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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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The GreenMoney Interview: Leslie Christian and Carsten Henningsen of the Portfolio 21 mutual fund
Interviewed by Cliff Feigenbaum and Ted Ketcham, GreenMoney Journal
One of the most enjoyable tasks at GreenMoney Journal is interviewing true leaders in the socially
responsible investing world.
This issue features the widely respected co-founders of the Portfolio 21 mutual fund, Leslie
Christian and Carsten Henningsen. Portfolio 21 (http://www.portfolio21.com ) is a global fund
focused on sustainability that has been a top performer in its category since it was launched over
10 years ago. Leslie and Carsten responded to our questions together. In the interest of brevity,
their answers are attributed to Portfolio 21, for whom they both speak.
GMJ: What
people, conditions, and/or events inspired you to launch the Portfolio 21 fund in 1999?
Portfolio 21: We have been managing investments with social
and environmental screens for 27 years. As SRI grew dramatically during the 1980s and 1990s it
became increasingly clear that investor priorities were focusing more on environmental issues. The
launch of the Portfolio 21 fund in 1999 was inspired by The Natural Step
(http://www.naturalstep.org ), which we integrated into every aspect of our company and culture
during the late 1990s. Paul Hawken was instrumental in bringing The Natural Step from Sweden to the
U.S. and he continues to be a great inspiration to Portfolio 21.
Through The Natural Step
process we began studying environmental sustainability as it relates to the investment process and
decided to design an investment strategy for managing ecological risks and opportunities. We were
one of the first to develop investment selection criteria to identify companies with a higher
probability for adaptation in a resource-constrained world.
The premise behind our
investment strategy defines ecological capacity as the earth's ability to provide us with all the
ecosystem services that make our lives and lifestyles possible. This capacity is finite. Unlike the
financial system, in which it is possible to simply print more money, it is not possible to create
another planet or more ecological capacity. There is no Federal Reserve or lender of last resort
for natural resources or ecosystem services. Unfortunately, we are using these ecosystem services
faster than the earth can replenish them each year. We are able to keep growing and consuming
because we are liquidating ecological capital rather than living off annual yields. Today our
ecological footprint is more than 25 percent greater than the planet can regenerate.
Increasingly, we have a much narrower bandwidth in which to live and operate the world’s
economic system. Some people make the case that we are facing an ecological challenge, while others
believe we are on the verge of the greatest crisis ever faced by our species. Whatever one’s
position, it is clear that our waste and pollution cannot systematically increase and our natural
resources cannot systematically decrease.
As the path narrows, we expect greater
volatility and segmentation in the investment markets. Companies that recognize resource limits are
implementing wise business strategies, such as increasing resource efficiencies and decreasing
dependence on fossil fuels in order to gain a strong competitive advantage.
We believe it
is our responsibility to connect science and business in a way that leads to educated investment
decisions that are consistent with the goals and priorities of our investors.
GMJ:
How would you describe the fund’s first ten years in terms of meeting social, environmental, and
financial goals? How is your performance track record through 12/31/09?
Portfolio 21: Our goal is to provide competitive financial performance through
an investment strategy that integrates environmental and financial analysis. Over the past 10
years, Portfolio 21 has outperformed both the S&P 500 as well as the fund’s global benchmark, the
MSCI World Equity Index. Here are the numbers: as of 12/31/09, the Portfolio 21 fund has an average
annual return of +3.32 percent over the last 10 years, the S&P 500 averaged -0.95 percent and the
MSCI World Equity Index averaged +0.23 percent.
Fortune magazine has called us "Green in
more ways than one" and The Wall Street Journal recently cited Portfolio 21’s established track
record, noting that it is one of the few green funds "broad and diversified enough to be used as a
core holding in an investment portfolio." We are very pleased with the success of the fund and
happy to report record assets of approximately $325 million.
GMJ: In selecting
companies, Portfolio 21 looks at, among other things, revenues, products, sustainability, resource
use, production methods, and leadership. Have you found that any of your criteria consistently
trump the others in terms of forecasting success or is it really a combination of them?
Portfolio 21: A company’s business model is a key driver. We are looking
for companies that understand their ecological risks and opportunities, and are taking positive
action to integrate sustainability strategies into their business models. A company's business
model must be adapting to gain competitive advantages within ecological constraints. For example, a
company may encourage products of service, sustainable mobility, local raw materials/suppliers,
lean manufacturing, and/or the use of regional manufacturing and distribution.
In our
view, there are no truly sustainable companies in Portfolio 21; therefore, no companies excel in
all of the areas listed above. We select companies with strengths in multiple areas that are well
positioned to make advancements in addressing sustainability challenges. The core question in our
company selection process is, "What makes a company strong over the long term?" There are four core
characteristics: the business model, financial acumen, capable and adaptable management, and the
potential to retain and/or maintain a market niche.
GMJ: Related to the previous
question, have your investment guidelines, goals and global investing strategy changed in the first
ten years?
Portfolio 21: Good question. Yes, we expanded the
criteria to emphasize the importance of the business model.
GMJ: The Obama
campaign touted "Green" investments in renewable energy and sustainability as a rich source of jobs
and profits to help lead us out of this recession. Has Portfolio 21’s experience shown this claim
to be valid, and if so, how?
Portfolio 21: Certainly Obama’s
support of sustainability initiatives is a welcome change in our political leadership. This is good
news for investors in companies that "get it" about ecological constraints. It is highly likely
that the next growth sectors will be infrastructure, renewable energy, and efficiency—all areas in
which Portfolio 21 has invested money.
