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Nedbank’s Green Index outperforms the Alsi and SRI indices

Investors are becoming more selective in who they invest with.

JOHANNESBURG –Nedbank’s Green Index has outperformed the shareholder-weighted All-Share Index (the SWIX) and the JSE’s top 40 Index by just over 18% and almost 40% respectively from July 1 2008 to 30 December 2011.

The index serves as a benchmark for environmentally conscious investors and measures the performance of companies with environmentally sustainable business practices.

There are currently 43 companies on the Index chosen from the Top 100 companies on the stock exchange.

The fund’s performance

Nedbank Capital transactor, Amy Underwood says the fund offers investors the opportunity to invest in companies that are pro-actively mitigating their carbon footprint. Asked to explain why the fund is performing so well, Underwood said the initial thought was that it was due to the fund’s lower exposure to resources and higher exposure to industrials.

Nedbank Capital commissioned Riscura Analytics to run the numbers to ascertain why the fund was so performing so well. The research suggested that the success was largely due to stock selection. “It’s about stock selection, about which companies are being picked. It means the Carbon Disclosure Project (CDP) is picking up the right companies.”

The CDP is a global initiative to determine the carbon footprint of top companies worldwide. How it works will be explained later.

Underwood conceded the outperformance had come as a bit of surprise this early in the day. “CDP is about climate change. We would have expected a better performance as evidence of climate change presented itself. This tells us that there seemed to be a link between companies that took a longer-term view and seemed to have strong management teams.”

It also emerged that investor sentiment also reflected this in that they were reluctant to put their money into companies that were not considering climate change issues.

Nicola Comninos of the JSE has attributed the fund’s success to its exposure to industries outside of the resources sector. This segment has been experiencing difficulties of late exacerbated by sliding commodity prices and policy uncertainty.

Manager of equity market business development at the JSE, Nicola Comninos, explains that Nedbank’s BGreen ETF tracks the performance of the Nedbank Green Index. This is a fund that invests in the top “green” companies listed on the JSE.

The fund’s performance is derived from the performance of the underlying companies and therefore their respective industries. Its current spread of industries is 23% financials, 22% resources and 55% industrials.

Comninos says the fund’s performance is thus largely attributable to firstly the performance of the industrial and then also the financial sector.

As seen in the table below, the Industrial 25 index (as an indication of the performance of the industrial sector) hit a new all-time high of 34 703.81 on July 27 2012.

Not long before that, on June 21 2012, the Financial 15 index (as an indication of the performance of the financial sector) hit an all-time index high of 10 013.56.

“Both the SWIX and the JSE Top 40 indices have far greater exposures to the resources sector and the Resource 10 index (as an indication of the performance of the resource sector) has not recovered above its previous high of 77 308.45 in May 2008,” Comninos said.

 

Tradeable Indices

Index Code

 Highest Index Close

Highest Date

Top 40

J200

31 315.34

2008/05/22

Resource 10

J210

77 308.45

2008/05/22

Gold Mining

J150

3 741.50

2002/05/22

Industrial 25

J211

34 703.81

2012/07/27

Financial 15

J212

10 013.56

2012/06/21

Financial and Industrial 30

J213

38 251.20

2012/07/27

 

How companies make it onto the index

The companies are scored according to the UK-based not for profit Carbon Disclosure Project (CDP). The CDP administers and distributes questionnaires across the globe to ascertain the carbon footprint of companies.

In South Africa the forms are sent to the top 100 companies and scores are allotted according to the CDP’s scoring methodology. Companies are not obliged to participate in the survey but it is encouraged by the JSE.

Underwood says the index requires a lot from companies: “The responses have to be incredibly detailed. To get good scores you need to give tangible examples of your operations. Do you understand your carbon footprint?  Do you understand your energy usage? Are you tracking it? How are you controlling it?”

Underwood says 81 companies responded in the last CDP report placing it second in response rate to Europe.

She says making it onto the list is highly regarded both locally and internationally. “The signatories to the CDP – you’re looking at in excess of $70trn in assets under management around the world that consider this data. It’s the kind of data they take into account when making investment decisions.”

The top ten currently on the index are British American Tobacco (BAT), Gold Fields, Woolworths Holdings, Remgro, Nedbank Group, Pick ‘n Pay, Exxaro Resources, Mondi Ltd, Clicks Group and Sanlam.

Asked how tobacco businesses like BAT and resource companies like Exxaro and Gold Fields could possibly make into onto the green index, Underwood explained the philosophy behind the index and the CDP was to be sector neutral. “We don’t use the historical socially responsible investing method which is exclusionary and omits companies linked to say alcohol, gambling and the nuclear industry.”

Underwood said the new approach meant all sectors could qualify as long as they were amongst the best in terms of sustainability.

She cited as an example Gold Fields and its operations near Virginia in the Free State, where methane gas was pumped out of the mine and used as a form of renewable energy, thereby reducing its carbon footprint significantly.

Similarly, Exxaro had entered into a joint venture with Tata Power to look at renewable energy projects in terms of solar and wind, for instance.

“International studies have shown that the industries perceived as the dirtiest can actually do the most. While they are coming off an enormous base, they do make a difference,” Underwood said.

She added: “The whole purpose of CDP and the index is getting companies to take the lead in both mitigation and adaption to climate change. We will always have mining and chemical companies. We want the ones we have to be as green as possible.”

She added that more and more resources companies were turning to renewable sources of energy, citing Sappi and Tongaat as examples. “I think those trends are exciting. They are not keeping these issues on the fringes. They are taking it into the core of their business.”

Moneyweb has been reporting on sustainability in the workplace for close on a year now. A trend seems to be developing in that companies are starting to realise that it is no longer an option and that those not working it into their business plans will stand to lose in years to come. Arguments that it is too costly no longer hold water as various studies have shown the long term advantages far outweigh the initial cost.

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