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Thomas Koellner1) 2), Sangwon Suh3) 4), Olaf Weber1) 2, Corinne Moser5) and Roland
W. Scholz1)
1)
Swiss Federal Institute of Technology
Department of Environmental Science
Natural and Social Science Interface (ETH-NSSI)
ETH-Centre HAD F2
CH-8092 Zurich, Switzerland
thomas.koellner@env.ethz.ch
Tel: 0041 (1) 632 63 11
Fax: 0041 (1) 632 10 29
2)
GOE m.b.H, Zurich, Switzerland
3)
Department of Bio-Based Products, College of Natural Resources, University of
Minnesota, USA.
4)
Institute of Environmental Sciences (CML), Leiden University, The Netherlands.
5)
Care Group AG, Zurich, Switzerland
1
Abstract
This study is to compare equity funds, which are managed according to sustainability goals,
with conventionally managed funds with respect to their environmental impacts. The basic
motivation for this study was the conjecture that overlap in the portfolios of sustainability
funds and conventional equity funds can be very large. In addition, the sector allocation of
both types of funds is generally very similar, because portfolio managers follow the chosen
benchmark to minimize risk. These two effects can result in no differentiation between the
two types of funds in terms of their environmental impact and damage (null hypothesis). The
investment funds. We selected 13 sustainability funds and 13 conventional funds, which are
managed according to the benchmark MSCI World. The study applies Input Output Life
environmental performance. The environmental impact is evaluated per functional unit for
each fund, which is the risk-adjusted financial performance. The statistical analysis showed
that the analyzed sustainability funds performed better with respect to environmental impact
assessment but worse in economic risk adjusted performance (RAP) over the period 2000-
2004. In 2004, however, the RAP of the selected sustainability funds showed a better
performance. Both samples considerably overlap for the environmental and economic
parameter. The results suggest that the environmental impact of sustainability funds in the
2
Introduction
Investors, both private and institutional, are beginning to integrate socio-economic and
ecological criteria into their investment decisions (Kasemir et al. 2001). The supply of
investment funds in the ‘green’ and ‘socially responsible’ investment sectors has increased
2005). Equity and bond funds serving this rapidly growing segment of global capital markets
range from ethical funds to eco-efficiency funds to sustainability funds. Only sustainability
funds take simultaneously ethical, socio-economic, and ecological aspects into account. The
term socially responsible investment, or SRI, is used widely for this asset class; we avoid this
misleading term, because in reality, what is labeled SRI also includes environmentally
Due to increasing demand on stock markets such sustainable investments increase the
price per share and thus the market capitalization of companies rated sustainable.
Consequently, it is easier to increase equity capital through release of new shares at a higher
price. In addition, cost of equity and cost of loan capital can be reduced (Aslaksen and
communication with the rated companies, they can directly push the company management
towards more sustainable practice. Second, representing shareholders, the fund manager can
meetings (Monks et al. 2004). Third and most important, they construct the portfolios of
3
However, managers of sustainability funds are restricted by several side constraints,
which limit their degree of freedom in portfolio construction. In general, they construct
choose conventional indices (e.g., S&P 500, DJGI, MSCI, Fortune 500) as a starting
investment universe from which to select appropriate stocks for their portfolio. In addition,
they often rebuild the sector allocation of the chosen index in order to arrive at a risk structure
from the fund managers’ assumption that their target investors expect financial return and
The result of these factors is that the portfolios of sustainability funds can be more
similar to those of conventional funds than one would expect. Hawken (2004) found that
more than 90% of the companies of the conventional index Fortune 500 are included in the
cumulative portfolio of 399 sustainability investment funds. In other words, by mere chance
every conventional fund portfolio can contain stocks that were rated as sustainable. While
every conventional fund can contain stocks that are rated sustainable, the only difference
between sustainable and conventional funds is relative stock weightings in the portfolio. What
then, compared to conventional ones, is the value added of constructing sustainability fund
portfolios? This question has been intensively investigated in terms of the financial
performance of funds (Statman 2000; Plantinga and Scholtens 2001; Bauer et al. 2005;
Schröder 2003) and indices (Cerin and Dobers 2001). A comprehensive assessment of
sustainability funds, however, should also focus on their ecological and socio-economic
performance (for a complete framework for sustainability ratings of investment funds see
Koellner et al. 2005). Accordingly, Dillenburg (2003) discussed how to assess the total social
measure the different attributes of a SRI portfolio. Nevertheless, until now an operational
method for assessing the socio-economic and ecological performance of stock portfolios has
been missing.
4
The main goal of our paper is to develop a metrics for the ecological performance of
environmental ratings of the companies found in the portfolios and Input-Output Life Cycle
Assessment (IO-LCA), which allows the environmental impact (e.g., emission of greenhouse
gases in tons) of a $1000 investment into a specific equity fund to be evaluated based on its
industry allocation.
of industries. Then, the results for the economic and environmental performance for 13
conventional funds and 13 sustainability funds, both managed according to the benchmark
MSCI are presented and statistically compared. As a prerequisite, we investigate the overlap
of the portfolios of conventional funds and sustainability funds with cluster analysis. Finally,
we discuss the results with respect to their significance and methodological problems and
research opportunities.
