Mayors Argue to Cut Fossil Fuel Stock

By John Ryan,

Seattle Mayor Mike McGinn wants his city to divest from fossil energy companies.

Investment advisors from across the country met on Friday in Seattle in hopes of cutting fossil fuels from the stock portfolios they manage.

Seattle Mayor Mike McGinn organized the forum on divesting from coal, oil and gas companies. McGinn wants the city employees’ pension fund to divest because of fossil fuels’ impact on the global climate.

“Isn’t it fiscally irresponsible as well as morally irresponsible to invest in companies whose very business model depends upon destroying the climate we depend upon?” McGinn said.

McGinn doesn’t have control over Seattle’s more than $2 billion in pension funds. That’s controlled by a seven-member board.

No pension board members attended Friday’s forum.

The mayor has tried to exercise the control he does have, however. McGinn ordered the city’s finance director in December not to invest any of the city’s cash balances in coal, oil or gas companies. He also urged the board that administers the Seattle City Employees’ Retirement System to sell off its fossil-fuel investments.

That board voted last month to consider changing its investments for social or environmental goals only if doing so wouldn’t hurt the pension fund’s bottom line.

At Friday’s divestment forum, financial experts said that divesting from fossil fuels need not hurt the bottom line.

“There’s a lot of evidence out there showing that it won’t hurt,” said Craig Metrick, an investment consultant with the multinational firm Mercer. “It’s as much about what you do with the money once you divest, if you’re going to divest, as to whether or not you divest alone.”

Metrick said replacing fossil fuel stocks could even be financially beneficial, especially if burning of fossil fuels is restricted to protect the climate.

“If you’re replacing fossil fuel stocks, performance may be better over certain time periods,” he said.

McGinn said not divesting would leave the city’s pension holders more exposed to the risk of their retirement savings losing value. “They should be concerned if their financial returns depend on doing something that may be regulated out of existence,” he said.

How much of Seattle’s pension funds are invested in fossil fuel companies is unclear, as the investments are typically in mutual funds containing a variety of assets. McGinn said in December that the city employees’ pension funds included at least $17 million in ExxonMobil and Chevron stock.

McGinn’s opponent in the upcoming mayoral election also supports divesting from fossil fuels. Rep. Ed Murray’s campaign said Murray supports divesting only if it doesn’t put the city’s pension system at risk.

At least one investor at the forum questioned the utility of divesting in a long list of energy companies, as the environmental group is calling on cities and colleges to do.

“Divestment itself won’t reduce emissions,” said money manager Jonathan Naimon with Light Green Advisors in Seattle. “If you sell the stocks, but you still buy the fuel to fuel your cars, you’re not really moving the real economy forward.”

Naimon said he favors greening portfolios by shedding the very worst firms but investing in those that have improving records.

“You’ll actually have a larger impact on climate if you engage with these companies and get them not to do bad projects like the tar sands (heavy oil drilling in Alberta),” Naimon said.

Mayors of 12 cities have pledged to divest their cities’ funds from fossil fuels. McGinn was the first.

October 22, 2013

This article can also be viewed on the website here.




A Snowball’s Chance: “Re-Energizing Peabody” Bucks 20 Year Industry Decline

By Jonathan Naimon, Light Green Advisors:


Peabody sales of thermal coal to US utility were in a long term decline along with its stock price before President Obama announced a plan to reduce  US greenhouse gas emissions by 17% by 2020.  While Ms. Doherty is certainly  correct that US politicians including Obama are as unlikely to jeopardize a fuel supply that produces 50% of US power supply, however, the nation’s financially conservative electric utilities have no such qualms and have already reduced thermal coal’s role as fuel for US power consumption from close to 50% to under 40% in last 10 years – faster than the regulatory goals.  The reasons for the utility industry shift are not purely related to climate: natural gas is less expensive on an inflation adjusted basis, natural gas reduces the operational and capital expense uncertainty associated with upcoming EPA greenhouse gas regulations, natural gas does not require determining appropriate reserves for ash waste management, and as a fuel source,  natural gas generates no particulates and contains no toxic and increasingly regulated mercury.

