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Green around the investment edges

With the current focus on the environment and pick up in ethical investing, many investors could be forgiven for thinking that they are accessing green investment ideas through an ethical fund.

It does not help that many of the retail ethical portfolios tend to fall into one of two descriptions: light or dark green. But the use of the word green tends to refer to how proactive a fund is in its ethical stance and whether or not it uses negative or positive screening on stocks for inclusion.

It does not describe its approach to the environment or an investment philosophy looking to invest in areas of the market that benefit the planet. Just because a fund uses the title ethical does not mean it is investing in areas of business focused on improving the environment.

Granted, some do as it is a natural fit that ethical funds would look to invest in a pollution-reducing company but then, so too do mainstream equity funds. The investment theme of alternative or clean energy, sustainable resources and waste management is becoming so broad today, it is hard for almost any fund manager to ignore.

Reflecting the growing importance of companies in this area, there are now several retail funds more angled towards the ecological and environmental than ethical. For example, Neptune Green Plant and Jupiter Ecology on the open-ended side, while in terms of closed-end funds there is the Impax Environmental markets portfolio as well the Merrill Lynch New Energy Technology Trust.

The small number of specialist funds should not negate the growth potential this market offers or its broad appeal.

Without drawing parallels to technology investing, sustainable energy does feature some similarities. First off, it is not as niche a sector as it may first appear, covering industries as diverse as recycling, wind farms and water purification.

Many general fund managers are benefiting from this theme and while ethical funds may not seek out firms in this area, inevitably their paths cross.

Aidan Kearney, co-head of multi-manager at Credit Suisse Asset Management, which offers an ethical fund of funds, agrees many mainstream managers are taking on companies that once belonged to the more ethical and environment specialist portfolio. He highlights the example of the water industry, which is an environmentally friendly area where business growth is being driven in part by environmental concerns.

Still, it is worth remembering ethical does not equate into environmental, and vice versa. Take nuclear energy. Many ethical fund managers are debating whether or not this should be included in their remits considering the historic attitude towards this energy source. Yet with the pressure for cleaner energy sources, nuclear could be found in a sustainable energy portfolio as it would not feature the same ethical debate dilemma.

Justin Modray of BestInvest notes there is increased interest from clients in both ethical and environmental investing. In the long term, he says, it is clear the picture for investing in companies relating to the environment looks promising.

Regardless of whether or not firms or countries want to be green or not, world wide governments are forcing them to become so with increased regulation and legislation in this area. Just look at the issues concerning carbon emissions or the legislations on all forms of recycling.

Therefore, Modray says, on a 10-20-year time scale it is easy to see the increase in demand for some of these companies. However, in the short term how will the eventual winners in this space be identified? Much like technology, a lot of businesses in the fields of sustainable energy or waste management are small firms featuring new technologies. Modray also cites the concern that in the short term areas like sustainable energy remain vulnerable to the price of oil, making it quite a volatile investment for some.

There remain ways to access these quite evident global themes without heading into the more specialist fund arena. As these areas of the market grow in popularity and as increased regulation and legislation forces change among business, mainstream fund managers will be hard pressed to ignore these opportunities. Kearney notes: “Profit potential moves companies in a certain way. If companies can make money out of being green, then they’ll be green.”

According to the latest Barclays Gilt and Equity study (2007) : “The outlook for the next few years will be dominated, we believe, by the twin energy themes. It will be coloured both by high levels of risk and uncertainty but also by extraordinary returns. Above all else, the impact of the replacement, restructuring and expansion of our energy infrastructure cannot be ignored. Just as the personal computer cannot be uninvented, neither can the impending energy revolution.”

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