Method
Out of an extensive list of sustainability funds–based on listings in the category ethical funds
in the Bloomberg database and from other databases (SRIcompass.org and Morningstar)–we
have selected all sustainability equity funds in German speaking countries, that are managed
according to sustainability and ecological criteria and use the index MSCI World as a
benchmark. This index is maintained by the Morgan Stanley Capital International and is
with conventional equity funds, we have randomly selected 13 conventional funds also
5
managed according to MSCI World from the Bloomberg database (see Annex 1 for fund
For each equity fund, we requested the total portfolio from the fund company,
including all stock names and the proportion of each stock. Every fund company was
cooperative, but it was not possible to receive the portfolio composition for one effective day
(in fact, it was between August 31, 2004 and December 1, 2004). To assess whether the
sustainability funds and the conventional funds could be separated into two clusters based on
their portfolios (name of each stock and its individual weight in the fund’s portfolio,) we
performed a cluster analysis (squared Euclidian distances calculated with the Ward method in
their sector and industry membership listed in Annex 2 according the Global Industry
Classification System (GICS) (Anonymus 2005). The data for the companies were extracted
from a set of indexes (MSCI World, MSCI Europe, MSCI Small Cap, DJ Stoxx
Thomson Financials and the Bloomberg database. Using this as our base, the sector and
funds, we have selected the relative return of the fund portfolio RP , volatility σ P , and risk-
deviation of RP . In addition, the risk-adjusted performance RAP was calculated with the
after properly adjusting the portfolio return for risk and is calculated as
6
σI Equation 2
RAP = (RP − R f ) ⋅ + Rf
σ P− f
where RP − R f is the excess return of the portfolio in comparison to a risk-free return; R f ,
σ P − f is the excess return; and σ I , the volatility of the excess return of Index I. For the
calculation of the RAP, the MSCI World Total Return Index (USD, Bloomberg Ticker
NDDUWI Index) was used as benchmark. The risk-free rate was 4.21% (Bloomberg January
14th, 2005, function CRP). All RAP values were calculated per annum based on monthly data
All financial performance data of the selected funds were received from the
12/2004), because the due to difference in sector allocation funds are expected to perform
differently in the three periods of stock market development. We compared the sustainability
funds with the conventional funds with respect to differences in the means of the financial
fund portfolios, we have two data sources. One source is environmental ratings for the
companies in the portfolios and the other is the environmental impact and damage of the
portfolio based on its industry allocation, which is calculated with Input-Output Life Cycle
metric tons and energy used in GJ) from environmental damages (e.g., human health damage
reports and the latter gives a very comprehensive overall measure. The Ecoindicator method
is a widely used impact assessment practice in the framework of Life Cycle Assessment
7
The environmental ratings r were obtained from the SIRI Group (provided by
CentreInfo, Freiburg, Switzerland) for 413 companies in the MSCI World index. These
covered 37% of the 1131 companies found in the portfolios of the 26 equity funds
investigated. Specific criteria of the rating done by the SIRI Group include the availability of
policies, and management systems. For each of the assessment criteria up to eleven indicators
are defined and assessed based on existing information (e.g., existence of environmental
report, yes-no). The results are transformed into a value ranging from 1 to 10. In addition,
pollution (e.g., oil spills) and products, which are beneficial to the environment or lead to a
reduced environmental impact, are evaluated. All these data are aggregated into one rating
between 1 (very bad) and 10 (very good). The ratings for the 413 companies are distributed
pooled the 13 conventional portfolios into one pooled portfolio funds and the 13 sustainability
funds into another portfolio of funds. We then tested the equality of the means of the
environmental ratings of the two funds of funds with a t-test and the equality of variance with
a Levene’s test. The hypothesis is that the mean environmental rating of the pooled portfolios
of sustainability funds is better and the standard deviation of the ratings is more narrow,
The challenge, in assessing the environmental impact and damage of investment funds, is the
large number of companies in the portfolios. For the 26 portfolios investigated here, we
would need to assess 1131 companies. Given the present data quality of environmental
reporting on emissions and resource use, this would not be possible. We, therefore, develop
8
the method such that no physical inventory data need to be gathered. We used the Input-
Output Life Cycle Assessment (IO-LCA) to assess fund portfolios in terms of absolute
environmental impacts and damage. The method combines economic Input-Output tables and
Life Cycle Assessment (Joshi 1998; Hendrickson et al. 1998; Suh and Huppes 2002; Lenzen;
Suh 2004b). For theoretical background on Input-Output economics refer to Suh (2005b).
With this method, we can base the assessment of a company on their industry membership
(see Annex 2) and monetary information from publicly available sources. Although it is clear
that the large number of companies currently cannot be assessed individually based with a
LCA, we did include company specific ratings on environmental management and some
environmental key figures for about half of the companies in order to account for differences
System border: Another advantage of the method is that input-output tables reflect
the exchange between economic sectors and industries; therefore, the environmental impact
and damage calculated for a company includes its complete supply chain. This enhances the
comparability of companies within a single industry, which can vary significantly in the
extent of their value chain. This means also that the outsourcing of a specific division, which
is for example energy intensive, does not influence the calculated environmental impact of a
specific company. The disadvantage of the IO-LCA is clearly that the use phase and end-of-
Functional unit: In the LCA framework, the functional unit is a measure of the
performance of the functional output of the product system (ISO 1997). The functional output
of investment products is an expected financial return on the capital invested. We have chosen
the risk-adjusted performance (RAP) as the functional unit, because it takes the financial
return and the risk into account. It is possible to compare investment funds with different
return/risk profiles based on their environmental impact and damage standardized per 1 %
RAP.
