Socially Responsible Investment

An Evaluation of Environmental Friendly Investments and their Future Perspectives


Bachelor Thesis, 2009
73 Pages, Grade: 1,7

Excerpt

Table of Content

Executive Summary

Index of figures

1. Introduction

2. Basic facts about environmentally friendly investments
2.1 Market overview
2.2 Definitions of key words
2.3 Principles of Responsible Investment and leading Organizations

3. Investment forms and their ecological effectiveness
3.1 Three categories to rank investment forms by their ecologic effectiveness
3.2 Closer analysis of ecological effectiveness of each investment form
3.2.1 Bank deposit
3.2.2 Credit cards
3.2.3 Bonds
3.2.3.1 Loans
3.2.3.2 Shares
3.2.4 Investment funds
3.2.5 Hedge Funds
3.2.6 Life and health insurances and provisions of retirement

4. Investment strategies with sustainable focus
4.1 Common strategies in the implementation of sustainability into the asset management
4.2 Indices
4.2.1 Dow Jones Sustainability Index
4.2.2 FTSE 4 Good Index

5. The transparency challenge
5.1 Quality, objectiveness and expressiveness of information
5.2 Costs for transparency

6. Survey among financial service providers
6.1 Target, Methodology
6.2 Participants and their background
6.3 Presentation of results
6.4 Survey Conclusions

7. Calculating an indicator to measure environmental impact
7.1 Introduction of the Life Cycle Impact Assessment
7.1.1 The implementation of the LCA and the ISO 14040 on the basis of an example of the automotive industry
7.2 Critical discus on the Life Cycle Impact Assessment
7.3 Integration of ecological impact measurement into financial decisions and daily business life

8. Conclusion

9. Appendix index

APPENIDX A

APPENDIX B

APPENDIX C

APPENDIX D

APPENDIX E

APPENDIX F

References

Acknowledgment

Executive Summary

The ecologic crisis of our Planet is foreseeable. Making money with it, or even better making money by preventing the disaster, will sell.

This thesis shall evaluate the effectiveness of environmentally friendly investments and provide an outlook on future perspectives.

The topic has become very popular due to a general reorientation to ethical values and particularly, because of the questionable ethical behavior of many financial players in the current world economic crisis.

The indicators reveal a strong and continuous growth in the market of environmentally friendly investments. For this reason, the financial sector now copes with the topic more intensively. Whether this leads to improvements for investors through stronger performance or for managers of sustainable projects due to better financial conditions depends on the developments of standardization and the quality assessment processes.

This work starts with the clearing of uncertainties related to the core terminology and presents the numerous investment possibilities with their corresponding ecological impact.

The main challenge the environmentally friendly investment market is facing, is the need for more transparency; in the assessment criteria and their weighting, in methods, and in the application of funds. Subsequently, the credibility of these investments has to be increased. These statements are confirmed by a survey (cf. chapter 6). The survey reveals furthermore that financial consultants regard the issue as relevant for their job, but lack information to promote these investments. There is an urgent need to implement new ideas in order to lower the risks for the environment and to satisfy the financial market’s need at the same time. Therefore, concepts are presented that try to meet these demands. The focus lies on a concept as holistic as a Life Cycle Assessment and as measurable as the eMergy coefficient.

Index of figures

Fig. 4: Chart since launch

Fig. 5: Constructionof the FTSE4Good Environmental Leaders Index

Fig. 6: Important drivers for SRI according to a survey among asset managers

Fig. 7: Work experience with EFI before

Fig. 8: Investment forms with environmentally friendly background

Fig. 9: Estimation of the market of EFI 31 Fig. 10: Could administrative cost for the asset pool be decreased significantly? 32 Fig. 11: If employing a broadly accepted measurement of ecological impact, how

would the perception of EFI change?

Fig. 12: Intentions for further professional engagement for EFI

Fig. 13: Scheme of a product system's life cycle

Fig. 14: Product Sustainability Index by Ford Europe

1. Introduction

The main idea of socially responsible investment (SRI) is to improve long-term returns and establish sustainable business practices.

The following work will question whether the existing practices of SRI are rather a marketing ploy or if they are milestones in the financial world. After having examined the developments of the past and the present situation of these aspects, it will turn to the future considering the outlook for sustainable capital investment. In the next step, it will discuss if it is necessary to make adjustments on the market or in the system in order to create more effective assets, indices and information flows.

The discussion about sustainability is nowadays present in all aspects of life and business. Why is the financial sector interested in this topic, too? The financial sector has undergone a series of changes in the last couple of years which can be summed up in four key words: financial innovations in both product and process information, deregulation in the sector of financial service providers, the globalization of capital streams and changing customer needs and wishes.

