adoption of green investing by institutional investors: a ... · most empirical studies, however,...

Adoption of Green Investing by Institutional Investors:

A European SurveyNovember 2010

An EDHEC-Risk Institute Publication

Institute

2 Printed in France, November 2010. Copyright© EDHEC 2010.The opinions expressed in this study are those of the authors and do not necessarily reflect those of EDHEC Business School.The authors can be contacted at [email protected].

Abstract ................................................................................................................... 5

1. Introduction ...................................................................................................... 7

2. Background ...................................................................................................... 11

3. Methodology and Sample ............................................................................... 25

4. Survey Results ................................................................................................... 29

5. Conclusion ......................................................................................................... 39

References .............................................................................................................. 43

About EDHEC-Risk Institute ............................................................................... 49

EDHEC-Risk Institute Publications and Position Papers (2007-2010) ......... 53

Table of Contents

3An EDHEC-Risk Institute Publication

Adoption of Green Investing by Institutional Investors: A European Survey - November 2010

Since its founding in 2001, EDHEC-Risk Institute has monitored practices in the asset management industry. EDHEC-Risk Institute surveys on the state of the industry look specifically at the practical use of recent research advances and at best practices. In recent years, these surveys have shed light on such topics as asset allocation techniques, portfolio risk management, alternative investments, and asset/liability management.

In the tradition of our surveys this survey on green investing attempts to provide an account of current investor perceptions of this form of investing and to compare these perceptions and the conclusions drawn by the literature on green investing. A detailed examination of green investing is justified in the light of increasing environmental concerns and its increasingly pronounced influence on investment decision making.

As green investing becomes more prevalent in institutional investment practice, it is essential for investors to be informed of the views and practices of their peers. Since extra-financial aspects of investments may be hard to define, difficult to quantify, and often specific to each investment, it is critical to identify the criteria based on which investors make green investments. Most empirical studies, however, have focused on the performance of green investing rather than on investor perceptions. The aim of this survey is to make a contribution by assessing investors’ opinions as well as the definitions and approaches they use.

It is our hope that this assessment of current practice and perceptions will help define the most pressing research issues for the future and that it will be of use to future reflection on the means of improving green investment practices.

Noël AmencProfessor of FinanceDirector of EDHEC-Risk Institute

Foreword

4 An EDHEC-Risk Institute Publication


About the Authors

Felix Goltz is head of applied research at EDHEC-Risk Institute. He does research in empirical finance and asset allocation, with a focus on alternative investments and indexing strategies. His work has appeared in various international academic and practitioner journals and handbooks. He obtained a PhD in finance from the University of Nice Sophia-Antipolis after studying economics and business administration at the University of Bayreuth and EDHEC Business School.

Noël Amenc is professor of finance and director of development at EDHEC Business School, where he heads the EDHEC-Risk Institute. He has a masters degree in economics and a PhD in finance and has conducted active research in the fields of quantitative equity management, portfolio performance analysis, and active asset allocation, resulting in numerous academic and practitioner articles and books. He is a member of the editorial board of the Journal of Portfolio Management, associate editor of the Journal of Alternative Investments, member of the advisory board of the Journal of Index Investing and a member of the scientific advisory council of the AMF (French financial regulatory authority).

Lin Tang is a research analyst at EDHEC-Risk Institute. She has a master’s in risk and asset management from EDHEC Business School. Lin worked as a product engineer for one year after receiving her bachelor’s in engineering, with first-class honours, from Nanyang Technological University in Singapore.


Abstract



This document reviews the concept of green investing and reports the results of a European survey of investment management professionals. The objectiveis to provide background on industry and academic research into green investing and assess the views and uses of green investing. Our survey shows that green investing is a significant movement in which survey respondents are heavily involved. Nearly 90% of respondents consider environmental protection an investment theme and the same percentage plans to do more green investing in the future. The most popular green theme is climate change. We also find that investors define green investing in different ways; inconsistent definitions and terminology are the result. Likewise, survey results show that the main obstacle to green investing is the lack of credible standards for defining and assessing green investments. Survey results also show that social responsibility (followed by financial performance) is the driving force behind green investment. External constraints are a less important reason for taking environmental criteria into consideration. That financial performance is a force behind green investing raises the question of empirical validation of whether green investing in fact delivers attractive returns, as research into the performance of green investing has had mixed results.

Abstract


1. Introduction



This document reviews the concept of green investing and reports the results of a European survey of investment management professionals. The objective is to provide background on industry and academic research into green investing and assess the views and uses of green investing.

Of late there has been a swift increase of awareness, in both developed and developing economies, of the environmental degradation brought about by production and consumption. New policies and regulations, such as the Kyoto Protocol, the European Emissions Trading Scheme, and the US Environmental Protection Agency Clean Air Act are consequences of growing concern for environmental protection (Chia et al. 2009). These policies are not to be viewed only as brakes on economic activity; in fact, they may also create opportunities for new business. Concerns about greenhouse gases, for example, have led to a growing sector that produces power from wind and solar energy. As a result, investors have seen spectacular performance in these sectors in the equity market. From 2004 to 2007, for example, the returns for the global listed companies in the wind power segment exceeded 300%, whereas solar industries returned roughly 150% in 2007 (Gorman and Healy 2007). But in addition to influencing the returns on stocks in particular sectors, the increase in environmental awareness and the new opportunities it creates have a more profound influence on investment decision making, as investors have been looking to make environmental responsibility an integral part of their investment processes.

In fact, many large investment management firms have created groups specialised

in analysing environmental and other extra-financial information. Investment managers and institutional investors have agreed on principles1 and created action groups to push green investing forward. For instance, more than eight hundred institutions worldwide with more than $22 trillion of assets under management have endorsed the “Principles for Responsible Investments” drafted by the UN Environment Programme Finance Initiative (Röhrbein 2010). Focusing on a more specific issue, global warming, institutional investors have formed important action groups to develop common initiatives, such as the Institutional Investors Group on Climate Change (IIGCC), which currently has more than fifty members representing assets of €5 trillion (IIGCC 2009) and the P8 Group, which brings together some of the world’s largest public pension funds. Such initiatives, as well as allocation decisions made by particular institutions, are tangible proof that environmental responsibility is on the agenda of institutional investors around the world. In Europe, such leading institutional investors as ABP and PGGM, which have launched a €500 million equity fund to invest in clean energy projects (Sahloul 2007), or the Danish pension fund ATP, which announced in 2009 that it would allocate €1 billion to a climate change fund (ATP 2009), have made significant allocations to green investments in recent years. More recently, in January 2010, the British Telecom Pension Scheme (BTPS) invested £75 million in the UK government’s Innovation Investment Fund (UKIIF), which focuses on environmental technology investments (Brooksbank 2010).

As green investing is becoming more prevalent in institutional investment

1. Introduction

1 - Examples of such principles are incorporating the consideration of environmental issues in the decision-making processes, disclosing such information to shareholders, and so on.



practice, it is essential for investors to be informed of the views and practices of their peers. Since extra-financial aspects of investments may be hard to define, difficult to quantify, and often specific to each investment,2 it is critical to identify the criteria based on which investors undertake green investments. Most empirical studies, however, have focused on the performance of green investing rather than on investors’ perceptions. This survey aims to make a contribution by assessing investors’ opinions as well as the definitions and approaches they use. The EDHEC-Risk Green Investing Survey was an online questionnaire e-mailed to European professionals in the asset management industry. This survey elicited at total of ninety-seven responses from institutional investors, asset management firms, and local authorities. The questionnaire consisted of sections covering the current adoption of green themes and the understanding of green concepts. The survey also asked the respondents about their motivations and about their views of the drawbacks of green investing. Finally, we invited survey respondents to express their views of future developments in green investing.

Our survey results show that about 82% of respondents consider environmental protection one of their investment themes. Moreover, nearly 90% of respondents report that they expect to do more green investing.

But we also find that investors define green investing in different ways; the result is inconsistency in definitions and terminology across the spectrum of institutional investors. Likewise, survey results show that the main obstacle to green investing

is the lack of credible standards for defining and assessing green investments.

Survey results also show that social responsibility (followed by financial performance) is the driving force behind green investment. External constraints are a less important reason for taking environmental criteria into consideration. That financial performance is a force behind green investing raises the question of empirical validation of whether green investing in fact delivers attractive returns, as research into the performance of green investing has had mixed results (see section 2.3.3).

The remainder of this paper is organised as follows. We begin by providing background on green investing and then present the main results of our survey. In section 2, the background section, we first review the definition of green investing approaches; we then describe the current market for green investments and finally provide a review of the theory of and empirical evidence on the motivations for and limits of environmentally responsible investing. The methodology for the survey is presented in section 3, followed by a discussion of the survey findings in section 4. Section 5 provides overall conclusions.

1. Introduction

2 - See Bassen and Kovacs (2008)



1. Introduction


2. Background



This section provides an introduction to and review of green investing, which will be of use as we examine investors’ views in practice, as provided in the survey results. This section first reviews the history of green investing and defines the terms commonly used in the industry. It then discusses current approaches to green investing as well as problems with assessing extra-financial information. This discussion is followed by an overview of the market for green investing, including estimates of the size of the market and information on available products. Finally, this background includes an academic review of motivations for and drawbacks to green investing.