9
Quantification of impacts and damage of an investment in a fund: In order to
develop a method for quantification of environmental impacts and damage, we clarify the
links between the investment market and the consumer market. The operation of an
investment itself has minor environmental impacts in terms of paper use and energy use in
banks. What is important is the link to the consumer market and, thus, to the activity of the
buying one unit of an investment fund. As a shareholder, they own a (small) part of each
company i, and as a consequence, take part in the economic success or failure of that
company. Being joint owners, they are also partially responsible for the environmental
impacts and damage D caused by the companies as a result of their operational activity (for
simplicity, we only refer to the damage D in the development of the method, but the equations
Based on the total net asset value N of the investment fund in $ and the market capitalization
Figure 1, Investment Market portion). Knowing the weight wi of each company in the fund’s
wiN Equation 3
Si =
Mi
For each company, we calculated the total environmental damage Ditotal
Ditotal = d j Ti Equation 4
where dj is the environmental damage caused by the purchase of $1 of goods and services
from industry j and Ti, the turnover (sales) of company i. This equals the sum of the cost of
goods purchased (COGS) and the value added (see Figure 1, Consumer Market portion). The
10
proportion of the total environmental damage Dik for an individual company i found in fund
k is calculated as
n Equation 6
Dk = ∑ Ditotal Si .
i =1
Since the total market capitalization of funds differ, the normalized damage Dknorm for an
investment of $1000 in a fund k is calculated and used for statistical analysis. In order to
calculate the environmental damage per functional unit Dkrel , we built the ratio of Dknorm and
Dknorm Equation 7
Dkrel =
RAPk
obtained the data on the environmental impacts and damage associated with $1 in purchases
of goods and services from a specific industry in producer prices from two databases–the
EIOLCA (Carnegie Mellon University - Green Design Initiative 2003) and CEDA (Suh
2005a; Suh 2004a). EIOLCA uses the US 1992 annual input-output data and CEDA those for
the US from 1998. We matched the 78 sectors of EIOLCA and the 81 sectors of CEDA with
water used in 1000 liters, ores used in metric tons, energy used in GJ, external cost in $) were
obtained from the EIOLCA database. The environmental damage (human health damage in
came from CEDA. Based on the three types of damage, we calculated the total environmental
damage in EI points according to Goedkoop and Spriensma (1999, pp 96) based on the
European normalization (hierarchist) factors per inhabitant (damage to human health 1.54E-
11
02 Daly/yr, damage to ecosystem quality 5.13E+03 PDF*m2*yr/yr, damage to resources
8.41E+03 MJ/yr, and with 3.8E+8 inhabits in Europe) and the weighting factors for
Since we used IO-LCA, the damages calculated for companies are only a function of the
industry they belong to. However, the level of environmental impacts and damage per
functional unit can considerably vary within one industry from company to company. To
account for those differences in companies within an industry with respect to the
Because the company ratings are on a standardized scale between 1 and 10 it is not
possible to directly quantify on a metric scale the difference of environmental impacts and
damages between a company rated with e.g., 5 to one rated with 7. For this reason we
conducted a robustness check where we vary the level of differences between the differently
companies i, depending on their ratings ri. Companies rated “good” receive a damage
reduction relative to the industry average and companies rated “bad”, an extra damage. We
calculated this for four levels of correction factors y (y = 2.00, 1.00, 0.50, and 0.25) to check
for the robustness of the calculation. The factors are chosen to reflect moderate to extreme
ΔDi due to differences of environmental ratings. The damage Diy for company i was
calculated as
⎧ Di if ri = ∅ Equation 8
⎪
D =⎨
i
y
5 − ri
⎪ Di + 10 yDi if ri ≥ 1
⎩
12
where ri is the rating of the company i. This means that in the case of companies that didn’t
have any rating available, the original damage value Di was taken. For all companies with a
rating, the damage value was adjusted. Taking the correction factor of 1.00 as an example in
Figure 6, companies rated with the mean rating of 5 receive no change (industry average); the
companies rated as best, receives a reduction by the factor 0.50 and companies rated worse
than 5 receives an increase of its damages. Based on the values of Diy the total damage Dky
Results
In our investigation, we have focused on equity funds, which are managed using the MSCI
World as the benchmark. In general, portfolio managers attempt to follow the chosen
benchmark in the sector allocation. One would expect that sector weights do not differ
between benchmark and funds. However, the sector weights can vary considerably from fund
to fund (Table 1). Mean sector weights of the benchmark deviate from sector weights of
funds underweighted the sectors Energy and Consumer Discretionary. In contrast, Industrials
are overweighted, probably because they include environmental friendly industries (e.g,,
production of solar panels). Only the weights for Industrials show significant differences
The 13 conventional funds consist of many more stocks than the 13 sustainability
Financials, and Energy, the sustainability funds consist of fewer stocks. As a consequence, in
those sectors the average weight of stocks in a conventional fund is lower compared to the
13
weight in a sustainability fund. All of the investment funds were clustered according to the
portfolio composition (name of the stock i and its individual weight wi in the fund’s
portfolio) (Figure 2). The results didn’t reveal any separation into two distinct clusters as
expected (one cluster for conventional funds and one for sustainability funds), but brought to
light some interesting insights. Funds Sust 2, Sust 3, and Sust 4 form one narrow cluster which
can be explained by the fact that they are all managed by one company. Together with fund
Sust 11–its portfolio focused on companies dealing with water issues–they form another
cluster, which is furthest from that of all of the other funds. All of the other funds form one
conventional funds. The cluster analysis also shows that funds Sust 1 and Sust 9 are almost
equal, in spite of the fact that they are managed by two different companies, one from
Switzerland and one from Austria (in fact, Sust 1 is a clone of Sust 9).