However, from an investment perspective, this
recession is a minor blip in comparison to the larger ecological challenges ahead. Investing today
requires expertise that goes beyond understanding and managing the risks of the already-frightening
recession, trade deficit and budget deficit threats. We are facing a huge natural capital deficit
that has amassed over the last generation. This is without a doubt our greatest investment
challenge—one that has never been part of the business landscape—and if we are going to have any
hope of recovering we have to apply a broader level of thinking, which includes challenging the
popular mandate of unlimited growth. On the economic front, there is such a strong commitment to
growth that the financial world fails to understand the depth of ecological constraints. This is
the necessary first step toward coping with the monumental changes on the horizon. We must weave
together economics and ecological limits in a way that frees us to creatively and enthusiastically
confront the challenges of our time.
GMJ: What impacts has Portfolio 21 had
on national and global SRI and ESG investing? What is next for the fund?
Portfolio 21: We are often asked about impacts. Perhaps the greatest impact we
have is through education. As an internationally recognized mutual fund, we have the opportunity to
share our understanding of the ecological crisis with thousands of people each year, including
dialogue and interaction with corporations. What’s next is to continue building on the success of
the fund by adhering to our strict investment discipline, which we hope will continue to provide
competitive returns for our shareholders as ecological limits become more pressing. We continue to
search for new companies around the world that may pass our rigorous criteria. We are working on
publishing a paper that details our philosophy and investment strategy.
GMJ: What
are some significant "ah hah’s" experienced by fund managers in the past ten years? In other words,
what are the big surprises so far?
Portfolio 21: Certainly 2008
surprised most fund managers! We were actually surprised that most Portfolio 21 investors stayed
the course and continued investing with us even during such uncertain times. In the past 10 years,
we have only had one month of net redemptions (less money coming in than going out of the fund).
This is remarkable in the mutual fund industry. In 2005, hurricanes Katrina and Rita surprised the
world and forever changed media and public opinion about climate change. All of a sudden, climate
change became very real. Gas prices began to increase due to the disasters, which caused changes in
consumer-purchasing behavior in many industries, including the auto industry. From 2003 to 2008,
oil prices rose by more than 80 percent and the market share of the largest Detroit automakers lost
12 percent. Some mainstream Wall Street investment firms have now started looking at ecological
risk as part of their financial analysis. When Portfolio 21 launched in 1999, the SEC had just
allowed mutual funds to offer prospectuses electronically. Over the past 10 years, the Internet has
been by far the largest surprise for everyone. We all know that the ability to convey information
is astounding. Back in the days of radio, it took 38 years to reach 50 million people. In the days
of TV it took 13 years and with Facebook it now takes an estimated 2 years (according to Did You
Know 3.0).
GMJ: In your September 2009 letter to stockholders you state (and we
paraphrase) that we all need to listen less to Father, i.e., Wall Street, and more to Mother Earth.
Can you offer some examples of that lesson from Portfolio 21’s investing experience?
Portfolio 21: The vast majority of Wall Street believes in unlimited growth
supported by fairly cheap or free natural resources. We believe that the earth is finite. Until
quite recently, the question of physical limits to growth had been considered largely irrelevant,
and those who questioned the earth’s capacity to provide infinite, or at least plentiful, amounts
of natural resources and ecosystem services were dismissed as extremists or reactionaries. There
was no generally accepted, compelling evidence that economic activity need be limited by
environmental considerations, nor that there might be no real choice in the matter. Questions of
supply and availability have been dealt with by assuming that one resource could be substituted for
another through the ingenuity and achievements of modern science and technology. Economics is not a
"hard" science in that its theories and explanations depend upon human behavior, which to date at
least has not been captured in laws of science. Wall Street tends to separate financial analysis
from environmental, social, and governance (ESG) issues. This makes no sense. After all, financial
statements are simply the distillation of a set of decisions that are made in the context of a web
of factors driven primarily by human behavior. And, as we know intuitively, and as behavioral
economists are proving, human behavior is not always rational, nor is it driven by a single factor.
We are complex creatures, business is complex, and financial success is complex. It is imperative
for us to consider all of the factors that might be driving the financial performance of a company.
GMJ: One of Portfolio 21’s promises has been to support community banking? How
has that gone for you, and what are some of the success stories related to your involvement in
community banking?
Portfolio 21: We keep about one percent of
the fund’s assets in community banks that are aligned with our environmental criteria. These banks
include environmental concerns in their lending practices. Our greatest efforts in community
investing have actually come from Upstream 21 (http://www.upstream21.com ) and the Local Economies
Income Fund (LEIF). Upstream 21 is a regional holding company in the Pacific Northwest that helps
keep local companies local by creating a family of companies committed to sustainable business
practices. Upstream 21 also has challenged the corporate charter mandate that requires companies to
maximize wealth for shareholders at the expense of the community, employees, and the environment.
Upstream 21’s articles of incorporation call for the best interests of all stakeholders to be
balanced: employees; the environment; long-term as well as short-term interests of the company and
its shareholders; customers and suppliers; and the communities in which the company and its
subsidiaries operate. We believe the fundamental principle of Upstream 21’s charter that requires
consideration of multiple constituencies defines sustainability in local economies.
While
Upstream 21 is an equity approach to local economies, LEIF is a private fixed income fund that
invests in regional bonds that support positive projects, community bank CDs, and private loans
secured by real property to businesses that are engaged in building sustainable local economies. As
is the case with Upstream 21, LEIF’s geographic focus is the greater Pacific Northwest (including
Northern California). Many of the fund’s holdings are taxable municipal bonds from this region.
Both LEIF and Upstream 21 were created to support and build local economies. We believe that local
economies are not only desirable and beneficial to people and the planet, but that local investing
provides an important diversification opportunity.
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