Peabody management realizes the decline of its primary product, thermal coal for the US utility market, is inexorable.  The company’s defensive debt-producing acquisition of MacArthur coal was required to provide its investors with at least some growth in the increasingly Asian market for metallurgical coal used in steelmaking.  The company’s closure of US mines is a reflection of a structural shift away from coal among US utilities and a smaller future US market.

In contrast to coal, the natural gas industry has created billions of dollars of new shareholder wealth above and beyond the wealth destroyed by the coal industry. The natural gas industry has created literally millions of blue collar jobs in an era where few industries do. While technology associated with coal mining and burning has not advanced materially in recent years, the revolution in natural gas extraction technology has led to sizable investment in the US gas industry by many global energy firms from both Europe and Asia. Utility scale combined cycle natural gas turbines can now generate approximately 40% more energy per BTU than commercial coal systems.

Perhaps the most delicious “market-eats-politics-for-breakfast” irony is that according to the International Energy Agency, the US, not Germany, is the sole developed economy that has  reduced its greenhouse gas intensity as a result of a combination of more fuel efficient vehicles, and the substitution of natural gas for coal by electric utilities — in the five years preceding Obama’s recent proposal!

Beyond Copenhagen : Emissions Rate

By Jonathan Naimon, Light Green Advisors:

China president Hu’s recent commitment to reduce the emissions intensity of its growing economy by 40-45% by 2020 holds the key to a new global agreement that will have greater positive impact than efforts to revive the stalled Kyoto Protocol.

Simply put, reducing emissions rates and increasing energy efficiency is the only thing on which all the parties, regardless of their energy base, can agree in Copenhagen.

What’s wrong with a framework based on the inextricable link between energy and greenhouse gas emissions? Energy efficiency and emissions intensity reduction is a goal that is compatible with the growth aspirations of companies and governments worldwide who aspire to the quality of life enjoyed in high energy use countries such as the US, Japan or Europe.

The only way for greenhouse gas emissions to be reduced in any country is for the emissions intensity as measured in CO2/€, CO2/$ or GHG/RMB to be decreased. Therefore progressive reduction of emission intensity of the global economy is a necessary requirement for GHG emissions stabilization.

While critics of emission rate protocols and commitments by governments such as Canada have argued that such reductions not sufficient to guarantee that total emissions go down to a specific level, reductions in emissions rates are required for total emissions to go down on a sustainable basis worldwide.

However, the current Kyoto protocol model, featuring what externally looks like a “tough” absolute emission target – has not in fact resulted in significantly lower emissions in the EU, joint implementation (JI) or Clean Development Mechanism (CDM) economies once economic growth has been factored in. The bulk of the emission reductions that have been achieved have been due to economic recessions as in Russia.

A breakthrough from the right to development/limits to growth stalemate

Why is emissions rate reduction – or its inverse- increasing energy efficiency- a conceptual breakthrough? The short answer is that emission rates provide a practical indicator not only for sovereign states, but for companies whose supply chain and global impacts often span multiple countries.

Increasing energy efficiency and reducing GHG/revenue ratios is a measurable goal that can be incorporated into objectives of both large and small companies that are the global engine for economic activity and job creation. An absolute atmospheric target may be a consensus result, but even advocates would be hard pressed to claim it is related to measurable objectives at the corporate level.

Even in state-dominated economies such as China, specific technology and production choices with GHG intensity impacts are made by companies, and thus it is vital that any metrics for measuring success in climate change be relevant to companies, whatever their capital structure. Emission rates have several advantages over alternative measures.

Emissions rates are a key indicator used by some of the best corporate eco efficiency programs. Back in 1992, the Business Council for Sustainable Development (now WBCSD) coined the term Eco Efficiency to describe programs at companies that serve to decrease the emissions associated with economically productive activities. While companies develop their own eco efficiency programs, tracking energy and reducing the GHG emissions by increasing energy efficiency is a common denominator of many programs that span the vendor supply chain or an integrated service cycle as well as the production cycle in energy-intensive industries. Further information on corporate eco efficiency programs, including a toolkit for companies, is available through the WBCSD.

A second dividend for investors

Nation-states, corporations, and the environment are not the only beneficiaries of a move toward standards based upon a new protocol based upon the global reduction of GHG emission / unit of economic activity rates (what we call GHG/$ as a shorthand). While the investment universe has not developed the expertise of companies in energy efficiency, an increasing number of investors such as the California pension funds CalPERS and CalSTRS are now interested in energy efficiency as a new source of value for equity investors and as a key, along with renewable energy, to a greener economy.