The mean of the absolute RAP is lower for sustainability funds for 4 years backcasting
(1/1/2000 to 12/31/2004) and 2 years backcasting (1/1/2002 to 12/31/2004) (Table 2). For the
1 year period from 1/1/2004 to 12/31/2004, the return is higher for sustainability funds than
for conventional funds. Volatility as a measure of risk is similar for both types of funds in the
first two periods (16%) and decreases to 11% when only calculated for 2004. All
performances are measured in U.S. dollar $. Funds’ currencies are Swiss Francs and Euro.
That means that the performances shown in Table 2 also include changes in the exchange
rates. For the period 1/1/2004 to 12/31/2004 there was a 7.4 % performance increase for funds
14
Insert Table 2 here
For statistical analysis of the environmental impact of investment funds, we compared the
funds’ portfolios with respect to the environmental ratings of stocks based on SIRI group data
and the environmental impacts based on IO-LCA (absolute and relative to financial
performance).
environmental ratings, we pooled all of the stocks of the 13 conventional funds and all of the
stocks of the 13 sustainability funds. Figure 3 shows the distribution of environmental ratings
for conventional funds (number of stocks = 1034, mean = 5.5, standard deviation = 1.9) and
sustainability funds (number of stocks = 633, mean = 6.2, standard deviation = 1.7). The
conventional funds (t-test for equality of means with p < 0.001). The standard deviations are
also significantly different (Levene's Test for equality of variance, p < 0.001). The individual
distributions of environmental ratings for each fund reveal that sustainability funds tend to
eliminate stocks with bad environmental ratings (Figure 4). For example in Figure 4 the fund
Sust 4 has no companies in the portfolio with (bad) ratings 1, 2 or 3. You find this pattern
The mean environmental impacts calculated for a $1000 investment was always
higher for the 13 conventional funds than it is for the 13 sustainability funds (Table 3).
However, the differences are only statistically significant for the emission of greenhouse
15
gases in metric tons (680 kg for conventional funds versus 460 kg for sustainability funds),
energy use (8.5 GJ versus 6.3 GJ), and external costs ($28 versus $20). The environmental
impacts relative to the functional unit (RAP for the period 2004) show no significant
differences.
points (EI points) is higher for conventional funds for all three areas of protection than for
sustainability funds (Table 4). The same applies to the relative environmental damage
measured against financial performance RAP2004 (only for this period significant differences
of performance could be found). However, statistically significant differences are only found
on a 10% security level. Figure 5 shows that the ranking of conventional funds and
all. Already the fifth worst fund out of 25 funds in terms of environmental damage is a
sustainability fund; yet the distributions indicate that sustainability funds cause less
environmental damage.
company’s industry affiliation. That means that the method does not differentiate between
environmental leaders and latecomers within a given industry. To address this, the
environmental impacts and damages were calculated using also the environmental ratings of
the companies. Companies with an above average environmental rating receive a reduction in
their environmental damage total; those with a below average rating, an additional damage
16
(Figure 6). The results of the robustness check indicate that changes–even large changes,
which introduce large differences between companies rated as good and bad–only have a
small to modest impact on the overall environmental damage (Table 4, middle part). An
explanation for this result is that the mean environmental rating of both conventional and
sustainability funds are close to the average rating of 5 (see Figure 3). As a consequence the
overall damage of a fund portfolio remains rather stable, because reductions in environmental
damages, which receive companies better than the average are out weighted by additional
17
Discussion
Overall, the results show that with respect to portfolio composition, differences between the
portfolios of sustainability funds in our sample exhibit better environmental ratings, fewer
environmental impacts, and less damage. At the same time, the difference between the two
types of funds is smaller than investors might expect. This is partly due to the fact that we had
a rather homogenous sample, since all 26 funds are managed according to the benchmark
MSCI World.
two groups of funds. The sustainability funds investigated, however, show worse financial
returns for the periods that include the poorly performing years of 2001 and 2002. This might
regarded as a relatively clean and sustainable sector. According to our data, this trend turned
around in the period 2004, for which sustainability funds in the sample show significantly
With respect to the environmental ratings of the companies in the portfolio, we can
see that sustainability funds we have analyzed tend to omit companies with very bad ratings
and overweight companies with good ratings–although to different degrees. However, the
difference in mean ratings between the aggregated portfolio of sustainability funds and of
conventional funds that we constructed based on every investigations of the individual fund
portfolios is significant, but much smaller than one would expect. This might be explained by
the difficulties SRI fund managers face while attempting to construct portfolios that are
18
environmental and social performance. On the other hand, this trend might be supported by
uninformed investors who invest money in sustainability funds, but do not scrutinize the fund
managements’ self-declarations and marketing messages. Even for investors who are trying to
critically challenge the fund managers’ assertions, however, it is currently difficult to get
funds and their portfolios. Only the transparency guideline of EUROSIF is going in that
The main outcome of this paper is the quantification of environmental impacts and
damages in absolute terms for an investment of $1000 into a specific equity fund. The idea is
that investment funds can be regarded as a physical product that needs energy and resources
and emits CO2 and other chemicals in order to generate a financial return on the investment.