According to an EIRIS (Ethical Investment Research Service) report, investors managing USD 15 trillion have now signed up to the Principles of Responsible Investment (PRI). This commits investors to integrate environmental, social and governance (ESG) factors into their investment analysis. Furthermore, it enables and encourages investors to share knowledge and develop effective engagement approaches. This leads to the question of what is necessary for an effective engagement approach. Do investors have access to all required information? Do they understand the significant details of public accessible information? Do they need more orientation in the information jungle among indices, funds, self-presentation of companies and analyst reports? For instance, do they need clearly defined categorizations of different assets, a quality proving logo or easier access to a sound financial consultancy on sustainable issues concerning their individual investment strategy?

From all ESG issues the environmental factors are the most accepted ones by companies. The management responds to a large degree to environmental issues due to the ongoing international, intense and emotional discussion concerning this issue1. So, reading numbers like “50% of high impact companies demonstrate a management of environmental issues” could lead to an attitude, things seem to finally work out well. But paying attention to the latest reports on climate change2, which state that humanity is still facing urgent threats such as growing water shortages threatening millions of lives around the world and taking into account the ongoing increase of material stream destroying valuable natural resources, it is not yet time to lean back. Rather the established vision on climate protection and environmentally friendly economic activity should be reconsidered. Companies aim to reduce emissions and politics even developed a trade with emission based certificates. But wouldn’t it be wiser to start modifying the input of natural resources instead of reducing the amount of pollution a company transmits?

This idea goes back to the concept of dematerialization of the economy (“factor 4”3).The dematerialization of the economy is not only an environmentally friendly solution of the problem, it is a sustainable solution.

In this context it is essential to distinguish between environmentally friendly and sustainable management strategies. They may seem very similar at first glance but the difference of the results is significant.

Investors with the interest of backing up sustainable companies or concepts of economic activity therefore need a guideline through the jungle of information on environmentally friendly assets and investment strategies.

This paper will analyze the existing standards and accessible information required by investors in order to make a conscientious decision in terms of sustainability. Furthermore, it brings up ideas on how to complete or improve the knowledge about relevant issues for the investment strategy.

The ideas for improvements, presented in the last chapter of this work, cannot be understood as a holistic and scientifically absolutely proven system. The author rather introduces suggestions and shows opportunities and chances as much as weak points that exert further profound research. The ideas were raised to a great part in the interviews series with Dr Johan Verink, a Dutch professor for environment protection and inventor of wastewater technologies for emerging countries. He taught in different universities in Germany and Thailand and is now promoting the Energy Point concept. His vision is not only attracting the business world but already has caught the attraction of the Dutch government parties.

The aim is to give new impulses for the discussion and dialogue on the implementation of a standardized international measuring system of ecological impacts.

2. Basic facts about environmentally friendly investments

2.1 Market overview

“Sustainable investments” has become a trend expression recently. Many economic actors identify the chances that lie in this growing market and start acting in order to be part of the success. In very fast growing markets, there is always the danger that a bubble is created bearing more detriment than opportunities. For this reason, this chapter shows the market development in the past years.

In Europe, 537 public funds were counted on June, 30 2008 with an investment volume of 48, 7 bn Euros. Taking also institutional investors into account the amount rises to 2083 bn Euros in Europe; representing 17, 6% market share of the total invested capital in Europe.4

illustration not visible in this excerpt

Fig. 1: Amount and volume of sustainable public funds in Europe5

Of these 537 public funds in Europe, 196 are listed in Germany. The figure below shows the apportionment of the diverse investment funds.

illustration not visible in this excerpt 6

This definition on sustainable development is widely used and reflects the meaning very well. It was developed in connection with a study by Klaus Gabriel from the University of Vienna7.

A more business orientated approach defines sustainable development as “a form of progress that meets the need of the present without compromising the ability of future generations to meet their own needs”.8 The simple addition of the three words “form of progress” changes the meaning from an intergenerational contract to a more business orientated point of view. Noticing the small changes in the focus of a definition provokes a totally different general understanding of the topic.

Environmentally friendly or also called "eco-friendly," refers to any product or service that is not harmful to the atmosphere or surroundings9. It also implies that the same precautions were taken in the manufacturing, transport and packaging of the product. The term is often used for window-dressing. The author highlights that the term environmentally friendly refers to processes that are less damaging to the environment, such as CO2 emission reduction. This does not necessarily indicate that the change has been a big step forward or that the processing is in any way sustainable either for societies or the environment. Environmentally friendly actions must go further; in this case the exact term to apply is resource efficient processing. In the course of this work, the term environmentally friendly refers to both concepts to simplify the wording.

An ecological act has got the intention to benefit or protect the environment, while ecology describes the relationship between organisms and their environment.10

The fact of not having one definition to rely upon when speaking about EFI or any other issue related to the concept of sustainability is – as stands out across all chapters – a main problem to deal with.