Since 1998, our firm (LGA) has been analyzing corporate energy intensity and eco efficiency to gain insight into competitive advantage in many industries. We have confirmed that the success of corporate programs experience relative to industry peers is related to their financial performance over the past decade. With an increasing number of governments – from China to Canada – looking at emissions rate based analysis, we expect the financial advantage accruing to companies best able to drive down their emissions rates to increase. This corporate competitive advantage can provide both public and private sector investors with insight into how well companies in any market- developed or developing—is doing, as a new type of input, akin to ROE ratios, that change over time but that are common in different currencies and languages.

The future

Almost twenty years from the heady days of the Rio summit, it is certainly clear that energy efficiency is inextricably linked to environmental progress in addressing climate change. The tremendous surge in developing country (e.g. Brazil Russia India and China) stock markets makes it equally clear that any efforts to slow growth in developing markets are misguided.

Global adoption of GHG emissions rate based standards as a basis for gauging compliance with global climate change commitments will accelerate the implementation of energy efficiency and eco efficiency programs at companies, and the adoption of cleaner technologies.

The last 20 years have shown that increasing energy efficiency is compatible with sustained technology development in virtually every industry. It stands to reason that the financial value of these programs, on a global basis, will be magnified substantially by global adoption of energy efficiency and GHG emission rate reduction goals by nation-states signing a new successor to the Kyoto protocol.

Rather than bemoan the end of the Kyoto protocol, we should look forward to the new opportunities that will emerge from a new emissions rate protocol for controlling GHGs, and an even stronger, more global competition to reduce GHG emission rates and increase energy efficiency among countries and companies.

Potential in the Pipeline – FA


By Jerilyn Klein Bier, Financial Advisor (FA Online):

Biofuels buzz has gotten louder in recent months.

The U.S. Departments of Agriculture, Energy and Defense (through the Navy) announced a three-year $510 million joint investment to support the development of drop-in biofuels for aviation and marine applications. The USDA pledged $136 million to support development of advanced biofuels made from non-food crops. Many idled biodiesel plants are humming again with the return of a federal tax credit, and several European airlines have fueled commercial flights with biodiesel.

A number of biofuel-related IPOs have also been launched over the past 20 months including Solazyme, KiOR, Gevo, Amyris and Codexis. A handful of others are in the IPO queue, says Jim Lane, editor and publisher of Biofuels Digest, a Web site and daily online newsletter.

“The fields to wheels universe is big,” says Lane, who estimates that in addition to large and small public players, some 1,200 private companies are also doing some sort of bio-energy work.

But do biofuels carry hope or just hype for a cleaner, greener environment? How far out are we from seeing them used on a large-scale basis? And what opportunities are available for investors in this volatile sector? (Solazyme, Gevo and Amyris were trading approximately 55% to 72% below their 52-week highs as of early November.) 

First-generation biofuels, such as ethanol made from corn and sugarcane and biodiesel from palm oil, have had their share of skeptics. “The real problem is with the food-versus-fuel question. How do we feed 9 billion people by 2050?” asks Ellen Kennedy, a senior sustainability analyst with Calvert Investments. 

It’s not just the socially responsible investing community that’s upset with the upward pressure corn-based ethanol production has exerted on corn prices, demand for cropland, the cost of animal feed, and, ultimately, the prices of other farm commodities. Roughly 40% of this year’s U.S. corn crop will be used to make ethanol and its byproducts, estimates the USDA.

Food concerns also extend to palm oil, which Kennedy notes is a staple in the Asian diet and is being used as a substitute for trans fats. She’s concerned, too, about the life cycle effects related to biofuels. For example, atrazine, a pesticide commonly used in corn production, has been found in Midwest drinking water supplies. 

Ben Caldecott is the head of policy for London-based Climate Change Capital Ltd., an investment manager and advisory group. The firm seeks investment opportunities in companies that will emerge and thrive as the world economy accommodates lower carbon footprints. Caldecott worries about distortion in food markets and destruction of tropical forests for palm oil production. “This is the scandal of our age. How’s that going to save the planet?” he asks. (Kennedy notes that palm oil certified by the multi-stakeholder Roundtable on Sustainable Palm Oil offers greater environmental and human rights assurances.)