Of course the fund itself is not a machine producing money, but it is a certificate confirming
environment–clearly to varying degrees–in order to generate profits. The results for our
sample suggest that statistically, on average, the portfolios of firms of sustainability funds
emit significantly less greenhouse gases and use less energy than conventional funds.
Furthermore, the damage to human health, ecosystem quality and resources is less for
sustainability funds.
In order to base this calculation not only on industry membership, but also on the
Since we do not know in absolute terms how much better than average a positively rated
company is, we conducted a robustness check. However, the difference was very slight. Even
assuming that the company rated as best would only exhibit a damage of 25% and the
company rated as worst, 175% of the average damage (see Figure 6), we find no influence on
the end result. The reason for this is that the ratings are approximately normally distributed
around mean rating (Figure 3). This means damage reductions for the half of the companies
rated as good are balanced out by damage supplements for the other half of companies rated
19
as bad. Consequently, the industry allocation of each fund strongly determines the calculated
impacts and damages. However, the relationship between the physical size of the company
performances like RAP per $1000, a small sized company is superior to a large company,
simply because within a single industry class, absolute environmental impacts and damages
are correlated with size. As a consequence the environmental impact and damage relative to
the financial performance is superior for small companies. The portfolio analysis showed that
small and medium-sized companies are in fact more common in sustainability funds than in
conventional funds.
The external costs are clearly lower for sustainability funds than for conventional
funds, but still reduce the absolute performance of a $1000 investment considerably ($144
financial return annually for 2004 in Table 2 vs. $20 in external costs in Table 3). When
discussing such results, the question that comes to mind is the validity and reliability of the
figures just presented. In the next section, we address this through our discussion of
Assessment of the environmental impacts and damages has three main limitations. These are
environment, ii) the restricted system border, and finally iii) data availability and data
uncertainty.
i) The environmental impacts and damages calculated with IO-LCA are strongly
performance can vary considerably within a single industry, this is clearly no more
than a rough proxy of the true environmental impacts and damages for a specific
company. To refine this, one would need company-specific inventories of energy use,
resource use, emissions, and so on. However, given that environmental reporting is
20
not standardized, it is currently nearly impossible to have a data set of sufficient
quality for the large number of companies found in the investigated investment funds.
We tried to account for differences between companies within an industry and took
information. The ratings produced by the SIRI group, however, were only available
subindustries into account, so they were assessed as equal to the respective industry.
These are the subindustries Alternative Energy (providers of renewable energy) and
management and pollution control services and excludes large-scale water treatment
subindustries in the funds, however, is rather small: companies which fall into the
Since all of the calculations are based on IO-LCA, we only have monetary
input variables to determine the company’s impact and damage. This is particularly
repurchasing their own stocks (e.g., to reduce cash) or private owners increasing their
calculated with Equation 3, increases and a larger proportion of the company’s impact
and damage is allocated to public stock owners. To adjust for this bias, it would be
21
ii) Since the calculation is based on IO-LCA, the system border comprises the
company’s activities from gate-to-gate and all industry tiers in the supply chain. The
use phase and end-of-use phases, however, cannot be taken into account with IO-
iii) Data availability and uncertainty are major issues in an assessment of investment
data is difficult to obtain for the large number of companies required, but even the
assignment to one industry is not always easy, especially for conglomerates (see
Koehler et al. 2005, for more discussion on this issue). To be accurate it would be
industries and calculate the environmental impacts and damages separately (e.g., car
producers can bring in a considerable part of their revenue through credit banking
and, therefore, belong to two industries). On average, for 4.9% of the fund portfolios,
we did not have any information on their industry membership. To account for this,
we linearly extrapolated the results, based on the known part of the portfolio, to
100%.
As an input variable for the IO-LCA, we used the most basic monetary
goods sold (COGS) broken down into industries downstream to the individual
structure into account and not to rely on the average cost structure of the whole
industry. However, to our knowledge, these data are not consistently available for this
Another limitation is that the geographical scope of the Input-Output data and
the environmental assessment with Ecoindicator is not consistent with the country
22
allocation of portfolios. The problem is that companies from 48 countries can be
found in the 26 funds portfolios. Because, it is not possible to find consistent data for
all countries, the portfolios were assessed based on IO tables from the US and the
damage assessment was done based on European data with Ecoindicator. With this
we assume that US IO tables are a good proxy for all countries for which we find
companies and that the European damage assessment is representative for other parts
of the world. This of course provides room for further improvements in the analysis.
