Ethical investment does not only involve avoiding the bad; it is also about actively embracing the good. JENNIFER JACOBS chats with the new spiritual capitalists.
Altruism is hardwired into our brains. Just ask the US National Institute of Health neuroscientists Jorge Moll and Jordan Grafman. They strapped a bunch of volunteers to brain scanners and asked them to imagine either donating a sum of money to charity or keeping it for themselves. The results showed that when volunteers placed the interests of others before their own, a primitive part of their brain lit up, the part usually associated with food or sex.
So, given that humanity is governed by the twin desires of doing good, on the one hand, and of making a quick buck, on the other, it is always interesting to see how some clever people have managed to combine the two — bringing out products that are not only expected to turn a profit, but also to affect the community, or even all of mankind, in a positive way.
London-based CFA Institute Islamic finance and environmental, social and corporate governance (ESG) director Hayat said there are three levels of what is popularly known as “ethical” investments.
The first is avoiding the bad, also known as “negative screening” where the investor stays away from industries that can potentially harm mankind. The second level involves trying to bring about change by using voting power or other appropriate means, to encourage companies to improve their practices in a manner fitting with investors’ values. The third and most powerful level is to actively put your money where it clearly does good.
Hayat pointed out that investments in alternative energies and clean drinking water represent ESG opportunities while litigation is a major source of ESG risk. “You could either make money by looking at these things in a systematic manner or avoid losing money by being more careful about these things.”
Gatehouse Bank CEO Richard Thomas, in speaking of the bank’s recently launched water-focused investment strategy fund, pointed out that it has been very well received, not only by institutional investors, but also from high net worth individuals: “People see it as an opportunity to invest in an ethical product and to look at the profit motive at the same time.”
Gatehouse teamed up with Swiss fund management company Sustainable Asset Management to launch the fund in May this year. It can invest in anything water-based, from utilities to companies doing research in new water technologies.
According to Ron Pernick and Clint Wilder, in their book, The Clean Tech Revolution, the water filtration market alone is worth some US$400 billion a year. “With an estimated one billion people on the planet without access to clean water and the increasing threat of ‘water shocks’ — abrupt water shortages owing to pollution, rapid water-table depletion, or natural disasters — the ability to deploy clean technologies to enable water filtration and purification is likely to expand considerably in decades.” These would include a range of new technologies such as desalination, reverse osmosis, nano-based membranes and ultrafiltration.
Thomas said Gatehouse was heavily influenced by the work of the Islamic Development Bank (IDB) in developing the water fund. “It has a number of profit-making elements but they all come together for the benefit of mankind. And they are all sustainable, not just from an ethical perspective, but from a financial perspective too.”
He pointed out that there was little use in being a foolish do-gooder, throwing good money after bad projects with good intentions. “If you involve yourself in too many speculative, badly managed projects, it does nobody any good and brings the whole business into disrepute.”
As he pointed out, the more profitable ethical sustainable projects there are, the more there will be in the future. It’s a self-perpetuating business.
Thomas said the water fund sets a benchmark for Gatehouse’s institutional wealth management division. “It gives us a target for our future funds to be equally value-added. We’re interested in energy, healthcare and education, so in addition to going green, we will also look at other areas of sustainability.”
As Thomas mentioned, IDB has been putting money into sustainable projects that help improve the lives of people in its member countries for years. It recently teamed up with the Asian Development Bank (ADB) to form a US$260 million Islamic Infrastructure Fund to make strategic Shariah compliant investments in infrastructure projects for countries, which are members of both IDB and ADB. IDB has put US$150 million into the fund with the ADB subscribing US$100 million, and it will be investing in transport, telecommunications, energy, water supply, sanitation and waste management in the target countries.
The project was initiated by the ADB to mobilize Islamic financing capital, which it would be unable to do with its own conventionally structured transactions. It pointed out that institutional investors in many Middle Eastern countries, who might have an appetite for investment risk in the fund’s target countries, require Shariah compliant investment opportunities. On the flipside, it has member countries crying out for capital, eager to tap the large pools of wealth in the Middle East.
The infrastructure fund is aimed at helping to increase the set of economic opportunities available to the inhabitants of the targeted countries, thereby alleviating poverty. “Most fundamentally, infrastructure services are intermediate input costs to production and any reduction in these costs raises the profitability of production, allowing higher levels of output, income and employment.”
