We offer this paper, written in collaboration with Sarah Cleveland Consulting, to fill a need we have observed among investors and advisors to have a clearer understanding of how environmental consideration are applied in the investment process. We also seek to resolve some confusion about the labels applied to this style of investing—Environmental, Sustainable, Responsible, and ESG are all commonly used, but often the strategies they are applied to look quite different.

Although it may seem that Sustainable Investing and Environmental Investing could be one in the same, the term “sustainable” has now been applied to so many strategies, including those that have nothing to do with environmental considerations, that it is now virtually meaningless.

There are many reasons investors may pursue environmental investing: to improve the resilience of our society, to avoid investment risk, or to seek new opportunities. As interest has grown, we have observed many investment managers rush to throw their hat in the ring and offer a solution. However, across the industry, methods of environmental research and integration into the investment strategy vary widely. It can be difficult to glean much from the label of a strategy; investors need to ask real questions in order to discern the rigor and quality of the investment process behind the label.

Amanda is Portfolio 21's Communications Manager.  She has more than 10 years of research, communications, and interactive media experience in the financial industry.

Our investment process is designed to identify the global leaders most capable of thriving in the emerging economy that will carry society forward.  Certain business activities entail unacceptable risks in environmental, social, or governance areas.  Our research has shown that the fossil fuel exploration and production industry poses unique risks that are not manageable to the extent required to make companies directly involved in this activity attractive investments.  The paper outlines these risks, as well as Portfolio 21 Investments’ long-held rationale for not investing in the sector.

We believe that the fossil fuel sector is unnecessary to prudent portfolio structure and that it is possible to produce risk adjusted returns that are competitive with appropriate broad-market benchmarks through a portfolio that does not invest in fossil fuel companies.

Portfolio 21 Investments has a number of  policies in place as negative screens to avoid industries and business activities that are simply too environmentally risky or present social outcomes that are too unattractive to warrant investment consideration.

Please share the paper with others and we welcome your comments and questions.

John Streur is President of Portfolio 21 Investments. He has 25 years of experience in the field of investment management. 

McKibben recently hit the road in a biodiesel bus for a 21-city speaking tour to raise awareness around why divestment is a powerful tool for education.  The most prominent example of this was, of course, the campaign to end apartheid in South Africa.  Beginning in the late 1970s and continuing through the early 1990s, this campaign, which was a primary focus of the nascent Socially Responsible Investing industry, mobilized educational institutions, governments, and faith-based investors to divest from companies with South African business interests.  According to an analysis by corporate responsibility consultant Richard Knight, during the 1980s a total of 155 colleges at least partially divested.  They were joined by 90 cities, 22 counties, and 26 states that also took some form of economic action.  Nelson Mandela has stated that he believes the University of California’s $3 billion divestment in the late 1980s was a particularly significant milestone in the eventual dismantling of apartheid.

It is probably not surprising then that McKibben is focusing his efforts at colleges, universities and religious organizations across the country.  Today’s youth will have many decades to manage the impacts of current and future climate change and have the most at stake.  They may be able to speak collectively and persuasively that fossil fuel risks have grown too large to ignore and must be addressed systemically.  Since early November, more than 100 college and university groups have signed on to the campaign to Go Fossil Free.  Some, like Harvard, University of New Hampshire, and Brown, are passing student resolutions and pushing for dialogue with administrators.  Others, such Unity College in Maine and Hampshire College in Massachusetts have already started the process of creating new investment policies.

We applaud the work of these young activists and wish them great success.  Clearly, we are of like mind that the risks inherent in these industries are just too high.  We have supported 350.org since its launch and Portfolio 21 Investments’ policy is to not invest in fossil fuel production or any extractive industry.  We recently shared more about our policy, and the reasoning behind it, with journalist Marc Gunther following his recent article on this topic for Guardian Sustainable Business (“Where can investors who worry about climate change put their pension?”, November 30, 2012).  Marc included our response, along with comments from several other fund managers, in a follow up post on his blog.

Amanda is Portfolio 21 Investments' Communications Manager.  She has more than 10 years of research, communications, and interactive media experience in the financial industry.