iv) An important issues is how to allocate the damage between demand, i.e. consumers
company participates in the economic success (or failure), but should also be made
partly responsible for the environmental impacts and damages. This is the basic idea
other side the extended consumer responsibility framework (see Gallego and Lenzen
2005) suggests that the final consumer demanding the goods is responsible for
model we did use are based on the Leontief model, which assumes that supplies are
perfectly elastic to demands (Suh 2005a). In other words, when an additional demand
is placed, supply (input) will always follow under the fixed purchasing (input)
structure. Conceptually, therefore, the demand is the driver or the cause that runs the
system and all responsibilities are allocated to the demand side. The Ghoshian model
(Ghosh 1958) assumes instead that productions are perfectly elastic to supply,
always follow. In this case supply drives the system and thus the supply will be
responsible for the ensuing economic activities. When Ghosh suggested this
framework at the first place, he assumed a monopolistic economy where supplies are
23
the limiting factors: imagine the 70s when industries are begging for oil, and then
(1997) argued that the Ghoshian model should be interpreted as the price-push
mechanism, which shows how the increased input prices are imputed to the price of
the end products. Even there, one needs to consider that it is not the cost of input but
Of course, reality lies in between the Ghosh and Leontief model: both supply
side and the demand side can be somehow responsible for part of the consequences
taking place by their activities. However, in this paper we did only calculate the total
damage broken down to stock ownership, but the results should not suggest that
The approach shown in this paper facilitates assessments of the environmental impacts and
damages of fund portfolios. On that basis, portfolio managers are able to perform a multi-
criteria optimization of the fund portfolio with respect to its environmental and financial
sustainability rating of investment funds, and it complements the rating of the fund
management processes (e.g., quality of the research method, diligence in carrying out
24
Conclusion
Based on this study, we conclude that the environmental impact and damage caused by
advantage of sustainability funds, however, is less clear-cut than investors might expect,
because the portfolios of both types of funds investigated have a considerable overlap. The
Null hypothesis (no differentiation between the two types of funds in terms of their
environmental impact) could be rejected for 3 out of 5 measures of impact and for 3 out of 4
Portfolio managers have the potential to change this situation and to reduce the
environmental impact and damage of sustainability funds. Normally, they deviate from the
sector allocation of the chosen benchmark only for financial reasons. From the perspective of
sustainable development, it is preferable to actively the sector allocation and not to passively
adopt it from the benchmark. They need to actively control the sector and industry allocation
with respect to environmental criteria, because the benchmark reflects the sector allocation of
the world economy. If, for example, the sectors energy and materials were to gain weight in
growth, those sectors would be automatically weighted higher in the sustainability fund,
unless the portfolio manager considers environmental criteria when defining the sector
allocation.
The method developed here can help to optimize portfolios with respect to
environmental impacts and damages. For a reliable assessment, we recommend expanding the
static view adopted in this paper and to continuously monitor the development of funds’
environmental impacts and damage in order to detect improvements and deteriorations over
time (for more on that issue see Koellner et al. 2005). In order to assess sectors and
25
companies at the same time in a more accurate way, the use of hybrid LCA where IO-LCA
26
Acknowledgement
We would like to thank Patrick Wirth, Moritz Leuenberger and Basil Vitins from Care Group
AG, Switzerland for helpful discussion and the information they provided us on fund
portfolios. Thanks to Centre Info, Switzerland who provided the data on environmental
27
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30
Annex 1: Names and IDs of funds investigated
ID ISIN Fund name Number Total
of stocks assets
in mill $
Conventional funds
Conv 15 BE0167281535 DEXIA INDEX WORLD 588 97
Conv 16 CH0013211567 POSTSOLEIL EUROPE 57 16
Conv 17 DE0005315154 ALBATROS AKTIEN INTL OP 66 4
Conv 18 DE0009750273 UNIGLOBAL -NET- 214 935
Conv 20 DE0009757930 KOELNER-AKTIENFONDS-UNION+ 69 14
Conv 21 DE0009769950 DWS KONSUMWERTE 60 32
Conv 22 LU0071970049 ML OFFSHORE ST-GLOBAL FUND 138 96
Conv 23 LU0088165062 ACTIVEST LUX GLOBALGROWTH 113 104
Conv 24 LU0092017853 PICTET F-GLOBAL EQT SEL-P 51 86