“Overall, [current commercial biofuels] have been a negative in terms of climate change,” says Jonathan Naimon, the founder and managing partner of Light Green Advisors (LGA), a Seattle-based asset manager focusing on environmental sustainability investing. Producing corn-based ethanol can require more fossil energy than the energy yielded by ethanol, according to studies he cited from Cornell and MIT.

A rash of industry bankruptcies, including leaders Pacific Ethanol, VeraSun Energy and Imperium Renewables, also makes Naimon cautious. The bankruptcies highlight the industry’s vulnerability to such moving targets as feedstock prices, subsidies and tariffs.

Meanwhile, investors are looking at second- and third-generation biofuels made from feedstocks that can be developed on marginal land and won’t disrupt food markets. Such fuels include cellulosic (woody) plants and algae, and they are raising curiosity and cautious enthusiasm. 

Over the next two years, Lane expects biodiesel and renewable jet fuels will receive increased attention and many companies will launch waste-to-energy initiatives (particularly with municipal solid waste). Within three to five years, he anticipates the greater use of wood biomass, sugarcane and jatropha in biofuels. By the end of the decade, he expects a boom in algal feedstocks, an area that’s received a huge infusion of venture capital the last five years.

“The biofuel space has incredible developments and lots of different opportunities,” says Caldecott, whose firm has funded a number of biomass projects in India and China. In India, it’s building cogeneration plants fired by waste sugarcane biomass that will boost energy production and help community members.

Caldecott is under no illusion that biofuels will solve the world’s energy and climate change problems. There’s only so much that can be produced and not nearly enough to adequately accommodate road transportation. But he does see sustainable, advanced biofuels as a bridging technology that can make a big difference in key areas where they can be dropped into existing engines-especially aviation.

Sustainable bio-jet fuels are currently the only viable option for significantly reducing aircraft emissions without canceling flights, says Caldecott, who co-authored a research report on promoting their development and commercialization while head of the Environment & Energy Unit at Policy Exchange, a large British think tank. Unlike cars, aircraft can’t run on hydrogen or batteries. Thus, biofuels can significantly contribute to 2050 emission reduction targets, he says.

Caldecott also sees much promise in third-generation algae-based biodiesel. Exxon Mobil Corp., BP and Chevron have been developing operations, as have some start-ups in the U.S. “The holy grail would be getting algae to directly produce diesel [without having to go through the refining process],” he says. 

Naimon describes algae as “more of a science project right now,” but he thinks Exxon Mobil’s algae biofuels research and development program, a joint venture with Synthetic Genomics, has potential for commercial scalability in the future. Synthetic Genomics’ CEO, Craig Venter, led the team that decoded the human genome. LGA is invested in Exxon Mobil.

Many companies large and small are testing biofuels made with jatropha and camelina, which Naimon says provide a better energy balance than corn and don’t require fertilizers. However, he’s skeptical these “weedy” plants can be cultivated to scale. “The real problem is there are no plantations of jatropha,” he says. (Lane anticipates jatropha will be grown on abandoned land in India that’s unusable for traditional crops.)

Boeing, one of LGA’s holdings, has successfully tested biofuel blends that included jatropha, camelina and algae. But the primary reason LGA is invested in Boeing is the aviation company’s successful development of the fuel-efficient Dreamliner jet, which is designed to use certain biofuel blends as they become available.

Naimon is also interested in waste-to-energy businesses that convert organic wastes from agricultural and municipal waste streams into usable gas or power. “It’s a challenging industry due to the intersection of energy and public policy issues,” he says, “but the result of not doing waste to energy is that we are using coal for baseload power in the U.S. and around the world.”

Naimon mentions a number of companies that LGA doesn’t currently invest in but which he says are very promising in waste-to-energy technology. Two of them are public companies, Covanta Energy and the ABB Group, a Switzerland-based power and automation technology company (where Naimon once worked), and two are private companies, Farm Power and Harvest Power. 