Back in the late 70s and early 80s, social and environmental investing was just getting started.  By 1982, there were about five social and environmental mutual funds to choose from, compared to the hundreds today.  Our firm was one of the nation’s first investment managers specializing in the field.

Over the past three decades, the catalyst of growth for the social and environmental investing industry has been centered on specific themes based on current events.  In the 1980s, the South Africa divestment movement showed investors worldwide that it is possible to “vote with your dollars” and affect corporate behavior.  In 1989, the Exxon Valdez oil spill was a wake-up call to corporations and investors about environmental liability.  Since the 1990s, the environment has been the top issue for investors.  Of course, the main catalyst for growth has been competitive financial performance.

At first, environmental issues were applied to the investment process primarily as avoidance screens. Investors were looking to avoid companies with poor environmental performance.  In 1998, Portfolio 21 Investments developed one of the first approaches to positive environmental screening.  Today we have become best known for our expertise in environmental investing.

I’m very fortunate to have found a vocation with passion starting in 1982 (at an early age).  It is a gift to be surrounded by colleagues and clients who care deeply about the environment and demonstrate their concern through their actions.  It is a privilege to be celebrating my thirtieth year at Portfolio 21 Investments.

Carsten is Portfolio 21 Investments' founder and Chairman. He has 30 years of experience in socially and environmentally responsible investing.

My first SRI conference was in San Francisco in 1984. Over the past 28 years I have lost count of the SRI conferences that I’ve attended. Back in the 80s, attendance was usually about one hundred or fewer. Now these events attract several hundred from many countries. Increased interest in applying social, environmental, and governance criteria to the investment process is, in part, due to consumers and investors becoming more aware of both the risks and business opportunities of ecological limits, including climate change.

This year’s high-profile speakers include environmental leader Robert F. Kennedy, Jr., journalist David Brancaccio, author Dr. Deepak Chopra, and Nobel Laureate Professor Muhammad Yunus. I first met Muhammad Yunus in the early 80s when he was just starting Grameen Bank in Bangladesh. He was visiting Oregon and I gave him a tour of an organic farm outside of Eugene. At the time I was a director of a community loan fund to assist organic farmers. Dr. Yunus went on to become known as the father of microcredit and he has founded more than 50 companies in Bangladesh.  Just this year, Fortune Magazine named him as "one of 12 greatest entrepreneurs of our time."  Dr. Yunus will be delivering the opening keynote session and is one of 16 plenary speakers. There will be 30 sessions offered including “Think Local Food: Real Prosperity Starts Here” and “America's Low Carbon Energy Breakthrough Opportunity.”

The SRI Conference is the largest annual gathering of responsible investors and investment professionals in North America.  If you are interested in learning more, please visit http://www.SRIconference.com. Portfolio 21 Investments is a sponsor every year and I’ll be there hosting our booth.

Carsten is Portfolio 21 Investments' founder and Chairman. He has more than 25 years of experience in socially and environmentally responsible investing.

The Skin Deep Database can be used by consumers to assess the toxicity of the ingredients in their personal care products or by investors like Portfolio 21 Investments to help assess the risk associated with particular raw materials or companies.  The database is searchable by product type (skin care, eye care, etc.), by product name, or by ingredient.  The database provides information on the health concerns of ingredients and assigns a hazard score between 0 (low hazard) and 10 (high hazard).  It also offers a data score (None to Robust) that identifies the scope of ingredient safety data contained in the database, and the number of studies available in scientific literature.

For example, one can determine that the ingredient aluminum starch octenylsuccinate carries a high hazard score of 9 out of 10, with a data score of “fair.”  Of products covered in the database, aluminum starch octenylsuccinate is present in 67 eye shadow products, 55 anti-aging products, 54 foundations, 52 moisturizers, and 47 concealers.  Unfortunately, this ingredient also shows strong evidence for human neurotoxicity and moderate evidence for developmental/reproductive toxicity.  The database organizes its search results from low to high hazard score, so consumers who are interested can find products and companies with low hazard scores.

