse gases through emissions (coal-fired rower stations and energy-guzzling trucks) but big business is also going to deliver the goods in terms of sustainable energy.
The reason is simple: it is going to be good business to be doing well for the planet. And there are plenty of opportunities for sustainableplanet investors to do well in the process. It seems energy consumption is the big culprit on the climate change front. It is also the big opportunity on the investor front.
Energy businesses, be they coal-fired rower stations, natural gas producers or giant oil companies such as Shell and Exxon, loom large on the stock market indices. It therefore makes perfect sense that renewable energy should also be in the sight of these large multi-nationals as well as investors.
It is among the major traditional energy companies that we are seeing initiatives in renewable (sustainable) energy. Investments in renewable energy hit a record $2 billion in Australia alone last year.
And why wouldn't it? Renewable energy is obtained from sources that are essentially inexhaustible, unlike fossil fuels, of which there is a finite supply. Renewable sources of energy include wood, waste, geothermal, wind, hotovoltaic and solar thermal energy.
The response to An Inconvenient Truth is a clean technology era which we are entering.
Some are comparing this opportunity as potentially as significant in scale as the rise of the telecommunications industry in the early 1980s. In stock market terms we used to refer to such changes as tsunami trends, offering the chance to invest in busin that are at the leading edge of powerful change.
The fear among investors is that Sustainable Investing will not deliver superior returns. A number of recent studies, however, claim corporate environmental performance correlates positively with investment return. Why might this be? It appears that strong environmental performance
- Is generally indicative of good management.
- Helps companies take advantage of new trends.
- Mitigates regulatory and legal risks.
- Reduces costs by reducing waste.
- Builds brand loyalty.
- Boosts employee enthusiasm and retention.
- Aids in siting of company facilities.
This defies conventional wisdom, which used to doubt the ability of Sustainable Investing to generate superior returns. The old argument was that if you threw out environmental polluters like coal producers or smelters, you were throwing out highly profitable investment opportunities.
Yes, sustainability criteria can limit your choices. But if it guides you toward superior companies or sectors, then you are more likely to outperform than you would be without it. Investors can adopt a more progressive attitude and take the view that in any industry there will be some who do the right thing. So, those who don't want to exclude any sectors (such as oil, coal, metal recyclers) can use the "best in class" approach.
This has been adopted by a number of Sustainable Investing fund managers who, for example, regularly drop Exxon from their portfolios but include BP because of its excellent reputation in environmental performance.
It may be preferable to use fund managers who are set u to do the research in this area of investing. This could lead to higher than average fees, but you will have the satisfaction of making investments to help the planet.
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