2.1 An Introduction to Green Investing2.1.1 HistoryWith the increasing focus on environmental protection, there have been growing calls, whether from the media, government, or corporations (Boulatoff and Boyer 2009), to make responsibility for the environment an integral part of investment decision making. But the notion of responsible investing is not new. It dates to Methodist and Quaker communities in the US, which sought such investments in the mid-eighteenth century (Schueth 2003). The Quakers, for example, excluded such investments as those that were linked to war or slavery. This principle of considering extra-financial implications of investments has parallels in today’s investment practice, particularly when it comes to considering environmental implications. In the 1980s, the Brundtland Report, which set out the principle of environmental sustainability (Kreander 2001), and disasters such as the Chernobyl meltdown, raised environmental

awareness. The preservation of nature and the planet as a whole has since become an important value in most countries. Not unlike the Quakers, who made religious criteria part of their investment philosophies, investors may now wish to incorporate environmental protection dogma into investment decisions. So they may be likely to exclude companies with a strong negative impact on the environment.

To cater to the demand for environmentally responsible or green investments, the investment management industry began providing specific green funds in the late 1980s. In April 1988, the first environmental fund in Europe, Merlin Ecology, was launched in the UK; such funds were then launched in other European countries, in particular in Sweden, Norway, France, and Germany (Kreander 2001). Designing these funds would, of course, require proper definition of green investing, and it is to this definition that we now turn.

2.1.2 Definition of the ConceptJust as it is difficult to pinpoint the origins of green investing, it is hard to find a unique definition of it, that is, to pin down exactly what green investing entails. And analysing investor perceptions of green investing clearly requires that the core of this investment approach be identified.

In the industry, there are several commonly used terms, such as socially responsible investment (SRI), sustainable development (SD), green investing, and responsible investing. These concepts are different but they also overlap; as a result, there is some confusion. All the same, the common denominator of these notions is that they

2. Background



take into account extra-financial aspects of investments.

These aspects come in three broad categories: criteria having to do with environmental, social, and governance factors. They are commonly known ESG factors. These factors are non-financial and sometimes hard to quantify. Their effect on a company plays out over the medium or longer term (CFA Institute 2008). Table 1 provides a list of possible themes for each of these broad categories.

Table 1: Common ESG themes

E - Environmental climate change, hazardous waste, nuclear energy, sustainability

S – Social diversity, human rights, consumer protection, animal welfare

G - Governance management structure, employee relations, executive pay

Two other widely used terms are socially responsible investment (SRI) and sustainable development (SD). It is important to identify the concepts behind these terms and show how they relate to ESG issues. Socially responsible investment, as defined by Eurosif (2008), refers to those investments that incorporate ESG factors; it may thus be equivalent to the ESG concept. SRI, however, is sometimes understood to focus solely on the social perspective. It would thus be a subset of the ESG concept.

Sustainable development was defined by the United Nations in the 1987 Brundtland Report as “development that meets the needs of the present without compromising future generations’ ability to meet their own needs”. The United Nations 2005 World Summit Outcome Document refers to economic, social, and environmental sustainability as the three dimensions of sustainable development (Adam 2006).

The following figure demonstrates the relationship between SD and its three pillars. It clearly illustrates that SD is built on the integration of those three elements. Any action which may lead to improvements in at least one element of SD (environmental, social, or economic) should not come at the expense of any other. The main difference between this definition and the ESG concept is the lack of an explicit mention of governance. Good governance, however, could be seen as a condition of economic sustainability. Sustainable development can thus be understood as very similar to ESG concerns. Both SRI and SD, when taking the broad definitions, can be understood as referring to investments that combine investors’ financial objectives and their concerns about environmental, social, and governance issues.

Figure 1: The relationship between sustainable development and its three pillars

Economic

SocialEnvironmental

SustainableDevelopment

Source: Adam 2006

The topic of our survey—green or environmentally responsible investing—takes only environmental issues into account. Cohen, Fenn, and Konar (1997, 6) state that green investing means “investing in companies that are the environmental leaders in their respective industries”. Boulatoff and Boyer (2009, 9)

2. Background



write that “green investing is the act of investing in companies that have a positive environmental impact”. Green investing can thus be understood as a subset of or as one aspect of ESG issues. So although green investing may be more sharply focused than are broader approaches, it shares with any approach integrating extra-financial information the many ways of considering such information, ways we describe in the following subsection.

2.1.3 Green Investing ApproachesExtra-financial information on environmental factors can be taken into account in the investment process in different ways, as highlighted by Mercer (2009). There are three types of approaches to green investment: the thematic approach, screening, and engagement. The thematic approach focuses on specific sectors, such as clean energy, clean technology, water and wastewater management, and so on. Screening implies including (positive screening) or excluding (negative screening) companies on environmental criteria. Finally, engagement focuses on a long-term relationship with the companies, establishing a dialogue on environmental and sustainability issues, in the interest of inciting companies to change their practices in favour of the environment. These three approaches are not, of course, mutually exclusive. An investment in a clean energy company (thematic), for example, could also involve enticing the company (engagement) to minimise the environmental impact of its production process and delivery logistics.

The remainder of this section discusses the means of integrating extra-financial criteria in more detail and provides an analysis of problems with assessing extra-financial information.

The three approaches to taking into account environmental informationThe thematic approach could be considered the easiest way to make environmental factors an integral part of portfolio construction. It focuses only on sectors having to do with environmental issues. The allocations of institutional investors to climate change and renewable energy funds, allocations mentioned in the introduction, are illustrative of the thematic approach to green investing. Green technology or clean technology funds, whose popularity has skyrocketed recently, likewise stand to benefit from thematic environmental allocations.

The second approach is by screening, of which there are two variants. Negative screening refers to excluding environmentally harmful companies, whereas positive screening is the opposite—selecting environmental leaders in each sector. Positive screening is often referred to as the “best-in-class” approach. The Green Century Fund, for example, excludes companies whose environmental practices, such as misuse of resources or poor waste management, may be unsustainable (negative screening) and the FTSE4Good Index Series includes only companies that meet the responsible investment criteria (positive screening).

During screening, a host of indicators of environmental performance or environmental impact may be used. Companies from different industries will usually be graded on different criteria to adjust for the differences in the environmental impact of different industries.3 The table below shows some common key performance indicators (KPI) for environmental screening (Bassen and Kovacs 2008).

2. Background

3 - Index providers and ratings providers do not necessarily publish the list of criteria used for screening.



The third possible approach to making green factors an integral part of investing is engagement. Engagement focuses on a long-term relationship with the companies and on establishing dialogue that will incite companies to become greener. Jupiter

(2000), for example, reports that over a typical year its environmental research unit holds sixty meetings with companies and writes 116 letters to companies on environmental and social issues.

2. Background

Table 2: Indicators of environmental performance or environmental impact

Environmental

General KPIs which apply to all industry groups E1 Energy Efficiency

E2 Deployment of Renewable Energy Sources

Sector-specific KPIs which apply to certain sectors E3 CO2 Emissions

E4 NO, SO Emissions

E5 Waste

E6 Environmental Compatibility

E7 End-of-Lifecycle Impact

When thematic or screening approaches are taken, companies make their own determinations of the funds to be included. These determinations may vary widely from provider to provider and investor to investor. So it is of interest to look into whether different definitions—and in thematic approaches definitions vary widely—or criteria would lead to the same risk/return characteristics. We now use a set of alternative energy indices to analyse differences in sector definitions and the effects these differences have on risk/reward profiles.

To analyse differences in the definitions of a thematic green investing approach, we focus on the so-called new energy theme, a theme that characterises companies that provide alternatives to energy sourced from conventional fossil fuels. We obtained the daily returns of global new energy indices provided by FTSE, WilderHill, DAXGlobal, and Standard & Poors. The table below describes the composition of the four indices and shows risk and return statistics for the period from 26 January 2009 to 25 January 2010. The table shows that these indices have different numbers of constituents, selection criteria, and total market capitalisations. The DAXGlobal index includes only energy providers, whereas the S&P and WilderHill have larger universes, including companies from such sectors such as energy conservation. The FTSE index requires that at least 20% of the business of the companies it includes be derived from the renewable and alternative energy industries. Table 3 shows that, even though these indices are based on a relatively homogeneous sector (new energy), the differing definitions of the sectors cause risk and return properties to vary widely. The annualised return can be as high as 14.85% for the WilderHill New Energy Global Innovation Index and as low as 3.6% for the DAX Global Alternative Energy. Volatility, which ranges from 9.87% to 18.16%, likewise varies widely. These results underscore the great heterogeneity of thematic



2. Background

4 - Twenty percent of business derived from renewable and alternative energy is defined as follows: a) [EO revenues]/[total revenues]; b) [EO invested capital]/[total invested capital]; c) [EO EBITDA]/[total EBITDA].

definitions and the resulting differences in risk/return profiles of indices meant to capture the same thematic exposure to the new energy sector.

Table 3 Descriptions of four global thematic indices in the new energy sector and their risk/return profiles

FTSE Environmental Opportunities Renewable &

Alternative Energy

S&PGlobal Clean Energy

WilderHill New Energy Global Innovation

DAX Global Alternative Energy

No of constituents 103 30 88 15

Total market capitalisation (US$ billion)

358 73.7 216 N.A.

