Investment Trends to Watch in 2010: Ecological Limits, "Greenwashing," Sustainable Business Models, Wall Street is Wrong, Increased Demand for Green Investing.
Submitted by Portfolio 21 Investments
For the past 10 years, Portfolio 21 Investments has observed more and more companies voluntarily taking responsibility for the resources they consume and the pollution they emit. Portfolio 21 manages a global mutual fund investing in green companies around the world. CEO Leslie Christian said, "The companies we have been investing in over the past 10 years see environmental sustainability as a clear competitive advantage and they see ecological risks and opportunities as a critical part of their business models."
The investment management team at Portfolio 21 has put together the following 10 guidelines for investing in 2010.
1. Ecological limits matter.
The inevitability of our planet’s ecological limits means that the choices before companies are not about whether they care for the environment, but about the substance and relevance of what they are doing. Dealing with limited ecological capacity is arguably the most important business challenge facing companies in the 21st century, and "greenwashing" has no place in a company that is serious about its future. It is irrelevant whether a company wants to be perceived as "doing the right thing" or "committed" to environmental sustainability. It is only relevant that a company understands the challenges and opportunities associated with ecological limits and then acts accordingly.
2. Greenhouse gas liabilities are real.
Climate destabilization is among the greatest ecological risks we face, and the associated liabilities pose a threat to investors. We believe investors should look for companies that are reducing direct and indirect greenhouse gas emissions as well as decreasing exposure to other environmental liabilities, such as superfund sites, spills, toxic releases, and the fines and penalties associated with these liabilities.
3. Pay attention to the business model.
Companies should be adapting their business models to gain competitive advantages within ecological constraints. They need to be deliberately addressing the ecological constraints that are increasingly limiting "business as usual." A positive business model might include products of service, sustainable mobility, local raw materials and/or suppliers, lean manufacturing, and the use of regional manufacturing and distribution.
4. Follow the revenues.
One way to discern the difference between a company's green rhetoric and real action is to look at the composition of its revenues. For example, investors should look for companies with rising trends in revenues derived from ecologically superior product lines, evolving green product lines, investments in renewable energy, innovative transportation and distribution strategies, and efficient use of resources.
5. ESG is an integral part of financial analysis.
Financial analysis must be integrated with environmental, social, and governance (ESG) issues. After all, financial statements are simply the distillation of a set of decisions that are made in the context of a web of factors that are driven primarily by human behavior. And, as we know intuitively, and as behavioral economists are proving, human behavior is not always rational, nor is it driven by a single factor. We are complex creatures, business is complex, and financial success is complex. It is imperative to consider all of the factors that might be driving the financial performance of a company.
6. Qualitative, fundamental analysis goes hand in hand with long-term investing.
We believe there is an advantage for long-term investors who spend a lot of upfront time understanding a company and its business before investing. An easy way to determine whether a manager is matching behavior with rhetoric about long-term investing is to look at the turnover rate of the fund. This number will tell you how often the securities in the fund are replaced with new positions. For example, a turnover rate of zero means a fund literally buys and holds. An annual turnover rate of 100% means the fund replaces every security in the fund once a year. A long-term manager will tend to have low annual turnover rates.
7. There is no Federal Reserve or lender of last resort for natural resources.
As the financial crisis unfolded and huge institutions imploded, the response from policymakers was to print money. It's as if, when faced with the most serious economic crisis since the 1930s, the answer was, "There's an app for that." Print and borrow money, dole it out, and increase the national debt and budget deficits. Unfortunately, while it is possible to borrow money, at least for a while, there is not another set of ecosystems from which we can borrow ecological capacity.
8. Awareness and action are on the rise.
The relentless flow of scientific verification of global climate change, an administration that actually acknowledges this reality, growing awareness on the part of business and the public-all have been contributing to big increases in flows of money to investments that focus on environmental issues and opportunities. During our 10 years, Portfolio 21 has experienced positive net new money (deposits minus redemptions) in every month except one. That's an impressive record for a mutual fund, especially during the past year, and illustrates the increasing demand for green investing.
9. Father does NOT always know best.
For once and for all, let's set aside the outdated illusion that a bunch of financiers on Wall Street really know best about everything. The fundamental economic principles underlying the risk and return assumptions governing Wall Street have changed little since World War II, yet the world is completely different today and faces a whole new set of challenges and opportunities. It's time to listen to Mother Earth.
10. The future is now.
Ecological limits are not going to happen someday. They are here today, and they were here yesterday. It is too late for us to reverse global climate change. There are thousands of worthy organizations and individuals working diligently to roll back the tide of human destruction of the environment, but no matter how hard they work we are at the point where we are striving to make things "less bad" or "less disruptive." While this may seem negative, it’s the truth as we understand it. From an investment perspective, we cannot afford to be in denial or hope and wait for a technological solution to solve the ecological crisis. Investment strategies must manage ecological risks and opportunities.
In summary, there is an enormous opportunity for companies to save money by saving natural resources and prosper by providing the products, services, and technologies that are needed to create a sustainable society. We believe the business and investment case for environmental sustainability has become increasingly clear, and the corporations that are embracing it are strategically positioned to prosper in the 21st Century.
About Portfolio 21 Investments:
Portfolio 21 Investments has been a pioneer in the field of environmental and socially responsible investing since 1982. In 1999, the company launched the Portfolio 21 mutual fund to address the ecological risks and opportunities of the investment process in the 21st century. Portfolio 21 Investments is based in Portland, OR and has approximately $450 million in assets under management.
Mutual fund investing involves risk. Principal loss is possible. The Fund invests in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund's environmental policy could cause it to make or avoid investments that could result in the Fund underperforming similar funds that do not have an environmental policy.
The views expressed herein represent the opinions of Portfolio 21 and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
The fund's investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company, and it may be obtained by calling 877-351-4115, or visiting http://www.portfolio21.com. Read it carefully before investing.
Distributed by Quasar Distributors, LLC. (12/09)
Portfolio 21 Investments provides a palette of investment options for clients who understand the ecological and social risks present in the current market paradigm, and want to make wise investment decisions accordingly. Portfolio 21 Investments is also the investment advisor to Portfolio 21, a no-load mutual fund that manages ecological risk by investing in companies that are designing ecologically superior products, using renewable energy, and developing efficient production methods. In 2004 we started a new company, Upstream 21, which directs capital to small businesses supporting environmental sustainability in the local economy.
More from Portfolio 21 Investments