Are you looking to invest in a fund with an impressive track record based on an outside-the-box, cutting edge and commonsense approach to ecological risk-the sort of risk that has contributed to so-called Black Swan events like the BP Deep Horizon oil spill or Fukushima?
Portfolio 21, a Portland, Oregon-based mutual fund that has beat its benchmark MSCI World Equity Index nine of the past ten years, assesses companies based on factors like whether their business model incorporates regional manufacturing and distribution or is moving away from synthetic chemicals to organic materials. With a 10-year annualized return of 6.41% compared to 4.73% for its benchmark (and 3.29% for the S&P 500), the $450 million fund believes that sustainability factors like these will determine whether companies will even survive a world defined by peak oil, water shortages, etc.
"In our efforts to quantify risk and return profiles, we have inadvertently closed our minds to the big picture," Portfolio 21 president and chief investment officer Leslie Christian wrote in a blog post (http://rsfsocialfinance.org/2010/04/leslie-christian-1/) at the RSF Social Finance Web site last year. "Our current categorization of asset classes with associated risk/return profiles is [not] sufficiently robust to deal with the complexities of the global economy as it relates to ecological limits and social inequity."
Others agree. "The metrics for measuring risk are outdated," says Michael Kramer, managing partner and director of social research at Natural Investments LLC, whose firm has invested with Portfolio 21 since the fund's inception in l999. "Portfolio 21 is an important leader because they're trying to [gauge] ecological risk," he says, adding that his firm is pleased with both the fund's performance and its low volatility. "They are raising the bar for the entire industry."
The story begins in 1998 when Christian and Portfolio 21 co-founder Carsten Henningsen attended training at Nike headquarters about how corporations could apply the principles of a sustainability framework called The Natural Step and thereby prepare for shortages and disruptions--and save money in both the shorter and long-term. "It wasn't just stewardship or doing the right thing," says Christian, a CFA who spent nine years as managing director of Salomon Brothers earlier in her career. "It was a very pragmatic approach to business."
Christian hired Natural Step consultant Susan Burns, now co-head of the Global Footprint Network, to help develop criteria to identify companies with a higher probability for adaptation in a resource-constrained world and allow the fund to rank companies based on qualitative information. Christian also looked for a source of quantitative data about ecological issues like water. But when she couldn't find it, the fund began by building its own database with the view of using the qualitative descriptors developed by Burns as an overlay.
By now, the concept behind the fund's analysis is familiar. Mankind faces a diminishing supply of fundamental resources like oil and water (a situation exacerbated by exploding population growth and economic development), which represents huge business risk. The Natural Step has developed four simple scientific principles that can't be perpetually violated if we want to sustain the economy long-term; we can't extract more fossil fuels than can be regenerated, produce chemicals faster than they can be broken down, or deplete or degrade natural resources like forests faster than they can be replenished. Nor can we subject people to conditions that undermine their ability to meet their needs.
How do you apply these principles to your business? "You do things like change the business model so that sourcing, production and distribution are closer together," Christian says. "You build in energy efficiency at both the manufacturing and product level, or retool a manufacturing process to become more natural or biodegradable. You use natural or recycled materials, reduce packaging and perform life-cycle analysis to improve design."
In Portfolio 21's view, however, the materiality of various ecological risks differs by company and industry. Google's biggest risk, for example, is the company's supply of electricity-something that, if lost, could disrupt all of its operations. At pharmaceutical firms like Baxter and Roche, the biggest risk is chemical ingredients and their associated environmental life-cycle impacts.
These three firms-along with Novo Nordisk, Novartis, Novozymes and Vestas Wind Systems-- are among the fund's top holdings (it owns about 100 companies.) But since their most material ecological risks vary, their approaches to sustainability-what they should be doing with respect to their core business-- are different. According to the fund's Web site, Google's supply of power runs at 90% efficiency compared to the industry average of 60-70%--a source of enormous savings. It has started its own electric utility and is busy sourcing renewable energy. Roche is promoting sustainable chemistry through its R&D labs. Baxter has, among many things, created a Product Sustainability Review, a product life-cycle assessment designed to minimize environmental impacts in the early stages of design.