Selection criteria 1. Companies have at least 20% of their

business4 derived from renewable & alternative energy

2. Market capitalisation requirement is not

available

1. Clean energy production and clean

energy technology and equipment providers

companies2. Market capitalisation

of the company has to be more than $300

million3. Three-month daily value traded of more

than $3 million

1. Companies focusing on the generation and use of cleaner

energy, conservation, efficiency, and the advancement of

renewable energy in general

2. Three-month average market

capitalisation of at least $100 million

3. At least 50% of the stocks outside the US

1. Energy providers from five sectors with equal sector

weightings2. Average daily

trading volume is greater than $1 million

Based on returns data for the period from 26 January 2009 to 25 January 2010

Problems with assessing extra-financial informationAlthough there are several approaches to integrating extra-financial information, the implementation of any of them involves problems having to do with the very nature of this information. There are problems with data availability, data properties, interpretation of the data, and standardisation. Information on the environmental impact of companies that issue securities, for example, is still relatively rare. Although such data vendors as Bloomberg have provided platforms for investors to access the common environmental information of companies (Peeva and Noetzel 2009), these platforms do not cover all relevant companies. And information for a given company may be available, but it does not necessarily lend itself to investment analysis. Quigley (2009)

has analysed the characteristics of this information and concludes that it is usually low frequency (mostly annual) and has a shorter history than financial information. In addition, interpreting the information and assigning weights to green factors to obtain an aggregate environmental impact is another challenge, as fund managers and analysts have different views of the relative importance of these factors (Insight Investment Management [Global] Limited 2009) and because environmental information is often hard to quantify. Finally, there is not yet a standard for disclosure of environmental performance. Regional differences in policy focus, discrepancies in the definitions among analysts, and diverse portfolios across companies are challenging the integration process (Amaeshi and Grayson 2009). As a consequence, investors are not



necessarily able to compare data for different companies.

2.2 Market AnalysisWe now provide an overview of the product offerings for the green investment markets. This section describes the size of the market and the major investment vehicles.

Growing concern for the environment has led to strong growth of the market for green investments and to more general forms of responsible investment, such as SRI. As the latest data the Eurosif 2010 study (2010) show, the European socially responsible investment (SRI) market (including institutional mandates, funds, and other financial products) amounted to approximately €5 trillion at the end of 2009. As of October 2009, green funds accounted for 41% of the total SRI fund universe in Europe (Wheelan 2009). Investments in SRI and green funds are often driven more by institutional demand than by retail demand. In Europe, for example, institutional investments account for 66% of SRI assets (Eurosif 2010). In recent years, however, the share of retail investors has increased rapidly, from 6% of the total EU SRI market at the end of 2007 (Eurosif 2008) to 34% at the end of 2009.

In this fast growing market, investors are able to access green investing strategies in several ways (table 4 summarises the vehicles for green investing). It is clear that green investing has been adopted in both traditional and alternative asset classes, even though the most developed market is surely the equity market. Vehicles for

green equity investing include indices, mutual funds, and ETFs that usually take either a thematic or a screening approach. Fixed-income investors have a choice of “green bonds”, bonds generally issued by federally qualified organisations to raise capital to solve environmental problems. For alternative asset classes, the most common vehicles for green investing are real estate funds and infrastructure funds, which are often organised as private equity vehicles and are sometimes said to provide green investment opportunities better than those of more traditional asset classes (Bird 2010). Fixed-income investments have recently drawn attention in the SRI universe in Europe; the Eurosif (2010) study shows that bonds have replaced equity and become the most favoured asset class, accounting for 53% of all European investors’ SRI holdings.5

Equity accounts for another 33% of total SRI assets under management. The remaining 14% is invested in alternative asset classes.

2.3 Green Investing: Theory and EvidenceOur description of the market for green investment vehicles provides evidence of recent growth. To better understand what incites investors to increase their exposure to these vehicles, this section will look first at the literature on the potential motivation for and drawbacks of green investing. We then provide an overview of the large and still growing body of literature on the financial performance of investments that integrate extra-financial criteria having to do with the environment.

2. Background

5 - The SRI investments include mandates, funds and other vehicles, such as structured products, etc.



2. Background

Table 4: An overview of vehicles for green investing

Asset class Type of vehicle Description Example

Equity

Indices

Include only stocks of companies that have “good environmental practices”.

Screening

1. FTSE4Good Environmental Leaders Europe 40 Index 2. S&P Global Eco Index

Thematic

3. WilderHill New Energy Global Innovation Index 4. S&P Global Water Index5. FTSE KLD Global Climate Index

Mutual funds

1. Calvet Large Cap—screening large-cap stocks with good reputation for environmental consciousness 2. Winslow Green Growth –small-cap fund investing in eco-friendly companies 3. Guinness Atkinson Alternative Energy—investing in natural resources

ETFs1. PowerShares WilderHill Clean Energy Portfolio (PBW )2. Claymore/LGA Green ETF (GRN)

Fixed-income Bonds

Bonds are usually issued by federally qualified organisations to raise capital to solve environmental problems

1. European Investment Bank—Climate Awareness Bonds 2. U.S. Treasury—“Green Bonds”3. SEB & Credit Suisse—World Bank green bonds to support low-carbon development in developing countries

Alternatives

Real estateReal estate investment that is environmentally acceptable.

Micro: energy efficiency, recycling, etc.Macro: reducing greenhouse gases, carbon footprinting, less resource depletion, etc.

Infrastructure/ private equity

Funds that invest in, e.g., environmental technology infrastructure

1. Miaoli Wind Macquarie Int’l Infrastructure Fund2. Carlyle Infrastructure Partners (CIP)

2.3.1 Investor Motivations for Considering Green InvestingThe reasons for investing green can be categorised in four groups. First, investors may be driven by ethical considerations. Second, they may be interested purely in advantageous return profiles. Third, by making an environmental dimension an integral part of their investment decisions investors may simply be responding to legal or regulatory constraints. Finally, investors may be looking to improve their reputation by making a public showing of their concern for the environment.

Ethical considerations may be the most basic force behind taking extra-financial

information into account in investment decisions. Lewis and Mackenzie (2000) and Lewis (2001) argue that, when structuring their investment portfolios, investors derive utility from behaving in ways consistent with ethical considerations. Such utility gains may mean that investors would even be willing to sacrifice some financial returns. Schueth (2003) notes that, although they are looking to generate returns, some investors may also want their investments to do good.

Taking information on environmental criteria into consideration when investing may also provide investors with attractive risk and return properties. For several



reasons, green investing may be attractive from a purely financial point of view.

First, high returns are a possibility. Dunn (2009) points out that decreased costs through removal of environmental inefficiencies may lead to increased firm earnings and higher returns. Furthermore, new products and markets to meet changing needs stemming from consumers’ growing tendency to view their purchases as acts of environmental protection may provide earnings growth (Dunn 2009) for companies that successfully fulfil such needs. Many consumers are also willing to pay higher prices for green products (Coddington 1990; Suchard and Polonsky 1991). Therefore, paying more attention to the environment could lead to higher profitability. For these reasons, identifying green firms could help to generate attractive returns in an equity portfolio.

A second reason for the attractive financial properties of green investments has to do with correlation. Green stocks and the general stock market, for instance, may not be highly correlated; green stocks may thus provide diversification. In fact, Chia et al. (2009) find that such common risk factors as firm size, sector, style, and geographic distribution do not fully account for the superior performance of renewable energy stocks. A statistically significant “green factor” is found even after all typical equity risk factors are controlled for. The existence of this factor in equity markets means that exposure to this factor may be beneficial in that exposure to standard equity risk factors is diversified. In addition to diversifying by seeking assets whose correlation is low, investment managers seek assets that are

highly correlated with investor liabilities or spending objectives. These assets can naturally play a role in hedging portfolios meant to have the highest possible correlation with liabilities or spending objectives. Green investments may provide convenient hedging properties. In particular, investing in resource saving should serve as a hedge against resource price spikes. Investments in companies that exploit alternative energy sources or that allow energy savings, for example, benefit when energy prices rise (Greenstein 2008; Preston and Martel 2008).

In addition to their return potential and correlation properties, green investments could come with risk-reduction benefits. Through better management of future environmental risks, green firms may be subject to lower risk overall (Konar and Cohen 2001; Dunn 2009). Avoidance of environmental risk may lead to lower stock price volatility. By contrast, when companies do not respect environmental criteria, they are at risk of having to shoulder responsibility for environmental disasters, which could in turn lead to significant losses for shareholders. In the second quarter of 2010, for example, the share price of the oil giant BP fell by 40% after it failed to plug a leaking well in the Gulf of Mexico. If investors were able to screen out companies at risk of creating such environmental hazards, they could benefit from risk reduction.

In sum, investors have many reasons—from ethical considerations to the pursuit of particular risk/return properties—to consider green investment. There may also be external regulation or concerns about the image of the institution. The

2. Background



Swedish Society of Financial Analysts (SFF) has noted that a positive environmental profile has become a major marketing tool (Aguilera et al. 2006; SFF 2000). From the regulatory perspective, the main focus is on disclosing how pension fund trustees take ESG issues into consideration. Institutional investors from more than eight European countries (including the United Kingdom, France, and Germany), for instance, are required to disclose the environmental and other extra-financial information of their pension investments.

2.3.2 DrawbacksAlthough there are many reasons to take a green investing approach, there are also major stumbling blocks. More often than not, the reasons to invest green can also be seen as reasons not to invest green. If green investing were assumed to provide poor returns, for example, performance would be an obstacle to adoption. And, as it happens, it is from the financial perspective that the main arguments against green investing are drawn.