Conv 25 LU0103938170 WM FUND GLOBAL GROWTH-B 30 7
Conv 26 LU0114434946 ACTIVEST LUX MF BALANCD EQ-N 106 118
Conv 27 LU0123347535 INVESCO GT GLOBAL VALUE-A 77 33
Conv 28 LU0149329681 UBS ACCESS SICAV-GL EQUITY-B 301 535
Sustainability funds
Sust 1 AT0000820287 SALZBURG-KLASSIK OEKO TRND-A 117 5
Sust 2 BE0167113795 DEXIA SUSTAIN ACCENT SOCIAL 88 71
Sust 3 BE0175503300 DEXIA SUSTAIN WORLD LG CAPS 68 51
Sust 4 BE0176815810 DEXIA SUSTAINABLE ACCENT EAR 90 10
Sust 5 CH0009074300 SWISSCA GREEN INVEST 105 175
Sust 6 CH0011981005 RAIFFSN FUTURA GLOBAL STOCK 44 43
Sust 7 DE0007013641 DLI GLOBAL QUALITY 97 8
Sust 8 LU0036592839 SEB INVEST OEKOLUX 88 45
Sust 9 LU0076532638 UBS LUX EQTY-ECO PERFORM-BSfr 119 216
Sust 10 LU0119216553 ING (L) INV-SUSTAIN GRWTH-PC 81 40
Sust 11 LU0133061175 SAM SUSTAINABLE WATER FUND 39 72
Sust 12 LU0138546881 ABN AMRO SOCIAL RESPONS EQ-A 68 6
Sust 13 LU0138810733 HENDERSON HORIZ-GL SUST I-A2 80 3
31
Annex 2: Sector and industry classification according to GICS
Sector Industry
10 Energy 101010 Energy Equipment & Services
101020 Oil & Gas
15 Materials 151010 Chemicals
151020 Construction Materials
151030 Containers & Packaging
151040 Metals & Mining
151050 Paper & Forest Products
20 Industrials 201010 Aerospace & Defense
201020 Building Products
201030 Construction & Engineering
201040 Electrical Equipment
201050 Industrial Conglomerates
201060 Machinery
201070 Trading Companies & Distributors
202010 Commercial Services & Supplies
203010 Air Freight & Logistics
203020 Airlines
203030 Marine
203040 Road & Rail
203050 Transportation Infrastructure
25 Consumer Discretionary 251010 Auto Components
251020 Automobiles
252010 Household Durables
252020 Leisure Equipment & Products
252030 Textiles, Apparel & Luxury Goods
253010 Hotels, Restaurants & Leisure
254010 Media
255010 Distributors
255020 Internet & Catalog Retail
255030 Multiline Retail
255040 Specialty Retail
30 Consumer Staples 301010 Food & Staples Retailing
302010 Beverages
302020 Food Products
302030 Tobacco
303010 Household Products
303020 Personal Products
35 Health Care 351010 Health Care Equipment & Supplies
351020 Health Care Providers & Services
352010 Biotechnology
352020 Pharmaceuticals
40 Financials 401010 Commercial Banks
401020 Thrifts & Mortgage Finance
402010 Diversified Financial Services
32
Sector Industry
402020 Consumer Finance
402030 Capital Markets
403010 Insurance
404010 Real Estate
45 Information Technology 451010 Internet Software & Services
451020 IT Services
451030 Software
452010 Communications Equipment
452020 Computers & Peripherals
452030 Electronic Equipment & Instruments
452040 Office Electronics
453010 Semiconductors & Semiconductor Equipment
50 Telecommunication Services 501010 Diversified Telecommunication Services
501020 Wireless Telecommunication Services
55 Utilities 551010 Electric Utilities
551020 Gas Utilities
551030 Multi-Utilities & Unregulated Power
551040 Water Utilities
33
Tables
Telecommunications
Consumer Staples
Discretionary
Health Care
Technology
Information
Consumer
Financials
Materials
Industrial
Fund ID
missing
Utilities
Energy
total
Conventional 15 8.0 5.3 10.0 11.7 9.3 10.5 23.6 11.3 4.7 4.3 1.2 100
funds
16 17.3 1.1 1.2 2.6 9.3 14.4 35.9 2.2 14.2 1.3 0.6 100
17 18.6 4.9 2.1 3.3 6.7 13.8 25.6 5.8 3.9 8.7 6.7 100
18 6.2 6.6 11.6 13.0 7.3 10.7 29.8 7.3 4.0 0.9 2.6 100
20 9.9 6.2 6.8 7.5 10.8 4.7 40.8 7.6 1.4 1.8 2.4 100
21 . . 1.2 64.7 28.3 . . 1.5 . . 4.2 100
22 9.7 5.0 11.6 11.5 8.8 9.7 24.3 8.5 4.2 1.8 5.0 100
23 2.5 3.0 5.8 13.7 10.9 22.7 9.0 20.6 8.6 1.1 2.2 100
24 2.9 13.8 13.0 13.5 2.3 6.4 14.5 12.4 8.5 6.2 6.4 100
25 3.6 3.5 3.0 16.7 . 19.3 3.5 19.1 14.3 . 17.1 100
26 6.4 9.2 12.9 9.8 4.8 3.5 5.1 20.4 5.5 9.1 13.3 100
27 9.9 4.1 8.8 14.2 8.2 13.5 21.7 8.7 6.2 3.1 1.7 100
28 10.9 5.4 6.1 13.7 5.0 6.6 27.5 10.0 9.2 3.6 2.1 100
∅ 8.1 5.2 7.1 15.1 8.6 10.6 20.4 10.3 6.5 3.1 4.9 100
Sustainability 1 3.9 6.6 9.2 11.0 9.2 12.6 22.3 12.6 6.1 1.8 4.6 100
funds
2 7.5 3.8 10.0 11.9 10.2 9.5 25.1 10.2 6.4 3.1 2.4 100
3 5.8 2.2 10.1 14.0 10.0 8.3 27.0 11.6 6.9 2.7 1.3 100
4 6.8 3.6 10.6 13.1 10.3 9.1 23.6 10.1 6.5 4.9 1.3 100
5 5.0 6.6 17.0 6.6 12.3 9.4 15.1 14.6 7.0 4.3 2.0 100
6 0.6 7.4 13.2 12.4 4.9 9.7 24.1 15.1 7.6 3.3 1.6 100
7 7.2 2.9 12.5 14.5 7.0 8.9 20.1 15.9 5.4 3.2 2.3 100
8 13.1 5.6 17.4 5.0 2.6 8.5 13.2 13.3 6.0 8.9 6.3 100
9 3.0 7.0 9.2 11.4 9.2 12.6 22.6 12.5 6.3 2.0 4.2 100
10 8.5 5.2 8.3 9.8 7.7 11.7 25.1 10.0 7.9 5.0 0.8 100
11 . 1.8 34.9 . 11.3 0.5 . 1.4 . 21.2 28.9 100
12 7.9 0.9 8.8 11.3 6.0 14.1 21.8 18.0 7.1 1.1 3.1 100
13 1.4 3.4 10.2 12.4 7.1 13.7 30.5 8.5 9.2 . 3.7 100
∅ 5.3 4.4 13.2 10.3 8.4 9.9 20.8 11.8 6.3 4.7 4.9 100
1)
MSCI world 8.2 5.3 10.6 12.4 8.8 10.2 24.5 11.2 4.7 4.1 100
1)
Benchmark
34
Table 2: Financial return RP , volatility σ , and risk-adjusted performance RAP of 13
conventional funds and 13 sustainability funds over three periods based on $ (* is
significant with t-test, p<0.1). In addition, the total assets in million $ are given for the
end of 2004.
