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The environmental investor.

Look for an increasingly important and growing band of investors to base their decisionmaking on a company's proactive environmental initiatives.

The environment will be a major investment theme in the 1990s. But it will have two discordant. strains. The mainstream investment community will march to the tune of what will be referred to here as "environmental sector investing." It will look for those waste disposal, engineering, consulting, and scientific instrument companies helping industry, and federal and local governments, confront the environmental challenges of the next decade.

At the same time, a smaller but increasingly important band of investors will practice what will be called here the "socially screened environmental approach." The socially screened environmental investors -- drawn primarily from the broader world of socially responsive investing that has developed slowly but steadily over the past 20 years -- will shun favorites of the sector players (Waste Management, for example) with histories of environmental controversy. Instead they will search out companies in the manufacturing, retail, or service industries (e.g., Apple Computer or Home Depot) that have proactively supported environmental initiatives and causes.

Environmental sector investing will have its ups and downs like other investment themes, such as biotechnology, cellular telephones, or health care. Socially screened environmental investing, however, is a more complicated phenomenon, in part because it plays a variation on the larger theme of social investing.

Earth Day 1990 opened the decade with a cacophony of environmentalists, entertainers, corporations, and government officials all singing the praises of Mother Nature to a backdrop of overflowing landfills, disastrous oil spills, a thinning ozone layer, a warming climate, and an ecosystem generally burdened by burgeoning growth. Despite the hype and the din, the message was clear: Most people are tremendously concerned about the environment.

The mainstream investment community responded by launching a series of environmental sector funds. Most of these funds featured the largest players in environmental remediation and related construction industries.

Many environmentalists and members of the social investing community objected, however. Peter Camejo, president of Progressive Asset Management and a prominent player in the social investing world, protested that these "environmental" funds did not point out in their prospectuses or sales literature that they could invest in firms cited for pollution violation or facing penalties for pollution problems.

In addition, social investors asserted that they had been practicing environmentally responsible investing for 20 years. Furthermore, they claimed that their version was more truly environmental and more truly responsible. They pointed to environmentally screened funds such as New Alternatives, which had been a feature of social investing since the early 1980s, and they launched new funds, such as the Merrill Lynch Eco-Logical Trust.

Advocates of socially screened investing criticized such favorites of sector investing as Chemical Waste Management and Browning-Ferris Industries for their long record of environmental fines and penalties. A deep-seated distrust of the basic waste disposal practices of these companies underlies these objections. they viewed with skepticism the safety of deep-injection wells, the efficacy of incineration, and the long-term viability of landfills.

By contrast, these investors praise companies that promote reduced and recycled packaging (Wa-Mart, Home Depot), have reduced or eliminated emissions of ozone-depleting chloroflourocarbons (Apple Computer, Hewlett-Packard, Digital Equipment), use clean-burning or alternative fuels (Consolidated Natural Gas, Magma Power), promote innovative hazardous waste remediation (Groundwater Technology), use recycled materials as a raw material in their basic manufacturing processes (Nucor, Wellman), or manufacture scientific instruments important in environmental remediation (Thermo Electron, Isco).

What's Out of Favor

They also avoid companies with recent records of major environmental fines or penaltties, huge environmental cleaup liabilities, a major share of the agricultural chemicals market (viewing pesticides in particular as a long-term detriment to the environment), or a major share of the market for chloroflourocarbons or bromines.

Environmental investing had its origins in the creation of multiple-screened mutual funds and has continued to grow with them. These funds, for which screens such as South Africa, employee relations, or military contracting are is important as environmental screens, have grown steadily since they first made their appearance in the early 1970s. Among the earliest of these was the Pax World Fund, now with $338 million in assets under management, and the Dreyfus Third Century Fund, now at $428 million. In late 1991, the 10-year-old Calvert family of socially screened funds passed $1 billion in assets. At the same time the number of new socially screened products with multiple social screens that include the environment continues to expand. Securities Benefits, for example, recently added a Social Awareness series to its annuity offerings.

Since 1990 the number of socially screened funds with a primarily environmental focus has grown rapidly. The Eco-Logical Trust, the Muir California Tax-Free Bond Fund, Global Investment Fund, and Green Century Funds are already on stage, and more are in the wings.

Range of Investors

Substantial as the assets of publicly available mutual funds with socially oriented environmental screens are, they represent only a small portion of total assets currently being managed with some environmental screens. Money managers specializing in social investing range from firms long specializing in social investing, such as U.S. Trust of Boston, Mass. ($1 billion in socially screened accounts) and Franklin Research and Development of Boston ($275 million), to mainstream investment houses that have recently started offering social screening for clients, such as Neuberger & Berman in New York, and start-up firms specializing in socially screened accounts, such as Informed Investors Groups of Seattle, Wash. ($20 million).

Numerous bank trust departments -- for example, those of Bank of Boston and Vermont National Bank -- screen accounts on environmental and other grounds for their clients. Moreover, large institutional investors are increasingly interested in applying environmental screens. In May 1992, TIAA/CREF added an environmental screen to its Social Choice Account. Launched in March 1990, the account stood at $175 million in assets as of April 1992.