Academic research shows that using sustainability screens will necessarily reduce the investment universe and thus lead to poor diversification. For instance, a mean-variance optimal portfolio whose constituents have been screened by extra-financial criteria will be less risk/reward efficient than will the mean-variance optimal portfolio based on the full set of constituents (Adler and Kritzman 2008). Furthermore, if investors value such extra-financial aspects as environmental friendliness, green stocks will be overpriced and polluting stocks underpriced. Fabozzi, Ma, and Oliphant (2008) argue that investors should perhaps

make “irresponsible” investments if they wish to reap high returns. This argument is at the origin of vice investing, the idea of which is to hold precisely those stocks that other investors will shun for extra-financial or ethical reasons. In our context, vice investing would mean seeking extra returns by investing in the companies that, as they are the most egregious polluters, are avoided by many investors and may be underpriced. Being environmentally friendly may not lead to the cost efficiencies and growth potential mentioned by proponents of green investing; in fact, as environmental friendliness is often costly, it may be a drag on performance. Lewis (2001), for one, shows that many investors perceive ethical investments as poorer performers.

The factor exposures of green portfolios can also be considered to see whether green investing leads to any systematic biases in equity portfolios. As it turns out, selecting stocks of green companies may lead to pronounced biases (Chang and Witte 2010; Rudd 1981), usually small-cap and growth biases (Kurtz 1997). Le Sourd (2009) summarises the literature on the biases in SRI funds and finds that, in general, SRI funds have obvious small-cap (but not growth or value) biases. Clow (1999) finds that social and environmental screens tend, as a result of the exclusion of old-line industrial manufacturers, to contain more technology stocks.

A frequent criticism of the fad for green investing is that it has caused organisations to expend more effort on marketing and advertising to claim to be green than on actually implementing business practices

2. Background



that minimise environmental impact (Elmore 2009). This is the so-called greenwashing risk.

2.3.3 Empirical Results of Financial PerformanceWe have seen that the potentially good financial performance of green investing (resulting from lower costs, better business opportunities for green companies, or reduced risk through environmental protection) is a main motivation for investors. At the same time, the potentially poor performance of these investments (resulting from higher costs, greenwashing, or overpriced stocks) is a major stumbling block. For investors considering a green approach, then, determining whether the financial performance of green investments is actually attractive is crucial. Cohen, Fenn, and Konar (1997) and Wagner (2001), authors of two of the several necessarily empirical studies that have attempted to make this determination, have provided excellent literature reviews on the topic. In this section, we follow a chronological order inspired by Wagner (2001) and briefly review the literature (some references are provided in Cohen, Fenn, and Konar [1997]).

The environmental impact on financial performance attracted considerable attention from academic researchers more than twenty-five years ago. Mahapatra (1984), for instance, finds that pollution control expenditures had a negative impact on the financial performance of US companies in the 1970s. By contrast, Erfle and Fratantuono (1992), who analyse forty-nine companies, conclude that there is a significant positive relationship

between firm environmental performance and financial performance (see the review of these studies in Cohen, Fenn, and Konar [1997]). On the whole, the findings of these earlier studies are inconclusive. The main focus of these studies is on tracking company performance individually and linking it to environmental performance.6

There are few studies such as that by White (1991), who finds that the mutual funds that use social responsibility screening criteria slightly underperformed the S&P 500 index on both a nominal and a risk-adjusted basis, that examine the performance of portfolios constructed with green strategies.

In the late 1990s and early 2000s, studies began to focus more closely on portfolio performance than on company performance. In particular, this literature analyses the differences in the performance of portfolios that have been screened and that of those that have not been. Diltz (1995) studies the daily returns for twenty-eight common stock portfolios over the period from 1981 to 1991 that had good environmental performance7 and finds that social screening did not improve portfolio performance significantly, whereas environmental performance did. At about the same time, Cohen, Fenn, and Konar (1997) examine the difference in the financial performance of heavy polluters and light polluters by constructing “industry-balanced” portfolios with different environmental responsibility characteristics. Unlike Diltz’s study, their findings suggest that investing in companies that are leaders in environmental protections would neither improve nor reduce portfolio returns.

2. Background

6 - There are more examples of studies in this period: Bragdon and Marlin (1972), Spicer (1978), Jaggi and Freedman (1992). The more interested reader can also see Wagner (2001).7 - Companies are rated as good, fair, or poor on many criteria including environmental, information disclosure, minority management, and so on.



Not even in the most recent studies is there any broad consensus on the relationship between environmental and financial performance. Konar and Cohen (2001) find that environmental performance is significantly positively correlated with the intangible asset value of publicly traded firms in the S&P 500. Semenova and Hassel (2008) find that, in a low-risk industry, the effect of environmental performance on market value is greater than in a high-risk industry. Derwall et al.(2005) constructed portfolios based on eco-efficiency scores and find that, from 1995 to 2003, stock portfolios with higher scores outperformed those with lower scores. Olsson (2007), by contrast, analysed the returns of thirty US industry portfolios and finds that the environmental score of portfolios had no statistically significant impact on returns. There are also studies that report neutral results. Boulatoff and Boyer (2009), for instance, studied the performance of more than three hundred environmental firms and find that the performance of environmental stocks is sector-dependent. King and Lenox (2001), for their part, examined more than six hundred US manufacturing firms and concluded that the financial performance of companies in cleaner industries is good. They are unable to prove, however, that this cleanliness is the cause of this good performance. In a very recent study, finally, Dixon (2010) discussed the potential impact of sustainability-themed investing on the performance of a global equity portfolio. The study argues that sustainability-themed investing could improve returns but would also mean higher risk.

Table 7 summarises (not exhaustively) the studies reviewed by this document. On the whole, the findings suggest inconclusive evidence of the relationship between environmental and financial performance. It is perhaps precisely because of this inconclusive evidence that the financial performance of green investment serves as an argument both for and against taking a green approach to investing.

Review of research into green investing shows a sector that is very much emerging and highly heterogeneous, and empirical evidence of the corresponding investment strategies has yet to lead to any clear consensus. So, in view of a lack of conceptual guidance, it is of interest to assess practitioners’ views of the notion of green investing and of the thought processes that accompany any such investments they may make. We now turn to the survey of investment professionals, which was taken with the objective of completing this assessment. We begin with a presentation of the survey methodology and the sample before turning, in section 4, to the actual results.

2. Background



2. Background

8 - Council of Economic Priorities.

Table 5: Summaries of studies of the performance of green investment

Form Author Method Time period Results

Negative results

Mahapatra (1984)

Compared pollution control expenditures across six industries to the average market returns in those industries

1967–1978 Pollution control expenditure limits the financial performance of the company

White (1991)

Compared the performance of six environmental mutual funds to S&P500 on both a nominal and a risk-adjusted basis

One-year period ending 28 June 1991

SRI funds underperformed

Olsson (2007)The daily value-weighted returns of 30 US industry portfolios are analysed

Jan. 2004–July 2006

The environmental “riskiness” of portfolios has no statistically significant impact on returns

Neutral results

Cohen, Fenn, and Konar (1997)

Two portfolios with heavy and light polluters were constructed and their performances were compared

1987–1989, 1990 and 1991

Environmental and financial performance: no penalty or positive return given to the green investor’s convictions

King and Lenox (2001)

652 US manufacturing firms were analysed

1987–1996 Association of pollution reduction and financial gain, but no direction of causality

Boulatoff and Boyer (2009)

The performance of 310 global green investing stocks was analysed

2003–2007 The performance of the environmental stocks is sector-dependent.

Dixon (2010)A framework is developed to investigate the performance of sustainability-themed investing.

Before 31 May 2010

Sustainability-themed investing could improve returns but with increased risk at the same time.

Positive results

Erfle and Fratantuono (1992)

Analysed 49 companies in CEP’s8 reputation indices of environmental performance

Before 1989 Significant positive correlation between firm environmental performance and return on assets, return on equity, and return on investment

Diltz (1995) Daily returns of 28 common stock portfolios are analysed

1981–1991 Environmental performance has significantly positive impact on the portfolio returns.

Konar and Cohen (2001)

Compared the environmental and financial performance of 321 manufacturing firms in the S&P500

1989 There is a significant positive relationship between environmental performance and the intangible asset value of publicly traded firms in the S&P 500

Derwall et al. (2005)

Compared the financial performance of high environmental rating stocks to that of low ones

July 1995–December 2003

Portfolios consisting of stocks with high environmental ratings provided substantially higher average returns than those of stocks with low ratings.

Semenova and Hassel (2008)

Industry risk moderates the relationship between environmental and financial performance

2003–2006 The effect of environmental performance on market value is greater in low-risk industries than in high-risk industries.



2. Background


3. Methodology and Sample



An online questionnaire and electronic mail sent to European professionals in the asset management industry were used to take the EDHEC-Risk Green Investing Survey. The survey targets investment management professionals, including those from institutional investors and asset management firms. To collect responses from practitioners and constitute a sample of respondents, the email containing a link to the questionnaire was sent out in December 2009. The first response was received on 22 December, the last on 11 January. In total, we received ninety-seven responses.

The ninety-seven respondents to the survey are all based in Europe. Nearly one-third of respondents come from the United Kingdom. The main continental European countries such as France, Switzerland, Benelux, and Germany together account for another 45% of the sample. The breakdown of the respondents’ countries can be seen in figure 2. On the whole, our sample provides a fair geographical representation of the European investment market.