Socially responsible investing is described as “an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.”11 Investments may exclude sectors as the alcohol or tobacco producing industry, gambling, arms and military or abortion.12

The wide range described in this definition is one of the basic problems in promoting socially responsible investing. It is subject of this work in various chapters.

Having found out about socially responsible investing, the reader might wonder what the difference to ethical investing is or if any difference exists at all. According to Christian Fiesler from the University of Sankt Gallen, ethical investment, socially responsible investment, sustainable investment, conscious investment, mission-based investment, social investing or socially aware investing are used interchangeably although the term “socially responsible investment” seems to be the most accepted in the academic discussion.13

Within two clicks in the internet you can find two basically identical definitions for three terms. It is no wonder that the average investor who is fairly interested in concrete details remains confused rather than informed.

Coming to the last term to be defined, it seems to be the most important one. Sustainability has become a fashion word in the last years and can be used in every context, be it financial planning, consumption, agriculture, donations and development aid, production and processing, human resources management, public relation engagement, etc.

Despite this broad field of application, is it possible to find an exact and brief definition on sustainability? According to the Cambridge Dictionary something is sustainable when it causes “little or no damage to the environment and therefore [is] able to continue for a long time”.14 But having in mind the broad context in which the term is used, one becomes aware that the definition that is focused on environmental issues is much too narrow compared to the common application of the term. The OECD glossary provides a more economically orientated definition: Sustainability refers to “non-declining trends of economic growth and development that might be impaired by natural resource depletion and environmental degradation.”15

Within this paragraph it won’t be possible to find a broadly accepted, generally applied definition covering all aspect of sustainability. Since this would be subject to an independent research work, the author confines to defining the concept in which the term sustainable will be used in the frame of this work and highlights the difference between environmentally friendly and sustainable. An environmentally friendly process or investment might be something only slightly less damaging in comparison to the benchmark, e.g. the reduction of CO2 emissions or stopping the wasting of valuable limited natural resources like water. Whereas sustainable is a concept that allows growth in the long-run due to sensitive and responsible resource management and at the same time stands for a certain standard of live for all human beings being possible due to innovations in organization, processing, transportation and technology. It is not always possible to achieve a really sustainable solution, so for the purpose of this paper only EFI will be analyzed, but the reader should keep in mind that the sustainable solution must be the mid - term goal to reach.

2.3 Principles of Responsible Investment and leading Organizations

The United Nations have realized this problem and have taken action by developing six principles to provide a foundation for interdisciplinary and global discussions.

The Principles of Responsible Investment (PRI) are developed by the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact (UN GC), but as a suggestion, not as a binding conduct.

“The Principles are voluntary and aspirational. They are not prescriptive, but instead provide a menu of possible actions for incorporating ESG issues into mainstream investment decision-making and ownership practices.” 16

The PRI’s are equal to the Ten Principles of the UN GC (for a listing of the six principles including a detailed description please see the original information taken from the UNPRI homepage in APPENDIX A). Subsequently, they face the same problems that they are not binding, lacking institutional control, and that there is the possibility to be abused for marketing purposes. They can be seen as an initiative, not a force with any kind of executive power (cf. APPENDIX B). Nevertheless, PRI’s show the interest big international investors have and the importance they give to this issue.

There are a large number of organizations and initiatives dealing with responsible investment. Among the well-known, reliable and up to date sources for research are the Ethical Investment Research Service (EIRIS), the ecoreporter online magazine, the European Sustainable Investment Forum, the Forum Nachhaltige Geldanlage and the Oekom Research AG.

The transparency logo was created by the Eurosif and its national Social Investment Forums (SIF) in May 200817 in order to label the retail SRI fund sector. Thereby, it gives private investors an orientation by improving the reporting for them. They are as well helpful for asset managers, research institutes and other stakeholders. Their guidance is divided into 7 categories which are:

1. Basic Details
2. SRI Investment Criteria
3. Research Process
4. Evaluation and Implementation
5. Engagement Approach
6. Voting Policy
7. Periodical Activities

Each category contains a question catalogue. Signatories of the transparency guidelines that meet all requirements may use the logo to demonstrate their transparency to stakeholders positively18. In March 2009, the Eurosif counts 30 signatories to the transparency guidelines thus representing around 150 funds in twelve countries19. The logo is shown below20:

illustration not visible in this excerpt

3. Investment forms and their ecological effectiveness

The range of possible investment forms for EFI is almost as broad as for conventional investments. Subsequently, a decisive distinction among all investment forms has to be made.

There are investment forms that create additional value. These investment forms are: the purchase of initial public offerings, venture capital investment and microfinance credits.