“It’s very early in the biofuels game, but we expect real investment opportunities over time,” says Chat Reynders, the chairman and CEO of Reynders, McVeigh Capital Management LLC, a Boston-based firm focused on sustainable and socially progressive investing. For now, it’s investing in what he describes as backbone plays in biofuels.

This includes Novozymes, a Danish biotech company that gets most of its revenues from the development, production and distribution of enzymes. Novozymes, whose enzymes can be used with nonedible feedstocks such as switch grass and assorted wastes, can help bring second-generation ethanol closer to the industrial arena, says Reynders. 

Farm equipment manufacturer John Deere is another holding. “The farm is becoming much more of a high-tech place. … This is a backbone play on rethinking what the farm is and what crops may or may not be used,” he says.

The idea of replacing food with wood crops, algae and farm waste for advanced biofuels is attractive to Reynders. Should gasoline prices rise, he thinks we’ll see relatively immediate acceptance. But if gas prices fall, he thinks subsidies will be needed to support such biofuels.

Reynders is very excited about algae. One acre can yield about 5,000 gallons of biodiesel, he says, while an acre of soybeans can only generate 40 gallons and an acre of corn yields only 400 gallons of ethanol. Seeing algae proved on an industrial scale is a must. “Maybe we’re a little conservative, but we want to see the rubber hitting the road a bit more [before investing],” he says.

He’s closely watching the algae developments of the oil and gas majors, Solazyme, Sapphire Energy and smaller private companies looking to get patents for growing algae. A pickup in the economy could bring more partnerships, a freer flow of capital and more research dollars, he says.

Trillium Asset Management, which is solely devoted to sustainable and responsible investing, hasn’t invested in ethanol. Monocropping (which degrades farm-rich soil), petrochemicals, pesticides and food security issues “decreased the benefit of biofuels right out of the gate,” says Natasha Lamb, a Trillium equity analyst in alternative energy and technology. The firm also tries to avoid genetically modified organisms (GMOs) and most corn is genetically engineered.

Lamb finds some of the new cellulosic- and algae-based technology compelling. As for investing, “it’s a bit of a wait-and-see approach,” she says. Much analysis is still needed on how much energy it can provide and how much extra carbon it can pull from the atmosphere.

She recently met with Solazyme and KiOR. Solazyme, which feeds sugar to algae, has focused on applications in soaps, perfumes and cake mixes. “It’s interesting, but they’re not really solving the energy crisis issue yet,” says Lamb. KiOR adds its proprietary catalyst to biomass to produce a crude oil substitute. Lamb has some concerns about the biomass it uses, from white pine trees, and would like to learn more about the company’s plans for replenishing them. 

“Biofuels are definitely something to look at [but] they’re not a panacea, sums up Caldecott of Climate Change Capital. He hopes that interest in advanced biofuels won’t draw attention from technologies that could potentially play a bigger role in lowering carbon output, such as electric vehicles and hydrogen fuel cells. Additionally, he says, “This is a complicated space. We need visibility on sustainability criteria as soon as possible to help provide investors with comfort.”

December 2, 2011. Article on FA website can be viewed here.

Leading the Charge – Barron’s


By Tom Sullivan, Barron’s:

High summer gas prices may help drivers decide that this is the year to test drive an electric vehicle (EV). But until charging stations replace gas stations, EV adoption may lack juice. So, who will develop the infrastructure necessary to support electric cars?

“We sure hope that we do,” says Colin Read, vice president of corporate development at ECOtality (ticker: ECTY), one of four key players taking on the largest deployment of electric-vehicle-charge infrastructure in history.

The San Francisco-based pipsqueak lost $1.78 per share last year on revenue of $14 million, and despite its size, in 2009, it beat larger competitors Aerovironment and Coulomb Technologies, winning the U.S. Department of Energy’s largest single grant to deploy EV-charging stations ($99.8 million to install 14,000 chargers in 18 cities). “ECOtality won, because [it is] more attuned to the retail market,” says Jonathan Naimon, managing partner at Light Green Advisors.

In May, the company installed its first 1,000 residential charging stations on the West Coast, and recently opened commercial charging stations (direct-current, fast-charging stations set up like gas stations) in Oregon and Arizona, and announced a pilot program in which Sears will install the chargers in 10 of its parking lots.