We also asked respondents about the main business of their institutions. Institutional investors, including pension funds, foundations, and insurance companies, are the largest group of respondents; they account for 39% of the respondents to the survey (see figure 3).Asset management companies and advisory/consulting companies together account for another 28%. In addition, 10% of respondents are from UK local governments, such as local authorities and county councils, which manage investments of their wealth in financial assets. The rest of the respondents include

practitioners from investment banks, private investors, and corporate funds.9

Figure 2: Country distribution of respondents

BeneluxFranceGermanyNordicSwitzerland

10%

12%

5%

14%

9%

31%

6%

7%

6%

United KingdomOther EUNon-EUNo answer

Figure 3: Main activity of respondents

Pension fundInsurance companyFoundation, associationAsset management firmInvestment bankAdvisory/actuary/consultantBrokerPrivate investorLocal governmentCorporationNo answer

21%

16%

13%

4%

2%

1%

7%

4%

10%

7%

15%


9 - Corporations sometimes set up funds to invest in environmental projects. These funds are often distinct from the pension fund sponsored by the same corporation.



Finally, figure 4 shows the assets under management (AUM) of the organisations survey respondents are associated with. In total, respondents manage more than €300 billion of assets. Only about 3% of respondents are very large firms (with more than €10 billion under management). The survey sample mainly includes medium-sized companies, with AUM of between €100 million and €10 billion. Thirty percent of respondents are from organisations that manage less than €100 million of assets.10

Figure 4: Assets under management (€)

< 10mn10-100mn100mn-1bn1-10bn>10bnNo answer

16%

14%

26%

32%

3%

9%

Taken together, this regional diversity and fair balance of sizes and types of organisations make the survey representative of European investment management. We now turn to the analysis of the responses elicited from this group of survey respondents.


10 - We approximate this amount based on the assumption that in each category the respondents manage the average of the bounds for each category, and we exclude respondents who do not report this information.


4. Survey Results



In this section, we present the main results of the survey and discuss possible explanations for the respondents’ answers. The questionnaire consisted of four sections. In the first section, respondents are asked about the adoption of green investing themes in their portfolios and the environmental themes investors would like to take into account. The point is to identify the fields practitioners are most interested in. The next set of questions turned to the understanding of the concept, including the scope of sustainable development, as well as the difference between sustainable development and socially responsible investment. In the third section, the motivations for and obstacles to green investing are investigated. Finally, the last set of questions invites respondents to express their views on future developments in the green investing market. We now turn to the results for each set of questions.

4.1 The Adoption of Green InvestingIn our survey, we first ask investors whether the environment is an investment theme for them. Figure 5 shows that for the large majority (86.3%) of respondents it is; for only a small minority (13.7%) is it not.11 This finding is consistent with the

generally increasing attention paid to environmental issues. Furthermore, we find that small organisations (by assets under management) tend to be more concerned about green investing than medium-sized organisations. None of our respondents from small investors (AUM < € 100 million) fails to consider the environment an investment theme, whereas 23.6% of respondents from mid-sized investors (AUM between €100 million and €10 billion) disregard the environment as an investment theme altogether.12 This result is statistically significant at the 1% level using Fisher’s exact test (p=0.0066). So smaller organisations are more likely to integrate environmental factors in their investment decision making than are mid-sized organisations.

Figure 6 shows that 81.5% of these respondents (excluding the non-responses) who take green investing into account are concerned with climate change. The great concern with investment themes centred on climate change jibes with its importance in the media and on the political agenda, and confirms the tendency of institutional investors to take climate change into account. Unlike many other green themes, climate change has even led to a nascent

4. Survey Results

11 - We exclude two non-responses in computing these percentages.12 - We only have three respondents who report having more than €10 billion of assets under management. The environment is an investment theme for all of them.

Figure 5: Is environmental protection an investment theme for you?



market for new financial products: emission rights for CO2. It is unsurprising that climate change should be a major feature in the green investing landscape, as there are funds and products tracking emission markets.13 And institutional investors are likely to have questions about the interest and potential uses of such new products. Other environmental themes such as water management, anti-pollution measures, and improvement of processes are also frequently taken into account by the majority of respondents. One in five respondents mentions such additional aspects of green investing as energy efficiency and deforestation.

To summarise the findings on the adoption of green issues in investment, we find that the majority of the survey respondents have taken environmental protection into account in their investment decisions. It is also clear that themes centred on climate change figure more prominently than other green investing themes.

4.2 Understanding of Concepts and DefinitionsWe have seen in the background that there are different criteria for and approaches to

incorporating green factors in portfolios. It is natural to assess how this multitude of approaches is reflected in investment practitioners’ perceptions.

We focus first on the concept of sustainable development, a concept described in the Brundtland Report and a popular label under which extra-financial information can be made a part of investment decisions. In particular, we examine whether sustainable development is regarded as a specific investment sector or whether it is an investment criterion across all sectors. This question has to do with the approaches to integrating extra-financial information, such as thematic investing or screening. Screening, of course, can be applied to a wide range of investments, whereas a thematic approach would restrict investments to particular sectors. Figure 7 shows that the dominant view of sustainable development is that it is a criterion encompassing all investment sectors rather than specific sectors. More specifically, excluding the non-responses, 62.1%14 of respondents consider sustainable development an investment criterion across all sectors, whereas 21.1% consider it a specific sector. However, the results also show that a considerable share of respondents (16.8%)

4. Survey Results

13 - For example, ASO is an exchange-traded fund launched by XShares Advisors LLC on 31 March 2009. It invests a basket of futures contracts for European Union allowances (EUAs). Another example would be ETFS Carbon (CARB), which tracks the ICE ECX EUA futures contracts traded in London on the ICE futures market.14 - 97.9% of participants replied to this question. Percentages shown consider only those who replied.

Figure 6: Which green investing themes do you take into account?



use both definitions at the same time.One can conclude from these results that there are competing opinions about the scope of sustainable development and that there is no clearly dominant approach, even though the approach encompassing all sectors is more popular. In addition, that respondents often work with competing definitions at the same time suggests that, in practice, definitions and concepts of sustainable development may not be entirely clear.

As discussed in the background, another widely used term for making extra-financial information an integral part of investment decision making is socially responsible investment (SRI). SRI can be understood either as focusing on the social dimension of extra-financial information or as an approach integrating social as well as environmental and perhaps other information. When the broader definition of SRI is used, SRI is somewhat similar to sustainable development. To identify the perceived overlap between sustainable development (SD) and socially responsible investment, we ask those surveyed if they distinguish between the two. For a clear majority (61.9%), sustainable development

and social responsible investment are two identical concepts. Only 38.1% of respondents think that there is a difference.15

In general, this finding is consistent with the view that SRI and SD both concern a variety of ESG issues, as was pointed out in the background.

It is also interesting to analyse in greater detail the group of respondents who do distinguish between the two concepts. These respondents do not agree on what the difference between the two actually is. Figure 8 shows that 60% of respondents who distinguish between the two concepts believe that SRI encompasses issues beyond SD (such as social and corporate governance issues), whereas 25% believe that SD encompasses issues beyond SRI. Another 15% think that SRI and SD are two distinct matters.

These varying interpretations imply that, for investors, there is no clear and generally accepted definition of the two terms. Such disagreement on basic definitions may further compound the fundamental difficulty of using extra-financial information in the investment process.

4. Survey Results

15 - Responses are normalised to 100% for those who provide a detailed answer

Figure 7: Do you consider sustainable development...



4.3 Green Investing: Motivations and ObstaclesThe background section has discussed the reasons for investing green as well as the obstacles to doing so. As financial performance was a main argument both for and against green investing, depending on what conclusion one has on this issue, the background also provided a review of the academic evidence on the financial performance of green investing. Against this backdrop, an interesting question is what practitioners actually perceive to be the main reasons for and against green investing. Moreover, for the large majority of our respondents, green investing is an investment theme in their daily practice. The survey results on motivations for and obstacles to green investing can thus be seen as reflecting the perceptions of a group of investors who, by and large, believe the theme matters.

MotivationsIn the background, we have shown that there are very different motivations for taking environmental information into account in the investment process. In addition to being concerned about extra-financial aspects out of a pure sense of

responsibility, investors may actually be seeking attractive financial properties, or they may be concerned about legal constraints or their image. These different motivations can also be clearly seen in the remarks made by survey respondents. One respondent, for example, argued that “some so-called responsible investing is effectively PR-seeking”, while another stated that environmental factors were integrated “to help create returns that are sustainable in the long term”. These statements show clearly that there may be very different reasons to invest green.

As a result, we asked respondents to identify the reasons that matter to them. Figure 9 shows that a vast majority (81.91%) of respondents see their “responsibility to the planet and society” as a reason to invest green.16 This responsibility is thus the driving factor behind green investing. However, survey respondents also consider other reasons for taking a green investing approach—nearly half (47.87%), more than that for any reason other than a sense of responsibility, report that they do so for marketing reasons. The financial properties of green investments are likewise a reason to adopt them. High returns are cited by more

4. Survey Results

16 - Note: the figure excludes three non-responses.