All other investment forms do not create a direct value; however they contribute to create favorable market circumstances. These different engagement possibilities are further highlighted in this chapter ranked by their ecologic effectiveness.

3.1 Three categories to rank investment forms by their ecologic effectiveness

According to Stephan Rotthaus, banker, economic journalist and co-founder of the eco fund NRW and Öko-Test magazine as well as head of a PR agency, there are three categories to differentiate for financial communication. The first category with the highest ecological effectiveness is marked with three trees down to the lowest category with only one tree21.

illustration not visible in this excerpt

- Initial public offering
- Venture capital investments
- Direct investment
- Donations

For these investments, money flows completely to the companies or projects after

subtraction of administrative costs.

illustration not visible in this excerpt

- Environmentally friendly operating banks
- Primary offering of fixed-income security

Banks can offer better credit conditions for companies certified as operating environmentally friendly or even may facilitate projects through innovative financial instruments which would have no chance at conventional banks.

[...]


1 Bergius, Susanne: Investoren suchen verstärkt nach Ethik-Investments. In: Handelsblatt, s.d. 12.11.2008: http://www.handelsblatt.com/technologie/nachhaltig_wirtschaften/investoren-suchen-verstaerkt-nach-ethik-investments;2086475 (11.06.2009)

2 United Nations Foundation: http://www.unfoundation.org/global-issues/climate-and-energy/sigma-xi.html (04.06.2009)

3 Cf. Wuppertal Institut: http://www.wupperinst.org/FaktorVier/index.html (04.06.2009)

4 Oekom Research AG : Corporate Responsibilty Review 2009, Nachhaltigkeit in Unternehmensführung und Kapitalanlagen – eine Bestandsaufnahme, München 2009, p.6

5 Oekom Research AG (2009), p.6

6 Author’s desi n of diagram, cf. Oekom esearch AG 2009), p.5

7 Gabriel, Klaus: Nachhaltigkeit am Finanzmarkt. Mit ökologisch und sozial verantwortlichen Geldanlagen die Wirtschaft gestalten, München 2007, p.90

8 Gabriel, Klaus (2007), p.91

9 Oxford Dictionary: http://www.askoxford.com/concise_oed/ecofriendly?view=uk (05.04.2009)

10 Oxford Dictionary: http://www.askoxford.com/concise_oed/ecology?view=uk (05.04.2009)

11 Kugler, Thomas: Anlegerverhalten auf Kapitalmärkten unter besonderer Berücksichtigung moralisch motivierter Präferenzen, Stuttgart 2005, p. 112, cf. www.socialinvest.org

12 Bundesministerium für Arbeit und Soziales (BMAS): http://www.csr-in-
deutschland.de/portal/generator/6188/__n-s.html (08.06.2009)

13 Fiesler, Christian: Die Kommunikation von Nachhaltigkeit: Gesellschaftliche Verantwortung als Inhalt der Kapitalmarktkommunikation, Sankt Gallen 2007, p. 43

14 Cambridge Dictionary: http://dictionary.cambridge.org/define.asp?key=80363&dict=CALD (06.04.2009)

15 OECD Glossary: http://stats.oecd.org/glossary/search.asp (06.04.2009)

16 United Nations Principles for Responsible Investment: http://www.unpri.org/about/ (07.04.2009)

17 Forum Nachhaltige Geldanlagen: http://www.forum-ng.de/front_content.php (22.05.2009)

18 Eurosif: Transparency Guidelines for the retail SRI fund sector, p.2

19 Eurosif: http://www.eurosif.org/publications/european_sri_transparency_guidelines/signatories_responses (22.05.2009)

20 Eurosif: The European SRI Transparency Guidelines Manual Logo Specificatio, s.d. 2008, p. 3: http://www.forum-ng.de/upload/Transparenzlogo/European_SRI_Transparency_Guidelines_ Logo_specification_manual.pdf

21 Rotthaus, Stephan: Erfolgreich investieren in grüne Geldanlagen, Frankfurt am Main 2009, p. 46/47

Excerpt out of 73 pages

Details

Title
Socially Responsible Investment
Subtitle
An Evaluation of Environmental Friendly Investments and their Future Perspectives
College
European School of Business Reutlingen  (Hochschule Reutlingen)
Grade
1,7
Author
Year
2009
Pages
73
Catalog Number
V138446
ISBN (eBook)
9783640466870
ISBN (Book)
9783640466771
File size
1801 KB
Language
English
Tags
Socially, Responsible, Investment, Evaluation, Environmental, Friendly, Investments, Future, Perspectives
Quote paper
Eva-Maria Betz (Author), 2009, Socially Responsible Investment, Munich, GRIN Verlag, https://www.grin.com/document/138446

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