In a similar vein, each year as summer approaches EWG publishes a guide to sunscreens to help inform the public which products are most protective and which ingredients to avoid.  In 2012, the non-profit reviewed 262 scientific studies and examined the labels of 1,800 sunscreens, moisturizers, make up and lip products with SPF ratings.  While it compiled a list of more recommended products than ever before, 75% still did not meet its safety standards.  EWG’s sunscreen guide says to look for active ingredients such as zinc oxide or titanium dioxide, and to use lotions over sprays or powders, along with other tips.  Sun lovers should avoid sunscreens with vitamin A, as it causes skin cancer in laboratory tests, and oxybenzone because it is a hormone disruptor and skin allergen.

EWG has a host of other focus areas and tools to inform the public on the intersection of human and environmental health.  In addition to the resources mentioned above, the non-profit provides an annual shopper’s guide to pesticides in produce, a national drinking water database, tips on cell phone radiation, a meat eater’s guide to climate change, and a U.S. farm subsidy database.  As a non-profit organization, EWG provides non-commercial, grounded, useful information that can help consumers avoid toxic substances or select better products for themselves and the environment.

Emily is a Senior Research Analyst with Portfolio 21 Investments. She has 9 years of experience in the environmental field.

The first important number he details is 2 degrees Celsius, which is the amount that scientists and most governments have agreed is the maximum increase in global temperature, without very serious consequences.  The second number is 565 gigatons, which is the amount of carbon dioxide that we can emit by midway through this century in order to keep us within the 2 degree Celsius range.  This all makes the third number even more daunting; 2,795 gigatons is the amount of carbon contained in the proven reserves of the world’s fossil fuel companies.  Meaning, the world’s inventory of fossil fuels is five times the amount that scientists think would actually be safe to burn.  And every day fossil fuel companies spend millions of dollars to find and extract more coal, oil, and natural gas.

This equation very clearly illustrates an unsustainable system with dire consequences for the economy.  Some kind of mechanism must evolve to increase the price of fossil fuels and decrease the cost of renewable energy sources, and quickly.  But if that optimistic climate-saving scenario does indeed play out, energy companies will be left holding assets that they can no longer sell, which will cause the industry losses in the trillions of dollars.  The consequences for investors of this “carbon bubble” are being researched by UK-based Carbon Tracker Initiative, which published a seminal report earlier this year titled, “Unburnable Carbon.”

McKibben’s article is sobering, but its prominent place in Rolling Stone is encouraging, and it is already getting a lot of attention.  Considering the extreme global weather this year, this could be a very good moment for the message.  A recent opinion poll reported that in July 70% of Americans stated that they believed that the climate is changing, which is a 5% increase vs. the same poll in March.  This is a rapid, and likely seasonal, increase in acknowledgment of the problem, but it remains to be seen when opinion might translate into significant national will.  There is still much progress to be made toward articulating the future that we want to see, and how we will transition to the energy sources that we need in order to get there.

Amanda is Portfolio 21 Investments' Communications Manager.  She has more than 10 years of research, communications, and interactive media experience in the financial industry.

It seems every few years there has been yet another label to describe the screened approach:  values driven; values based; corporate social responsibility; responsible; socially responsive; socially conscious; environmental, social, corporate governance (ESG); triple bottom line; sustainable; green; and impact investing.  Although these terms can be defined differently, in practice they are often used interchangeably, which can certainly cause confusion.

The most common terms used today are SRI, ESG, sustainable, and impact. SRI is often associated with one’s personal values.  ESG is more often associated with financial performance derived from ESG screening factors.  Sustainable investing often emphasizes the environmental screen; however, it is also widely used interchangeably with SRI and ESG.  Impact investing is the latest term and I associate it with community investing, social venture capital, and microfinance.  Again, in practice, impact investing is sometimes used interchangeably with SRI and ESG.

The only way to really define these terms is to look closely at the underlying investments and match the investment choice with your specific screened objectives.  For example, many mutual funds that fall under the category of SRI, ESG, or sustainable, invest in oil companies, which some people may not consider a sustainable approach.

Carsten is Portfolio 21 Investments' founder and Chairman. He has more than 25 years of experience in socially and environmentally responsible investing.