Figure 8: What is the difference between SRI and SD?



than one-third (36.17%) of respondents; nearly one-fourth (22.34%) mention low correlation with existing investments as a reason to make green investments, while nearly 20% mention low risk. It is thus clear that attractive returns are the most sought after of the financial considerations, whereas risk-reduction benefits (through either low correlation or low risk) are less frequently mentioned. Legal requirements are seen as a motivation by less than one-fifth of respondents, an unsurprising finding, as formal rules usually have to do only with reporting on environmental criteria; they do not necessarily require that such criteria be considered.

It is clear from these results that the original responsibility motive is the driving force behind green investing. To further analyse the remaining motivations and their relative importance, we regroup respondents into distinct groups. More specifically, we now disregard the answer given concerning responsibility and create four groups of

respondents that can be described as follows: 1. Respondents motivated by financial performance but not by external constraints17 2. Respondents motivated by external constraints but not by financial performance3. Respondents motivated by both financial performance and external constraints 4. Respondents motivated by neither financial performance nor external constraints.

To do the regrouping, we now see “high returns”, “low risk”, and “low correlation” as a single category related to financial performance. Any respondent mentioning any of these reasons will be classified as being motivated by financial performance. We also see “legal requirements” and “marketing reasons and company image” as belonging to a single category having to do with external constraints.

Again, most respondents across all groups report that they are motivated by their

4. Survey Results

17 - “Driven by financial performance but not external constraints” refers to respondents who select only motivations having to do with high returns, low correlations, or low risk but not with marketing or legal requirements. We disregard respondents who select “responsibility for the planet and society” or “other”.

Figure 9: Motivations for green investing



responsibility for the planet and society. The objective of the regrouping is simply to assess the relative importance of the remaining reasons. Figure 10 shows the results.

We find that 36.17% of respondents are motivated by financial performance and 29.79% by external constraints. 22.34% are motivated by both factors, whereas 11.70% are motivated by neither. Other than the “social responsibility” motive, the main force behind green investing is thus financial performance, not external constraints, though the difference is not great.

This finding raises the question of empirical validation of the financial performance of green investing. From the literature review in the background section, it is clear that the results on the performance of green investing are mixed and that no clear consensus has emerged on whether the financial performance of green investments is attractive or not. It is somewhat surprising

that the main stated reason—other than out of a sense of responsibility—for taking a green approach to investing should be the purportedly attractive financial performance of green investment, performance that has by no means been proven. At the same time, that no clear consensus has yet emerged on the financial performance of such investments may also suggest that more academic research may be needed to cut through some of the conflicting findings in the literature and provide clearer guidance to investors.

ObstaclesAlthough the majority of respondents to the survey consider green investing an investment theme, it is interesting to examine the perceived obstacles (see figure 11) to taking the green approach. Fifty percent of respondents report that a lack of credible standards is the biggest obstacle to their adopting green investing criteria. Insufficient offerings and insufficient information

4. Survey Results

Figure 10: Regrouping of respondents by motivation other than “responsibility”



about these offerings, mentioned by roughly one-third of respondents, are the next greatest obstacle. That these three issues are the most frequently reported obstacles to green investing tallies with much of the previous discussion. In fact, both the background section and the preceding survey results strongly suggest that definitions of green investing and approaches to it are characterised by their lack of clarity. In the background section, we have shown that although there are common “principles” drafted by industry groups there is little concrete guidance on how sustainability criteria should be made an integral part of stock selection, asset allocation, and risk management processes. In addition, as mentioned in the background, when green investing is offered in the form of highly standardised and publicly accessible products such as indices and ratings, there is often little information on the concrete screening criteria used by the providers. Moreover, there are, as we have noted, the inherent difficulties of using extra-financial information, as such

information is difficult to quantify, not objective, and, as it is sector-specific, often lacks generality (Teoh and Shiu 1990).

Figure 11 also shows the percentages of respondents for additional obstacles.18 Lack of knowledge of the topic, mentioned as an obstacle by a quarter of respondents, turns out to be important as well.

Low returns and high risk are mentioned by a considerable fraction of respondents, some 20% for each item. Oddly, the opposite properties—“high returns” and “low risk”—were identified as motivations for green investing (see figure 9). For example, although roughly 20% of respondents see “higher risk” as an obstacle, nearly 20% also see “low risk” as a motivation for green investing. Once again, the extreme lack of consensus on the financial properties of green investments stands out.

As with the analysis done for the motivations, we then regrouped the

4. Survey Results

18 - Note: the figure excludes nine non-responses.

Figure 11: Obstacles to green investing



obstacles into three categories for an overall sense of the obstacles to green investing. The three categories are:1. Respondents mentioning financial performance as an obstacle (higher risk, relatively low returns)2. Respondents mentioning the immaturity of the market as an obstacle (insufficient offerings, insufficient information about offerings, and a lack of credible standards)3. Respondents mentioning both performance and a lack of standards as limiting their green investing.

The advantages of this regrouping are that we now have distinct categories—the percentages for all categories add up to 100%—and that the regrouping of several items into a single category makes it possible to draw more comprehensive conclusions. Figure 12 shows the percentage of respondents in each category after regrouping. We find that 62.5% of respondents report that the immaturity of the market limits green investing; 13.64%

consider financial performance an obstacle, and 23.86% report that both financial performance and the immaturity of the market keep them from adopting green investing criteria.

On the whole, responses suggest that the main motivation for green investing is a genuine concern for responsibility, whereas the main obstacle is the immaturity of the market stemming from factors such as a lack of credible standards or of offerings accompanied by adequate information. The financial performance and properties of green investments are seen as both a hurdle to and incentive for green investing. After all, survey respondents do not agree on whether green investing leads to higher or lower risk and to higher or lower returns. Although this disagreement mirrors conflicting findings in the empirical literature, it is, at the very least, surprising that investors should seem to take stances for and against green investing for reasons not yet firmly established as facts. It is worth noting, finally, that external constraints

4. Survey Results

Figure 12: Obstacles to green investing (regroup)



having to do with legal considerations or company image are a reason for investing green for about half the respondents.

4.4 Future Development of Green InvestingIts ability to identify current perceptions as well as information about the future plans of respondents is a clear advantage of our survey-based method, as such information cannot be gleaned, for example, from market data. After having assessed the current perceptions of green investing above, we now venture a glimpse into the future by asking survey respondents about their plans for the coming years.

More specifically, we asked respondents whether they will do more green investing in the next three years. Figure 13 shows that nearly 90% of respondents plan to do more green investing, a finding that underscores the prominence of green investments, despite the acknowledged problems, on the agenda of survey respondents.

It is worth noting that nearly half of the respondents who plan to do more green investing plan to do significantly more, whereas the remainder plan only a

slight increase. That about 40% of survey respondents plan a significant increase is perhaps surprising given the obstacles, which the sample of respondents is well aware of, to green investing. Of course, the expectation that green investing will take on even greater importance to respondents in the future is also an incentive to be clear about the financial performance it can be expected to deliver. In fact, if investors turn increasingly to this concept and are in part motivated by expectations of attractive financial performance, they may end up disappointed. Obviously, to spell out more clearly the risk-and-return properties of green investment, a more clear-cut definition and identification of the types of green investing is necessary as well.

4. Survey Results

Figure 13: Do you plan to do more green investing?


5. Conclusion



Our survey shows that green investing is a significant movement in which survey respondents are heavily involved. Nearly 90% of respondents consider environmental protection an investment theme and the same percentage plans to do more green investing in the future. The most popular green theme is climate change; institutional investors have begun to coordinate efforts with prominent action groups on the main environmental issues.

Our survey finds that the greatest motivation for green investing is responsibility to the planet and to society. Other than social responsibility, however, the driving force behind green investing is respondents’ pursuit of attractive financial performance. Yet questionable financial performance is also widely mentioned by respondents as an obstacle to green investing; these conflicting findings reflect disagreement on whether the pursuit of performance is a reason to embrace green investments or to shun them. This lack of consensus is understandable, as the empirical finance literature has not provided any conclusive body of evidence on the matter. All the same, it is surprising that investors cite assertions about performance as a reason to take a particular approach, when this assertion has not yet been backed by a coherent set of empirical facts. In addition, high returns are investors’ main motivation. These returns be hard to validate by statistical methods given the difficulty of obtaining reliable information on the expected returns of an investment strategy (Merton 1980). In light of this difficulty and the lack of consensus on the returns to green investing, there may be room for additional analysis of financial properties—the hedging properties of

green investments, for example—other than the magnitude of returns. It would be natural for investments having to do with improving resource efficiency to exhibit these properties and they could provide value to investors who are negatively affected by, say, spikes in the prices of natural resources.

Slightly murky pictures of green investing obtain elsewhere as well. Even a basic definition of green investing approaches involves considerable disagreement and confusion on the part of respondents. They do not agree on whether socially responsible investing and sustainable development are identical concepts. When those who consider them distinct concepts are asked what differentiates them, diverging opinions emerge anew. This divergence of opinion reflects a lack of credible industry standards. And, indeed, respondents are more likely to mention this lack of standards than any other obstacle: it is, as it happens, mentioned by 50% of them. This situation clearly poses a challenge for industry groups, as well as for ratings and index providers, which, despite their work, seem not to have managed to bring transparency to this segment of the market. In fact, clear identification of the financial characteristics of green investing would almost certainly require clear identification of environmental factors and the investment approaches that take them into account.

