International opinion polls are showing a rapid rise in the public's awareness of ecological problems. It is hard not to be aware of the deteriorating environment when as in Hong Kong, you can literally see the air you breathe. As awareness grows, a number of investment products have entered the market with a target demographic in mind: those that seek to reap returns, and help an ailing planet in the process.
Green funds appear to be a popular choice among investors with this type of mindset. Socially responsible investment (SRI) funds – under which green funds are categorized – use sustainability as a measure to distinguish long-term corporate practices related to environmental, social and governance performance.
The Association for Sustainable & Responsible Investment In Asia (ASRIA), a non-profit organization involved in promoting corporate responsibility and investment practices in the region, says there are about $4.2 trillion worth of SRI funds managed globally.
Of this $4.2 trillion in funds, Japan and the rest of Asia account for a mere $2.5 billion. The U.S. holds about $2.3 trillion in funds and portfolio, followed by the United Kingdom with $1.1 trillion. The rest of Europe accounts for $340 billion.
Although Asia represents just a fraction of the pie, the demand for SRI funds is growing in the region. Matthew Wong, Managing Director & Head of Private Investor Products for ABN Amro in Asia, says the increased demand appears to be coming from North Asia.
“To my biggest surprise, China is very keen,” says Wong. “But the truth is, if you live in China, especially in big cities, you do feel the pollution and you can feel the need. They can feel the impact. And it has been surprisingly easy to talk to investors about climate-change related products.”
The calls to enforce international environmental policies such as the Kyoto Protocol are finally bearing fruit. The Chinese government, for instance, has targeted renewable energy to provide 10% of the nation’s power by 2010, and 15% by 2020.
“And this has given us a good angle to open doors to investors,” Wong says.
It is unlikely that large companies quoted on the stock market could ever offer an entirely "green and clean" investment for investors with very strong environmental views and beliefs. However, the argument is that green funds can fit better in the gap between financial decisions and personal values, when it comes to conventional investing.
This is why some green funds are not confined to choosing companies that have direct business to solving environmental problems. Some funds select companies in sectors such as technology or banking, as long as the companies have proven strong environmental records.
The Credit Agricole Asset Management (Hong Kong) Green Planet Fund is one such fund that picks up investments with environmental welfare in mind.
Launched in March 2006, the fund has assets under management of HK$101.46 million as of the end of the first quarter 2007. It has diversified investments in global equities, picking companies that range from energy, utilities, financials, information technology, telecommunications services, to consumer staples and healthcare.
“Apart from a company’s strong financials, one major consideration in the stock-picking procedure is the company’s fulfillment of a set of environmental standards,” says Kanise Chan, Manager of Fund Distribution in Asia for the Green Planet Fund. “So far, the portfolio contains about 200 to 230 stocks.”
As of March 2007, HP, AT&T, Banco Santander, General Electric (CNBC’s parent company), and Bank of America are the portfolio’s top five holdings.
Because it can pick from a universe of stocks, Credit Agricole says the fund aims to remain sector- and country-neutral versus its benchmark, the MSCI World Index.
In the first quarter of 2007, the portfolio underperformed the index by less than 1%.
Melissa Brown, Executive Director of ASRIA, says it’s still early days in Asia for such innovative investment products.
“In markets like Japan, oftentimes one firm will launch one product and will do better than expected. And then you’ll see two or three clones that are able to go to market pretty quickly. We’re seeing this in Korea, too,” says Brown.
“In Southeast Asia,” she says, “Thailand is taking the lead… But the problem in markets like Thailand and the Philippines is that neither one is sophisticated enough for these type of investment products. They’re kind of a punters’ market still.”
Kenneth Koh, Head of Research (Asia ex-Japan) at Lipper, says there are two questions that need answering to gauge the success of SRI funds: do they ultimately make money, and do they really have a viable proposition?
“If you look at the universe of products, a subset of SRI funds can only be a smaller part of the pie,” says Koh. “That would mean that fund managers or potential investors would have a smaller pie.”
In the case of green funds, the take-up will also be too focused as they become more specialized. Koh continues: “All things being equal, and from a pure investment perspective, these might not necessarily bring the outperformance we’d like. If they want to be strict and deliver what they’re supposed to, then you’re talking about additional monitoring costs.”
In short, most analysts do not expect funds like Green Planet to have big returns because of the nature of the fund – environmentally friendly companies and their products come at a higher cost and that eats into the bottom line. This has seen a lack of interest in these kinds of funds.
“People have been a bit indifferent so far,” CAAM’s Chan says. “But we’re looking at a long-term investment horizon and encourage investors to hold on for some years.”
In Hong Kong, the government faces continuous criticism over air quality, no thanks to emissions from power plants and factories within the territory and across the border in the Mainland. Chan says the problem for green funds in Hong Kong, and for SRI funds in general, is that success weighs heavily on the target market’s investment culture.
“But nowadays they’re getting more awareness. In Hong Kong, the government has been encouraging regarding campaigns on environmental awareness. It’s still the beginning but we expect to see substantial improvement in about one or two years,” Chan says.
Ultimately the people who invest in SRIs are not necessarily out to make huge profits. They are out to save the world. And if in the process, they can make a little money, why not?
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