Folks in the Northeast may wonder why all the infrastructure seems to be happening out West. It seems that plug-in vehicles are better suited to “temperate” climates, because running the car’s heater prematurely drains the vehicle’s batteries—significantly more so than running the air conditioner.

June 18, 2011

This article can also be viewed on Barron’s website here.

Re-thinking Eco-Friendly Investing


By Ellie Winninghoff, Seattle:

A new kind of fund sees green in some surprising sectors.


Cross a Wall Street quant, an investigative reporter and an environmental activist and what do you get? Light Green Advisors LLC (LGA), the sometimes politically incorrect but always common sense eco-investment firm co-founded and run by 47-year-old Jonathan Naimon.

Naimon’s hardly a household name. His approach to picking companies by looking in detail at a company’s environmental record has, for years, been available only to institutional investors. But among insiders Naimon is recognized as a pioneer in the rapidly growing field of environmental investing.

“Jonathan is the unrecognized and unsung godfather of the second stage of environmental investing,” says Richard House, who worked on a similar approach for the Center for Financial Innovation, a U.K.-based think tank. “He contributed the underlying intellectual equity and gravitas of the environmental investment movement and gave away the core ideas that other people have turned into an industry.”

Naimon’s approach may soon increase its popularity in the U.S. In December, LGA began offering, together with Chicago-based Claymore Securities, a fund aimed at consumers.

However, the approach is controversial. Included in Naimon’s “environmental” picks are defense companies like Boeing and oil companies like Exxon. These are companies that would most likely be excluded by many “socially responsible” funds. Naimon’s rationale is: instead of excluding an entire business sector, why not choose the most environmentally responsible companies in every sector based on concrete data? British Petroleum does not qualify, Naimon says, because, despite its superb advertisements about climate change, it has a poor environmental record. BP’s pipeline in Bellingham exploded in 1999, and the company has faced criminal penalties for violating environmental laws in Alaska. Picking the best of every sector, Naimon argues, gives companies an incentive to improve their behavior, rather than just do a better job of marketing.

“The reality is that we really use plastics and metals,” says Naimon. “Getting a 5-percent improvement in terms of material use efficiency in the metals industry has a bigger impact than all the windmills in the U.S.” Not only do such measures save energy, he explains, they also boost profits.

For the last five years, LGA’s Eco-Performance Portfolio of 80 stocks has beaten the S&P 500 benchmark by 1.62 percent, and has outperformed the Domini Social Index, an index that measures the performance of socially responsible funds, by nearly 27 percent.

“LGAs assessment tool is an indicator of good corporate management and good environmental stewardship,” says former Washington Treasurer Dan Grimm, an LGA investor and director at Doughty Hanson PLC, the U.K.-based private equity firm. He has a simple explanation. “It maximizes profitability and minimizes liabilities.”

Green practices boost finances 

To have an advantage in stock investing, you need information that others don’t have, says Glenn Anderson, senior vice president of Institutional Investments in Structured Products for the EFG Bank in Sweden. “That’s what (Naimon’s system) is.”

Almost every step of Naimon’s career has contributed to the development of his investment system. After graduating from MIT, Naimon worked for the House Energy & Power Subcommittee in Washington, D.C. His mentor there was Peter Hunt, who created the Corporate Auto Fuel Efficiency (CAFE) standards now widely used. Later, he obtained a master’s degree in environmental management at the University of North Carolina.

The next stop was ICF Consulting Group, Inc., where Naimon conducted economic analyses of environmental regulations in the metals, wood preserving and biotech industries. The analyses were used by the Environmental Protection Agency. “Somebody has to do an analysis, so you don’t bankrupt the country,” Naimon says.

Naimon discovered something odd. Everybody assumed there was a trade-off between doing the right thing for the environment and doing what was best for the economy. The assumption was that environmental regulation would stunt growth. But Naimon saw no such correlation.

His next job was with Asea Brown Baveri Environmental Services, where he studied ways to prevent oil spills. It was here that Naimon realized the entire notion of cost-benefit analysis was flawed. “A lot of technologies – like secondary containment around ground storage tanks –were actually saving companies money,” he says.

