The Brooklyn Bridge TBLI conferences bring together a much wider variety of culture and attitude towards the capital markets than you find at the average conference. In Asia, in particular, delegates come from all over the world to discuss everything from carbon trading through to microfinance and the task of providing proper sanitation for those billions of people still without it.
The major banks and finance houses are funding sustainability projects in emerging markets, often in the billions of dollars. ABN Amro is one such organisation. The bank's managing director for sustainable developments, Richard Burrett, predicts that China will represent 40% of the world's carbon trading by 2012, with potentially the major exchange for carbon trading physically based in China.
Since last year's conference, much has changed in the country. The ousting of Prime Minister Thaksim Shinawatra has resulted in many of the reforms he put in place being reversed. CLSA's head of Thai research, Gillem Tulloch, told IPA, "The situation in Thailand now is terrible. It could take 10 years to sort this out. They are rolling back many of the social reforms that Thaksim had been introducing." Not only that, there has been heated debate about new rules which make it difficult to change the law without it being deemed unconstitutional. With so much of the Association of South East Asian Nations region moving in a positive direction, Thailand is really going against the grain.
Thai Energy Minister Piyasvisti Amranand, a former private sector asset manager now part of the post-Thaksim government, was a speaker last year as well. Now that he is on the other side of the fence, his message remains the same. "SRI in a country like Thailand is very different from what you will see in developed countries. The magnitude of the global warming and the cause of that global warming are the large western nations, led by the US."
Under Thaksim, Amranand claims all private power generation came to a halt. Now, under the new administration, 80-90% of projects have been started again, including 33 very small power producers that are given special incentives. Since the beginning of 2007, the administration has increased incentives for palm oil, municipal waste, etc, to meet a 1,400MW annual growth in energy demand in Thailand. Eventually, nuclear will be the solution, Amranand says: "I believe it is socially responsible. It doesn't produce any global warming."
Once again this year, the conference discussed SRI in a fund management context and attempted to answer the question of whether SRI portfolios can deliver outperformance. The question is often asked, but as SIRIS's Mark Bytheway says: "The process of screening and indexing SRI-compliant stocks can only assist the fund manager, but it cannot replace the skill of the fund manager in finding those stocks that will outperform." He argues that fund performance may not be the best indicator of the value and contribution of SRI research.
Akihiro Tokuno, senior researcher at Nomura Securities in Tokyo, was rather less convinced of the value provided by Japanese SRI funds, based on his research of the ¥300bn (€1.83bn) Japanese SRI funds industry. Tokuno carried out a style analysis of 22 SRI funds and 97 active management funds based on the Three Factor Model developed by US academics Fama and French. Most of the funds have a large cap growth bias. The results show no statistically significant alpha resulting from SRI funds. A similar study of well-known SRI indices (FTSE4Good etc) confirms this conclusion.
Interestingly, Tokuno points out that Nikkei in Japan carried out a survey of good and bad company boards, assessed by fund managers on ethical and socially responsible characteristics. The results showed that ‘bad' boards outperformed their ‘good' counterparts. The conclusion Tokuno takes from this is that good boards provide low-risk, low-return portfolios while bad boards provide the higher-risk and potentially higher-return profile.
Overall, Tokuno says: "SRI funds are really no different to other active funds. You could argue that if you are delivering no less than the market, that is enough to justify the SRI approach. But how is the SRI approach to be paid for if the returns are not there? That is one of the key arguments the SRI funds industry has to address if Asian institutions are to embrace the concept in a big way."
Moving to a session on alternative assets, Bill Hartnett, managing director, Australasia, at Innovest Strategic Value Advisors made the case for a sustainable tilt applied to real estate portfolios. Innovest is putting together a Global Sustainable Property Securities Trust (GSPS Trust) that will incorporate sustainability risk factors into the investment decision making process. It is partnering with an Australian fund manager, Perennial Real Estate Investments. The trust hopes to be operating by the end of the year. In the meantime, Hartnett is busy convincing institutions that ESG issues are increasingly critical to financial performance and that an investment process that utilises specialised research on green buildings can provide better risk-adjusted returns. Hartnett says: "Environmental impact and energy usage information is difficult to assess and interpret. Its scarcity confers a major information advantage on investors and asset managers who have it."
The idea of a portfolio titled towards ‘green' buildings is something that real estate investors are taking an interest in. "There is increasing recognition from investors that ESG issues represent material financial risks. Many people are now aware of the implications of climate change, the Carbon Disclosure Project and the UN Principles for Responsible Investing."
Innovest has identified a trend towards higher rent premiums and higher tenant retention rates in green buildings. Significant net operating income gains can be achieved by a reduction in operating costs at the individual building level, and a hedge against energy price increases. Well-located green buildings will gain from the financial premium associated with the green trend, boosted by higher demand from corporates.
Simulations for the new fund suggest that a risk-controlled, green-tilted Dow Jones Wilshire REIT Index created by Innovest out-performed its benchmark by 480 basis points annually over a five-year period. Obviously the concept needs to be road-tested, but the concept is bound to catch on with the increasing recognition of ‘high performance' building design as an indicator of quality.
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