All eyes are now on green investing, but closer scrutiny suggests that a host of problems have yet to be resolved. These problems include but are not limited to the establishment of a generally accepted definition of what the concept

5. Conclusion



encompasses, a classification of “styles” of green investing, and an analysis of the performance, hedging, and correlation properties of green investments. Before this segment of investment management can sustain further growth, work towards a sound conceptual underpinning of the green investing approach will have to be done. After all, investors’ good intentions (to be responsible to the planet and to society) should not be used as an excuse to depart from rigorous and well defined investment processes and analyses.

5. Conclusion



5. Conclusion


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• Jupiter (2000). Engagement report. Jupiter Environmental Research Bulletin 24 (summer): 6.

• Insight Investment Management (Global) Limited. 2009. Responsible investment: Effective integration of ESG issues into investment decision making.

• The Institutional Investor Group on Climate Change (IIGCC). 2009. http://www.iigcc.org

• King, A. A., and M. J. Lenox. 2001. Does it really pay to be green? An empirical study of firm environmental and financial performance. Journal of Industrial Ecology 5:105-16.

• Konar, S., and M. A. Cohen. 2001. Does the market value environmental performance? Review of Economics & Statistics 83:281-89.

• Kreander, N. 2001. An analysis of European ethical funds. Certified Accountants Educational Trust.

References



• Kurtz, L. 1997. No effect, or no net effect? Studies on socially responsible investing. Journal of Investing 6 (4): 37.

• Le Sourd, V. 2009. The performance of socially responsible investment: A study of the French market. EDHEC-Risk Institute.

• Lewis, A. 2001. A focus group study of the motivation to invest: “Ethical/green” and “ordinary” investors compared. Journal of Socio-Economics 30:331-41.

• Lewis, A., and C. Mackenzie. 2000. Morals, money, ethical investing and economic psychology. Human Relations 53:180-91.

• Mahapatra, S. 1984. Investor reaction to corporate social accounting. Journal of Business Finance and Accounting 11:29-40

• Mercer. 2009. Shedding light on responsible investment: Approaches, returns and impacts

• Merton. R. 1980. On estimating the expected returns on the market: An exploratory investigation. Journal of Financial Economics 8 (4): 323-61.

• Olsson, R. 2007. Portfolio performance and environmental risk. Working paper, Sustainable Investment Research Platform.

• Peeva, G., and T. Noetzel. 2009. The future of ESG integration: Integrating ESG into mainstream investing and research. Responsible Investors (November).

• Preston, J. T., and B. L. Martel. 2008. Investment opportunities in clean energy. CFA Institute Conference Proceedings Quarterly 25 (1): 5-13.

• Quigley, J. 2009. A quant’s take on ESG. Responsible Investor (17 September).

• Röhrbein, N. 2010. Signatories to principles for responsible investment surge by 30%. Investment & Pension Europe (29 September).

• Rudd, A. 1981. Social responsibility and portfolio performance. California Management Review 23 (4): 55-61.

• Sahloul, F. 2007. Dutch schemes launch €500m green fund. Online Financial News (10 October).

• Schueth, S. 2003. Socially responsible investing in the United States. Journal of Business Ethics 43:189-94.

• Semenova, N., and L. G. Hassel. 2008. Industry risk moderates the relation between environmental and financial performance. Working paper, Sustainable Investment Research Platform.

• Spicer, B. H. 1978. Investors, corporate social performance and information disclosure: An empirical study. Accounting Review 53:94-111.

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• Suchard, H. T., and M. J. Polonsky. 1991. A theory of environmental buyer behaviour and its validity: The environmental action-behaviour model. AMA Summer Educators’ Conference Proceedings 2:187-201.

• Teoh, H. Y., and G. Y. Shiu. 1990. Attitudes towards corporate social responsibility and perceived importance of social responsibility information characteristics in a decision context. Journal of Business Ethics 9:71-77.

• Wagner, M. 2001. A review of empirical studies concerning the relationship between environmental and economic performance. Corporate Social Responsibility and Environmental Management 9:133-46.

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References


About EDHEC-Risk Institute




The Choice of Asset Allocation and Risk ManagementEDHEC-Risk structures all of its research work around asset allocation and risk management. This issue corresponds to a genuine expectation from the market. On the one hand, the prevailing stock market situation in recent years has shown the limitations of diversification alone as a risk management technique and the usefulness of approaches based on dynamic portfolio allocation. On the other, the appearance of new asset classes (hedge funds, private equity, real assets), with risk profiles that are very different from those of the traditional investment universe, constitutes a new opportunity and challenge for the implementation of allocation in an asset management or asset-liability management context. This strategic choice is applied to all of the Institute's research programmes, whether they involve proposing new methods of strategic allocation, which integrate the alternative class; taking extreme risks into account in portfolio construction; studying the usefulness of derivatives in implementing asset-liability management approaches; or orienting the concept of dynamic “core-satellite” investment management in the framework of absolute return or target-date funds.

40% Strategic Asset Allocation45.5% Tactical Asset Allocation11% Stock Picking3.5% Fees

Source EDHEC (2002) and Ibbotson, Kaplan (2000)

An Applied Research ApproachIn an attempt to ensure that the research it carries out is truly applicable, EDHEC has implemented a dual validation system for the work of EDHEC-Risk. All research work must be part of a research programme, the relevance and goals of which have been validated from both an academic and a business viewpoint by the centre's advisory board. This board is made up of internationally recognised researchers, the centre's business partners and representatives of major international institutional investors. The management of the research programmes respects a rigorous validation process, which guarantees the scientific quality and the operational usefulness of the programmes.

Six research programmes have been conducted by the centre to date: • Asset allocation and alternative diversification• Style and performance analysis • Indices and benchmarking• Operational risks and performance• Asset allocation and derivative instruments• ALM and asset management

These programmes receive the support of a large number of financial companies. The results of the research programmes are disseminated through the three EDHEC-Risk locations in London, Nice, and Singapore.

In addition, EDHEC-Risk has developed close partnerships with a small number of sponsors within the framework of research chairs. These research chairs involve a three-year commitment by EDHEC-Risk and the sponsor to research themes on which the parties to the chair have agreed.

Founded in 1906, EDHEC is one of the foremost French

business schools. Accredited by the three main international

academic organisations, EQUIS, AACSB, and Association

of MBAs, EDHEC has for a number of years been pursuing

a strategy for international excellence that led it to set up

EDHEC-Risk in 2001. With 47 professors, research

engineers and research associates, this centre has the

largest asset management research team in Europe.




The following research chairs have been endowed to date:• Regulation and Institutional Investment,in partnership with AXA Investment Managers (AXA IM)• Asset-Liability Management and Institutional Investment Management, in partnership with BNP Paribas Investment Partners• Risk and Regulation in the European Fund Management Industry, in partnership with CACEIS• Structured Products and Derivative Instruments, sponsored by the French Banking Federation (FBF)• Private Asset-Liability Management,in partnership with ORTEC Finance• Dynamic Allocation Models and New Forms of Target-Date Funds, in partnership with UFG• Advanced Modelling for Alternative Investments, in partnership with Newedge Prime Brokerage• Asset-Liability Management Techniques for Sovereign Wealth Fund Management, in partnership with Deutsche Bank• Core-Satellite and ETF Investment,in partnership with Amundi ETF• The Case for Inflation-Linked Bonds: Issuers’ and Investors’ Perspectives, in partnership with Rothschild & Cie• Advanced Investment Solutions for Liability Hedging for Inflation Risk, in partnership with Ontario Teachers' Pension Plan

The philosophy of the institute is to validate its work by publication in international journals, but also to make it available to the sector through its position papers, published studies and conferences.

Each year, EDHEC-Risk organises a major international conference for institutional investors and investment management professionals with a view to presenting the results of its research: EDHEC-Risk Institutional Days.

EDHEC also provides professionals with access to its website, www.edhec-risk.com, which is entirely devoted to international asset management research. The website, which has more than 40,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC’s analysis and expertise in the area of applied portfolio management research. Its monthly newsletter is distributed to more than 500,000 readers.

Research for BusinessThe centre’s activities have also given rise to executive education and research service offshoots.

EDHEC-Risk's executive education programmes help investment professionals to upgrade their skills with advanced risk and asset managementtraining across traditional and alternative classes.

EDHEC-Risk Institute: Key Figures, 2008-2009

Number of permanent staff 47

Number of research associates 17

Number of affiliate professors 5

Overall budget €8,700,000

External financing €5,900,000

Number of conference delegates 1,950

Number of participants at EDHEC-Risk Executive Education seminars

371




The EDHEC-Risk Institute PhD in FinanceThe EDHEC-Risk Institute PhD in Finance at EDHEC Business School is designed for professionals who aspire to higher intellectual levels and aim to redefine the investment banking and asset management industries. It is offered in two tracks: a residential track for high-potential graduate students, who hold part-time positions at EDHEC Business School, and an executive track for practitioners who keep their full-time jobs. Drawing its faculty from the world’s best universities and enjoying the support of the research centre with the greatest impact on the European financial industry, the EDHEC-Risk Institute PhD in Finance creates an extraordinary platform for professional development and industry innovation.

The EDHEC-Risk Institute MSc in Risk and Investment ManagementThe EDHEC-Risk Institute Executive MSc in Risk and Investment Management is designed for professionals in the investment management industry who wish to progress, or maintain leadership in their field, and for other finance practitioners who are contemplating lateral moves. It appeals to senior executives, investment and risk managers or advisors, and analysts. This postgraduate programme is designed to be completed in seventeen months of part-time study and is formatted to be compatible with professional schedules.