The momentum behind socially screened environmental investing is strong. It is most likely to grow through incorporation into multiple-issue social management screens rather than as a single-issue screen.

The paradigm for single-issue social screening has been South Africa. Public impatience with the slow pace of dismantling apartheid led many of the largest state and municipal pension funds, along with universities, foundations, and other institutions, to partially or totally divest their holdings in companies doing business with that country. By some estimates, assets under management with some South Africa screen ultimately reached $600 billion.

Three factors, however, distinguish the environment from South Africa as an investment issue: * The environment affects many more companies than South Africa ever did. Including energy efficiency and solid waste issues, it effectively touches every firm. * Unlike South Africa, the positive story on what companies are doing about the environment is as important as the negative, and is likely to become more so. Social investors want to hear what companies are doing to clean up their operations, to change their products and services, to deal creatively with the sizeable problems we all face. * Again, unlike the relatively clearly defined issue of South Africa, environmental issues spill over into offer areas of social concern. Occupational safety is in many senses an environmental issue inside factory walls. Spending on property, plant, and equipment or investment in total quality control programs are likely to be legitimate indicators of environmental progress.

Because the environment is a more all-encompassing and more complicated issue than South Africa, and because it cuts positively and negatively into other issues of vital importance to social investors, it seems likely that environmental screening will take place most frequently in conjunction with multiple-screened social investing accounts and less frequently in a single-issue environmental format.

Three Drivers of Growth

Three factors above others will drive socially screened environmental investing in coming years, and will ensure its continued growth: * The increasing availability of information, particularly in comprehensive and comparable format, on the environmental policies and practices of publicly traded firms. The Washington-based Investor Responsibility Research Center, the New York-based Council on Economic Priorities, and Kinder, Lydenberg, Domini & Co. Inc., in Boston, all offer environmental screening services that evaluate the records of substantial numbers of publicly traded U.S. firms. As more information becomes available, individual and institutional investors will be confident that meaningful distinctions can be made among the environmental records of U.S. corporations. * The inevitability of continuing environmental crises and occasional environmental disasters. Concern about the environment is already substantial, but the growing complexity of issues and their effect on all aspects of everyday life are likely to make most individuals increasingly anxious to take action wherever they can. * The general momentum building behind social investing. As social investing in general establishes itself as a viable investment option, investors will turn to the vehicles it has developed in recent years to incorporate environmental concerns into their investment decisionmaking.

How far socially screened environmental investing will grow is difficult to say. It is within the realm of the conceivable, however, that by the turn of this century, socially oriented environmental screens will be applied in one form or another to 55 of what is now a $3 trillion dollar pool of funds invested in equities.

Environmentally Related Funds

Socially Screened Funds -- Environment Is One Among Several Screens

Calvert Managed Growth Portfolio

(Bethesda, Md.): $378.6 million in assets

under management. Calvert Bond Portfolio: $40.9 million. Calvert Money Market Fund: $186.2

million. Calvert Equity Fund: $57.0 million. Calvert-Ariel Growth Fund (Chicago, Ill.):

$263.3 million. Calvert-Ariel Appreciation Fund: $115.8

million. Domini Social Index Trust (Boston, Mass.):

$5.2 million. Dreyfus Third Century Fund (New York,

N.Y.): $428.4 million. Linncoln National Social Awareness Fund

(Fort Wayne, Ind.): $61.2 million. Parnassus Fund (San Francisco, Calif.) $39.7

million. Pax World Fund (Portsmount, N.H.): $338.4

million. Rightime Social Awareness Fund (Wyncote,

Pa.) $6.0 million. Security Benefits Social Awareness Variable

Annuity (Topeka, Kan.): $5.5 million. Working Assets Money Funds (San Francisco,

Calif.): $325 million.

Socially Screened Funds -- Environmental Is the Primary Screen

Green Century Funds (Boston, Mass.): $1.3

million. Global Environment Fund LP (Washington,

D.C .): $28 million. Merrill Lynch Eco-Logical Trust (Princeton,

N.J.): $11.3 million. Muir California Tax-Free Bond Fund (San

Francisco, Calif.): $6.6 million. New Alternatives Fund (Great Neck, N.Y.):

$24.8 million.

Environmental Sector Funds

Alliance Global Environment Fund (New

York, N.Y.): $84.6 million. Freedom Environmental Fund (Boston,

Mass.): $2.88 billion. Merrill Lynch Environmnetal Technology

Trust Series I (Princeton, N.J.): $49.0

million. Merrill Lynch Environmental Technology

Trust Series II: $33.7 million.

Steven D. Lydenberg is Director of Research with Kinder, Lydenberg, Domini & Co. Inc. in Cambridge, Mass. KLD specializes in providing research on the social records of publicly traded U.S. corporations for the investment community. He is co-editor of The Social Investment Almanac 1992 (Henry Holt, 1992).
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Title Annotation:Meeting the Environmental Challenge
Author:Lydenberg, Steven D.
Publication:Directors & Boards
Date:Jun 22, 1992
Previous Article:Shareholders press environmental issues.
Next Article:Cleaning up the back office.

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