When the Exxon Valdez oil spill exposed Exxon to billions of dollars in liabilities, institutional investors clamored for a way to avoid such environmental risks, recalls Scott Fenn, formerly of the Washington, D.C.-based Investor Research Responsibility Center (IRRC) and now managing director of policy at Proxy Governance Inc., based in Vienna, Va. Fenn hired Naimon to find a way to quantify the risk and turn it into IRRC could sell.

“Nobody had pulled together the available data and assembled it so it could be useful,” says Fenn. “Jon was familiar with where the EPA had its data hidden away and how to get access to it.”

It took three years, a team of analysts and $1 million. The group collected government data, such as the volume of toxic releases and the number of oil spills for each company. Like an investigative journalist, Naimon had to request the information under the Freedom of Information Act. “They don’t just give it to you,” he explains.

Teaming up with Mark Cohen, a conservative economist from Vanderbilt University, Fenn and Naimon conducted a five-year study to determine the relationship between environmental compliance and 12 measures of financial performance, including returns on assets and equities. Their conclusion was that, over time, companies with a demonstrable environmental advantage performed better financially.

The analysis became the basis for the notion of “best of class investing.” The idea is that companies should be judged based on how environmentally responsible they are relative to the other companies in their sector. For example, rather than ban all power companies that use nuclear power, you would choose the ones whose facilities are managed in the most environmentally responsible way.

“It’s a risk management idea,” Naimon says. “It’s similar to the type of analysis insurance underwriters routinely do.”

The approach appeals to institutional investors, who prefer a diversified portfolio to help balance risk. But Naimon argues that his approach is also more effective at inducing change. “If you have a standard like no clear-cutting,” he says, “you cut out all the commercial forestry products in the world.”

industry are not asked to compete with somebody in banking,” he says. “You are not asking them to do impossible things – only things their competitors are doing who are in business to make a profit in that industry.” That approach, he argues, isn’t going to persuade forestry companies to become more responsible. Former Sierra Club Chairman Michael McCloskey, an original LGA board member and investor, favors the “positive” approach for another reason. “People in the chemical

Naimon also considers his approach more holistic. “The idea that there’s a clean sector and dirty sector is fundamentally naive,” he says. “You think electricity is clean? Look behind the switch. It’s a coal mine.”

But Pierre Trevet, managing director at Innovest, an environmental research firm based in Toronto, complains that Naimon’s focus is too compliance-driven. Looking at how well a company has complied with various regulations isn’t necessarily a good determinant of the company’s overall impact on the environment.

But Naimon defends the approach, insisting that his research shows compliance is highly correlated to financial performance. He says he supplements that research by looking at a firm’s ecological footprint – including more than over 300 types of chemical emissions as well as nontoxic waste generation. What’s important, says Naimon, is not just the total amount of a company’s emissions, but also whether it is taking effective measures to reduce those emissions.

Europe says “yes” U.S. “maybe”

In 1992, Naimon hit the conference circuit to evangelize his approach to investing. The United States was not receptive, but Europe was another story. Naimon moved to Oslo to teach at the Norwegian School of Management and to consult. Two of the companies he worked with – Storebrand (the Norwegian insurer) and Union Bank of Switzerland (now UBS AG) – subsequently used his approach to launch “best of class” funds. Today, more than $10 billion is invested in a variety of European sustainability funds that define “best of class” in different ways.

 Not so in the U.S., where such a strategy is exceedingly rare. In December l997, Naimon moved to Seattle to start LGA with Mark Sten, co-founder of The Hartman Group, the health and wellness market research firm. LGA was committed to providing U.S. investors with true “best in class” investment products that tapped the competitive advantages of environmental leadership.

The firm’s first institutional product, the Global Eco Index, was composed of a global set of firms that LGA selected for the way they addressed the top sustainability challenges for their industry (e.g., Anglo-Dutch Unilever was selected for taking on sustainability of its fish supply). LGA developed an 80-stock 500-based product called the Eco Performance Portfolio for U.S. investors seeking best-in-class opportunities. Maine, the first state in the country to move from green grandstanding to green investing, selected LGA to help it invest in green companies. California’s pension funds have launched their own, larger “green” investment initiative. During the last six months, over $1 billion has been invested by individual investors in alternative energy ETFs, a popular type of fund. In December an ETF based on LGA’s Eco Index will be launched. Perhaps the green investment wave in the United States is finally beginning to break.

 December 28, 2006