The programme has two tracks: an executive track for practitioners with significant investment management experience and an apprenticeship track for selected high-potential graduate students who have recently joined the industry. The programme is offered in

Asia—from Singapore—and in Europe—from London and Nice.

FTSE EDHEC-Risk Efficient IndicesFTSE Group, the award winning global index provider, and EDHEC-Risk Institute launched the FTSE EDHEC-Risk Efficient Indices at the beginning of 2010. The index series aims to capture equity market returns with an improved risk/reward efficiency compared to cap-weighted indices. The weighting of the portfolio of constituents achieves the highest possible return-to-risk efficiency by maximising the Sharpe ratio (the reward of an investment per unit of risk).

EDHEC-Risk Alternative IndexesThe different hedge fund indexes available on the market are computed from different data, according to diverse fund selection criteria and index construction methods; they unsurprisingly tell very different stories. Challenged by this heterogeneity, investors cannot rely on competing hedge fund indexes to obtain a “true and fair” view of performance and are at a loss when selecting benchmarks. To address this issue, EDHEC Risk was the first to launch composite hedge fund strategy indexes as early as 2003.

The thirteen EDHEC-Risk Alternative Indexes are published monthly on www.edhec-risk.com and are freely available to managers and investors.


EDHEC-Risk Institute Publications and Position Papers (2007-2010)



2010• Amenc, N., F. Goltz, Martellini, L., and V. Milhau. New frontiers in benchmarking and liability-driven investing (September).

• Martellini, L., and V. Milhau. From deterministic to stochastic life-cycle investing: implications for the design of improved forms of target date funds (September).

• Martellini, L., and V. Milhau. Capital structure choices, pension fund allocation decisions and the rational pricing of liability streams (July).

• Sender, S. EDHEC survey of the asset and liability management practices of European pension funds (June).

• Goltz, F., A. Grigoriu, and L. Tang. The EDHEC European ETF survey 2010 (May).

• Amenc, N., and S. Sender. Are hedge-fund UCITS the cure-all? (March).

• Amenc, N., F. Goltz, and A. Grigoriu. Risk control through dynamic core-satellite portfolios of ETFs: Applications to absolute return funds and tactical asset allocation (January).

• Amenc, N., F. Goltz, and P. Retkowsky. Efficient indexation: An alternative to cap-weighted indices (January).

• Goltz, F., and V. Le Sourd. Does finance theory make the case for capitalisation-weighted indexing? (January).

2009• Sender, S. Reactions to an EDHEC study on the impact of regulatory constraints on the ALM of pension funds (October).

• Amenc, N., L. Martellini, V. Milhau, and V. Ziemann. Asset-liability management in private wealth management (September).

• Amenc, N., F. Goltz, A. Grigoriu, and D. Schroeder. The EDHEC European ETF survey (May).

• Sender, S. The European pension fund industry again beset by deficits (May).

• Martellini, L., and V. Milhau. Measuring the benefits of dynamic asset allocation strategies in the presence of liability constraints (March).

• Le Sourd, V. Hedge fund performance in 2008 (February).

• La gestion indicielle dans l'immobilier et l'indice EDHEC IEIF Immobilier d'Entreprise France (February).

• Real estate indexing and the EDHEC IEIF Commercial Property (France) Index (February).

• Amenc, N., L. Martellini, and S. Sender. Impact of regulations on the ALM of European pension funds (January).

• Goltz, F. A long road ahead for portfolio construction: Practitioners' views of an EDHEC survey. (January).

EDHEC-Risk Institute Publications (2007-2010)



2008• Amenc, N., L. Martellini, and V. Ziemann. Alternative investments for institutional investors: Risk budgeting techniques in asset management and asset-liability management (December).• Goltz, F., and D. Schroeder. Hedge fund reporting survey (November).

• D’Hondt, C., and J.-R. Giraud. Transaction cost analysis A-Z: A step towards best execution in the post-MiFID landscape (November).

• Amenc, N., and D. Schroeder. The pros and cons of passive hedge fund replication (October). • Amenc, N., F. Goltz, and D. Schroeder. Reactions to an EDHEC study on asset-liability management decisions in wealth management (September).

• Amenc, N., F. Goltz, A. Grigoriu, V. Le Sourd, and L. Martellini. The EDHEC European ETF survey 2008 (June).

• Amenc, N., F. Goltz, and V. Le Sourd. Fundamental differences? Comparing alternative index weighting mechanisms (April).

• Le Sourd, V. Hedge fund performance in 2007 (February).

• Amenc, N., F. Goltz, V. Le Sourd, and L. Martellini. The EDHEC European investment practices survey 2008 (January).

2007• Ducoulombier, F. Etude EDHEC sur l'investissement et la gestion du risque immobiliers en Europe (November/December).

• Ducoulombier, F. EDHEC European real estate investment and risk management survey (November).

• Goltz, F., and G. Feng. Reactions to the EDHEC study "Assessing the quality of stock market indices" (September).

• Le Sourd, V. Hedge fund performance in 2006: A vintage year for hedge funds? (March).

• Amenc, N., L. Martellini, and V. Ziemann. Asset-liability management decisions in private banking (February).

• Le Sourd, V. Performance measurement for traditional investment (literature survey) (January).

EDHEC-Risk Institute Publications (2007-2010)



2010• Amenc, N., and V. Le Sourd. The performance of socially responsible investment and sustainable development in france: An update after the financial crisis (September).

• Amenc, N., A. Chéron, S. Gregoir, and L. Martellini. Il faut préserver le Fonds de Réserve pour les Retraites (July).

• Lioui, A. Spillover effects of counter-cyclical market regulation: Evidence from the 2008 ban on short sales (March).

• Amenc, N., P. Schoefler and P. Lasserre. Organisation optimale de la liquidité des fonds d’investissement (March).

2009• Till, H. Has there been excessive speculation in the US oil futures markets? (November).

• Amenc, N., and S. Sender. A welcome European Commission consultation on the UCITS depositary function, a hastily considered proposal (September).

• Sender, S. IAS 19: Penalising changes ahead (September).

• Amenc, N. Quelques réflexions sur la régulation de la gestion d'actifs (June).

• Giraud, J.-R. MiFID: One year on (May).

• Lioui, A. The undesirable effects of banning short sales (April).

• Gregoriou, G., and F.-S. Lhabitant. Madoff: A riot of red flags (January).

2008 • Amenc, N., and S. Sender. Assessing the European banking sector bailout plans (December).

• Amenc, N., and S. Sender. Les mesures de recapitalisation et de soutien à la liquidité du secteur bancaire européen (December).

• Amenc, N., F. Ducoulombier, and P. Foulquier. Reactions to an EDHEC study on the fair value controversy (December). With the EDHEC Financial Analysis and Accounting Research Centre.

• Amenc, N., F. Ducoulombier, and P. Foulquier. Réactions après l’étude. Juste valeur ou non : un débat mal posé (December). With the EDHEC Financial Analysis and Accounting Research Centre.

• Amenc, N., and V. Le Sourd. Les performances de l’investissement socialement responsable en France (December).

• Amenc, N., and V. Le Sourd. Socially responsible investment performance in France (December).

• Amenc, N., B. Maffei, and H. Till. Les causes structurelles du troisième choc pétrolier (November).

EDHEC-Risk Institute Position Papers (2007-2010)



• Amenc, N., B. Maffei, and H. Till. Oil prices: The true role of speculation (November).

• Sender, S. Banking: Why does regulation alone not suffice? Why must governments intervene? (November).

• Till, H. The oil markets: Let the data speak for itself (October).

• Amenc, N., F. Goltz, and V. Le Sourd. A comparison of fundamentally weighted indices: Overview and performance analysis (March).

• Sender, S. QIS4: Significant improvements, but the main risk for life insurance is not taken into account in the standard formula (February). With the EDHEC Financial Analysis and Accounting Research Centre.

2007 • Amenc, N. Trois premières leçons de la crise des crédits « subprime » (August).

• Amenc, N. Three early lessons from the subprime lending crisis (August).

• Amenc, N., W. Géhin, L. Martellini, and J.-C. Meyfredi. The myths and limits of passive hedge fund replication (June).

• Sender, S., and P. Foulquier. QIS3: Meaningful progress towards the implementation of Solvency II, but ground remains to be covered (June). With the EDHEC Financial Analysis and Accounting Research Centre.

• D’Hondt, C., and J.-R. Giraud. MiFID: The (in)famous European directive (February).

• Hedge fund indices for the purpose of UCITS: Answers to the CESR issues paper (January).

• Foulquier, P., and S. Sender. CP 20: Significant improvements in the Solvency II framework but grave incoherencies remain. EDHEC response to consultation paper n° 20 (January).

• Géhin, W. The Challenge of hedge fund measurement: A toolbox rather than a Pandora's box (January).

• Christory, C., S. Daul, and J.-R. Giraud. Quantification of hedge fund default risk (January).

EDHEC-Risk Institute Position Papers (2007-2010)



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Notes

For more information, please contact: Carolyn Essid on +33 493 187 824 or by e-mail to: [email protected]

EDHEC-Risk Institute393 promenade des AnglaisBP 311606202 Nice Cedex 3 — France

EDHEC Risk Institute—EuropeNew Broad Street House — 35 New Broad StreetLondon EC2M 1NHUnited Kingdom

EDHEC Risk Institute—Asia1 George Street#07-02Singapore 049145

www.edhec-risk.com

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