Wealthy investors turn to sustainable investments

Will the twin issues of today – global warming and the credit crunch – prompt high net worth individuals to take a closer look at sustainable investments?

Low returns or a dearth of options have traditionally discouraged investors away from sustainable investment. But the emergence of key themes such as energy security, clean technology and water, as well as concerns over the probity of traditional investments, may well encourage the wealthy to reconsider where they place their money – and what purpose that money could serve.

There’s no reason to believe complying with environmental, social or governance benchmarks dilutes investor earnings, says Matt Christensen from the European Social Investment Forum (Eurosif). “It’s like any investment; it depends on who is running the fund.” (Eurosif is a Paris-based, not-for-profit organisation that seeks to address sustainability through financial markets.)

Speaking at the International Responsible Investment Conference in Melbourne this week, Christensen says high net worth individuals tend to display “toe-dip” behaviour in relation to sustainable investments: once in, they tend to increase their allocations over time.

Sixty-one per cent of high net worth individuals in the European Union have allocated up to 5% of their portfolios to sustainable investments; more than a quarter have 10% to 50%.

Younger generations with more than $1 million in disposable assets (excluding their primary residence) are more likely than their parents to adopt sustainable investment, Christensen says. Older generations tend to take a more conservative approach, but younger people are more willing to seek market rate returns while engaging in sustainability issues.

For the Asia-Pacific, Eurosif research shows 13% of high net worth individuals have allocated part of their portfolio to green technologies and alternative energy sources. The research shows high net worth individuals in the European Union have shown the greatest enthusiasm for thematic investment, particularly in clean technology and water; while those in North America have shown the least.

Sustainable investment by high net worth individuals is expected to rise to more than €1 billion by 2012, or 12% of total European Union high net worth individual wealth, Christensen says.

Microfinance is seen as one way to address social issues, Eurosif says. And Australian investors will soon have an opportunity to invest in one of its key players. The Dutch-based Triodos Bank says a growing awareness of sustainability issues and Australia’s compulsory superannuation scheme make it good timing to launch five funds in Australia.

“We feel there’s a growing awareness around sustainability things, about climate change,” says Bas Rüter, managing director of Triodos Funds Management.

Triodos Bank, which has €3.4 billion under management and posted a 2007 net profit of €9 million, says it only finances enterprises that add social, environmental and cultural value, such as renewable energy, social housing, complementary health care, organic food and farming, fair trade and microcredit organisations in developing countries.

Microcredit is the first stage of microfinance, Rüter says. It simply means providing a small loan to someone who doesn’t have collateral or security. The loans are for a variety of purposes such as establishing businesses or helping farmers and traders.

The social pressure to pay back borrowings, and the awareness that microcredit provides a means to get away from poverty, ensures a vast majority of people pay back and thus become bankable, Rüter says. “And now that the model has been proven… you see a growing number of organisations widening the product range from just loans to savings to insurance to payments, and as a result providing all the financial services you need to people who are poor,” he says.

So how does it work? “People apply by going into a branch. Sometimes it’s people on a motorcycle in a village. We finance the bank, the local microfinance institution, we are a shareholder in the bank. They are just a Tanzanian, Kenyan, Peruvian, or Cambodian bank with local staff doing small loans. It’s really a classic, grass-roots system,” Rüter says.

Microfinance has financed about 150 million people across Latin America, Africa, Asia, the Middle East and Eastern Europe, Rüter says, but “there are three billion people who are very poor so that’s 50 times we (the sector) need to grow to solve that problem to some extent”.

Interest differs in each nation. “In South America, it’s relatively low at 12% to 18% on an annual basis, but these loans very often have a very short period of time. Sometimes things are so unstable that the rates can be 35% to 40%. If competition comes in, when countries become more stable, when currencies are stable, then those percentages come down quickly,” he says.

“And you shouldn’t forget that the alternative for having a loan from a microfinance institution is having a loan from a so-called loan shark, which is someone from the mafia who charges five times as much interest and if you don’t pay back they’ll shoot you. That’s the reality in some countries,” Rüter says.

“We know microfinance works,” Rüter says, “because people pay back, people become less poor, people grow their business and as a result… they can afford to have a television, they can afford to have electricity so they can work in the evening, they can afford to send their children to school or buy a school uniform. It’s the basic things because it’s people with basic needs.”

Triodos Bank became involved in Russia after the collapse of the Soviet Union, but has since stepped back as Russians’ wealth has increased. “One of the banks we were involved in there has been sold to an Italian bank that wanted to start its activities in Eastern Europe, but the strength of the institution was that it was one of the few that wasn’t involved in corruption.

“You see, because small microfinance institutions are so boring and old-fashioned – saving, lending – they are much less exposed to what’s going on right now in the financial markets. It’s the old-fashioned banking model with the exception of the lack of the collateral, and that is replaced by the social pressure to pay back the loan.”

This article first appeared in Eureka Report