09 August 2010 #Environment
As investor awareness of climate change and environmental concerns has risen, there has been a concerted move to more responsible investing principles. Large institutional investors have formed Ceres and in Europe the equivalent body is the Institutional Investors Group on Climate Change. These groups represent trillions of dollars of private capital, and are using it to try and effect real corporate change through their investment decisions, by evaluating the sustainability aspects of their investments into companies.
In light of this interest in more sustainable investing principles, a number of indices have been created aiming to track companies that make up a portion of their income from environmental activities. Despite the recession, these indices have performed well and should be considered for long term sustainable returns. However, they are not immune to global shocks and pressures which affect the broader market, due to the fact that many of the companies that make-up these indices are traded on major exchanges around the world. Figure 1 shows the relative performance of two of these indices, together with the FTSE100 index, from 1 January 2009 to 1 July 2010.
As the true extent of the recession began to unfold, with key employment data and interest rate decisions being made, all shares suffered. However, the environmental shares also recovered stronger and faster than the FTSE, particularly the New Energy Exchange (NEX), which showed strong growth. Investing in this tracker in March would have shown almost 100% ROI in December. Strong growth in these indices was likely driven throughout 2009 by the focus on climate change, in the run up to COP15 at Copenhagen. However, the failure to deliver a binding agreement also hit these shares hard in the aftermath.
Environmental indices are a viable option for ETF investments, and although reflecting the global market concerns, also have resilience to certain economic pressures, therefore making a case for portfolio diversity. Large players in the sector look likely to consolidate the market through acquisitions, further strengthening their position going forward. Legislation is also causing increasing demand for the products of these listed companies, and as the markets recover it is likely that more companies will go public through IPOs, eventually making their way onto these indices.
The Adour Global Alternative Energy Index tracks 111 companies with a focus on the clean technology sector, more information at http://www.ardourglobalindexes.com/. The Wilderhill New Energy Global Innovation Index (NEX) focuses on companies whose products are used in cleaner energy generation and use, more information at http://www.nexindex.com/. The FTSE 100 tracks the 100 largest companies on the main market of the London Stock Exchange, more information at http://www.londonstockexchange.com/.