35
Table 3: Comparative environmental impacts of investing $1000 into 13 conventional
funds versus 13 sustainability funds. The first block shows absolute impacts I knorm
and the second block shows impacts I krel relative to risk-adjusted performance
RAP2004 of the funds. The significance of differences of the mean are tested with t-
test,* p<0.1 and ** for p<0.05.
Conv. Sust.
Sig.
funds funds
Std. Std.
Mean Mean
Dev. Dev.
I knorm Greenhouse gases in metric tons CO2 equ. 0.68 0.37 0.46 0.11 *
Water used in 1000 liters 8.56 2.33 7.64 1.91
Ores used in metric tons 0.16 0.14 0.14 0.10
Energy used in GJ 8.50 3.96 6.30 1.34 *
External cost in $ 28.23 13.97 19.54 4.92 **
I krel Greenhouse gases in metric tons CO2 equ. to RAP2004 0.11 0.18 0.04 0.02
Water used in 1000 liters to RAP2004 1.43 2.08 0.64 0.21
Ores used in metric tons to RAP2004 0.04 0.09 0.01 0.01
Energy used in GJ to RAP2004 1.22 1.61 0.52 0.18
External cost in $ to RAP2004 4.59 7.57 1.68 0.77
36
Table 4: Comparative environmental damages of investing $1000 into 13
conventional funds versus 13 sustainability funds. The first block shows absolute
damages Dknorm ; the second block, the robustness check for damages Dky with
correction factors y; and the third block, damages Dkrel relative to risk-adjusted
Conv. Sust.
Sig.
funds funds
Std. Std.
Mean Mean
Dev. Dev.
Dknorm Human health damage in EI points 0.10 0.04 0.08 0.03 *
Ecosystem quality damage in EI points 38.14 17.54 29.82 9.96
Resource damage in EI points 0.56 0.42 0.34 0.19 *
Total env. damage in EI points 0.20 0.13 0.13 0.06 *
Dky Total env. damage in EI points with y = 2.00 0.19 0.12 0.12 0.05 *
Total env. damage in EI points with y = 1.00 0.20 0.13 0.12 0.06 *
Total env. damage in EI points with y = 0.50 0.20 0.13 0.12 0.06 *
Total env. damage in EI points with y = 0.25 0.20 0.13 0.13 0.06 *
Dkrel Total env. damage in EI points to RAP2004 0.03 0.03 0.01 0.01 *
37
Figures
38
correction factors y ranging from weak to strong influence were used. Above average
companies receive a reduction by the factor in their environmental damages; below
average companies receive an additional damage (e.g., a company with positive
rating 8 gets a damage reduction of 50% when the most extreme correction factor y
= 2 is chosen).
39
Investment Market
Company i
Net asset
Investment [$] Market cap M
value of fund
[$]
N [$]
Ownership S
[%]
Responsibility [%]
Consumer Market
Resources,
Environment emissions [t]
Environmental
damage D
[EI points]
Figure 1
40
Figure 2
41
Conventional funds
regular funds Sustainability
SRI fundsfunds
25%
20%
Frequency
15%
10%
5%
2 4 6 8 10 2 4 6 8 10
Env. Rating Environmental
R Env.
Rating r Rating R
Figure 3
42
BE0167281535 CH0013211567 DE0005315154 DE0009750273 DE0009757930
40% Conv 15 Conv 16 Conv 17 Conv 18 Conv 20
Percent
30%
20%
10%
20%
10%
30%
20%
10%
20%
10%
20%
10%
2 4 6 8 10 2 4 6 8 10 2 4 6 8 10 2 4 6 8 10 2 4 6 8 10
Env. Rating Env. Rating Env. Rating
Environmental RatingEnv.
r Rating Env. Rating
Figure 4
43
a) b)
26 16
17 17
16 28
23 Conventional funds 20
12 10
28 Sustainability funds 27
10 26
18 1
1 18
27 15
20 9
Fund ID
8 12
9 22
15 4
4 24
24 2
22 3
2 7
3 11
7 8
25 23
6 6
11 5
21 13
13 21
5 25
0.00 0.05 0.10 0.00 0.10 0.20 0.30 0.40
Total env. damage D
norm
k in EI points Total env. damage D relative to RAP2004 in EI points
rel
k
Figure 5
44
env. damage ∆D 200%
150% 0.25
Delta of
0.50
100%
1.00
50% 2.00
0%
1 3 5 7 9
Environmental rating r
Figure 6
45