Sustainability funds are gaining ground

The market for sustainability funds is continuously growing. Presently, there are 800 investment funds worldwide issued under the sustainability label. In Switzerland the volume of sustainability funds reached 4.5 bln Swiss francs ($ 3.7) in 2005, while the worldwide market recorded a total volume of 565 bln Swiss francs ($ 468) in the same year according to fund information provider Lipper.

The growth of this segment would generally imply that yields of sustainability products show a better performance than traditional investment funds. In fact, some figures support this proposition. The Dow Jones Sustainability Index, for instance, recorded an absolute performance of 177% during the years until 2004, whereas the MSCI World index only progressed by 129% in the same period. This would support the theory that corporations with ethical, social and environmental values are more competitive in the long-term perspective. Experts believe that companies with a sustainability policy are able to cut down on costs due to a better energy and material management and that the better image of the company would also boost their profits. However, these theories are difficult to prove. A comparison shows similar performance histories for both sustainability and traditional funds. Some are outperforming the market and some are not.

Sustainability products might reflect the social and political views of its investor community. In the 60ies political issues were dominating fund policies primarily in the US and UK when arms, alcohol or tobacco industries were excluded from the investment list. In the late 80ies sustainability funds turned to environmental issues. In 1992 the United Nations Conference on Environment and Development confirmed the trend and also introduced the sustainability concept to a broader public. This trend also had an influence on corporate ratings. From then on companies were not only rated on their financial but also on their environmental performance. Specific funds were created to comprise the best rated. Later on some social and ethical values were added to the rating criteria. The actual trend goes towards renewable energy and Microcredit.

Yet, sustainability ratings are not beyond doubt. Firstly, there are numerous definitions of sustainability and, accordingly, numerous criteria to choose sustainability stock. Overall, fund managers have defined "positive" and "negative" criteria for their decision. Positive criteria may comprise the environmental policy or the working conditions of employees. The negative criteria can include the production of certain goods or the violation of working laws (child labour). In conclusion, the definition of sustainability much depends on the individual sustainability criteria of the fund managers.

Source: Neue Z├╝rcher Zeitung

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