These days too, more and more Islamic money also seems to be going into the clean technology sector. It may be a coincidence because most of the oil-producing nations just happen to be Muslim, and looking to use petrodollars to fund alternative technologies, for when both the petrol and the dollars run out. One of the most significant projects in this area is Abu Dhabi’s Masdar initiative.
Its website puts it very simply: “Abu Dhabi has a bold vision: to transform itself into a global leader for sustainable new energy technologies. It created Masdar to do that.”
Wayne Keast, chief executive of Consensus Environment, the CleanTech and Environmental private equity and strategic investment arm of Consensus Business Group and a member of the investment committee of Masdar’s Clean Tech Fund, talked about the breathtaking scope of the project.
“Abu Dhabi wants to be the center for clean energy and also a knowledge base. They are building Masdar City, the world’s first zero carbon city and this will be a test case for the new technologies. They have also set up a university from which they plan to graduate several hundred PhD students in environmental studies, within a certain period of time. So, there’s an element of research and academic process that they’re putting into play.”
He said Consensus Business Group is one of the co-managers of Masdar’s US$250 million Clean Tech Fund (along with Abu Dhabi through its sovereign wealth fund Mubadala Development Company, Credit Suisse and Abu Dhabi Future Energy Company). The fund is aimed at investing in clean technologies, which are applicable to the so-called Sun Belt, particularly in terms of solar energy and water purification. The Sun Belt is part of a vast, rainless region reaching from the western edge of North Africa to the eastern edge of Central Asia that boasts the best solar energy resources on earth.
Authors Pernick and Wilder said clean technology covers four main sectors: energy, transportation, water and materials. It includes relatively well-known technologies such as solar photovoltaics, wind power, biofuels, bio-based plastics, advanced lithium-ion batteries and large-scale reverse osmosis water desalination. It also includes emerging technologies such as tidal power, silicon-based fuel cells, distributed-hydrogen generation, plug-in hy-
brid vehicles and nano-technology-based materials.
Keast felt it was a coincidence that Islamic funds are finding their way into clean tech. “The Qataris are getting involved and the Saudis are interested, but I think it’s more a question of converting petroleum revenues into core technologies that are sustainable for them.
“They realize that oil is a finite resource and they also suffer from other issues such as a lack of water. They know that within the Middle East, they are the highest users of energy per capita in the world, and the UAE in particular, is the highest polluter because of its use of energy. A lot of that is due to the construction and development taking place there, but it is also in some part due to the energy consumed by the reverse osmosis water purification plants.
“They are investing in sustainable technology so they can continue to support activity for a longer period of time,” he said.
Having said that, he pointed out that the present big investment play is clean technology and it is far more compelling than the information and communication technology (ICT) play of the early part of the millennium.
“Clean technology is about using less energy, less materials and polluting less, so it’s pretty diverse. Whether you’re talking about a water-based fund, energy efficiency or renewable energy, what you’re finding is that more capital is going into this sector than any other within private equity or venture capital,” Keast pointed out.
He added that there are a number of drivers for this: “There’s one aspect of climate change and there’s the issue of commodities becoming more expensive.”
As with any sectoral play, the more money that goes into the sector, the more opportunities there are to make money from that sector. But, considering the capital pouring in, are we looking at another possible bubble here? “If there’s been hype about clean technology, you will see some overvaluations but these will come down. You will need to continue to generate energy and there will be a shortage of resources. That won’t change,” said Keast.
He added that the solar technology in question is not the traditional photovoltaic cells, but a technology known as “concentrated solar power”, where mirrors are used to reflect the heat of the sun on to water and turn it into steam, which is then put through turbines to generate electricity.
“The Clean Tech Fund is a fund established for financing low carbon investments with donations from a number of Organisation of Economic Cooperation and Development (OECD) governments. It’s very concessional; you can say there’s a high grant element. We provide loans to governments but they are on very soft terms. It’s not meant for making money because it derives from the provisions in the Kyoto Protocol, which says that if developing countries are to take on more of the burden for climate change mitigation, developed countries will need to help in the financing of that.”
He said the Islamic funds are not committing to the Clean Tech Fund itself but have been invited to finance alongside that.
“We’ve not got to the stage of hard numbers and it’s a very upstream discussion at this point. They will be contributing towards financing solar power projects in the Middle East and North Africa and the related investments for transmitting and selling that solar power.”
He added that there is a very high level of interest, but it has not reached the state of financial close on any of the projects. “Everybody’s kind of waiting for everybody else, but there’s a very high level of interest because commercially and politically, there are ways of structuring this as a win-win solution.”