IF YOU NEED evidence of Man Group’s commitment to combating climate change, try organizing an interview with CEO Peter Clarke. When Euromoney proposes to fly from New York to London to speak to Clarke, it is gently suggested: “How about doing this on a video conference call from our Rockefeller office in mid-town instead? We’ve upgraded our video conferencing capabilities. We’re trying to do as much as we can to reduce the need to fly people around the world. It will save on carbon emissions.”
The focus on becoming an environment-friendly organization was championed by Stanley Fink, CEO of Man Group from 2000 until March 2007, when he stepped aside to become non-executive deputy. Thanks to Fink and other trailblazers in the company, says Clarke, “we were early along the curve at seeing the compelling signs of the likely economic impact of global warming as well as the social impact. There are clear adverse GDP consequences of global warming, and the scale of what needs to be done to slow it down is daunting.”
Under Fink and Clarke’s tutelage (Clarke was formerly Man’s deputy CEO), the firm has taken several initiatives to make the company greener. In most of Man Group’s offices waste is tracked, refuse is recycled, electrical appliances are energy efficient and there are climate control systems to save energy. At its London headquarters, Man has recently taken steps to make its basic power supply more efficient, thereby reducing fossil fuel use. About two-thirds of its basic power supply now comes via its electricity provider on a green tariff, which supplies electricity primarily from renewable sources, such as hydro, biomass and wind. The other third now derives from a newly installed on-site gas-fired generator, which produces electricity at a hefty 80% efficiency rate. That compares well with the roughly 30% efficiency normally delivered by electricity providers.
Employees are encouraged to reduce their household carbon emissions. Man offers, at a discount, the opportunity for employees to have a carbon emissions expert visit their home and advise on how to reduce carbon emissions. The firm has also rolled out a user-friendly carbon calculator on its intranet that enables staff to work out how much it would cost to offset their personal carbon emissions, with Man meeting half of the cost.
Man Group neutralizes its own carbon emissions through offsets. Its primary offset project is a tyre manufacturing plant in southwestern India that used to run on fossil fuels but has switched to biomass energy. The project is one of the few approved by the Gold Standard methodology, which is managed by a global group of non-governmental organizations and ensures that approved projects have positive social and financial consequences for local economies. Further emissions offsets have been purchased for a project that encourages sustainable agricultural and forestry practices in Mozambique.
Such efforts to reduce and offset Man’s 13,000-tonne annual carbon footprint helped make the group the first (and still sole) carbon-neutral hedge fund in April 2007.
Man Group has also been taking its commitment to reducing the effects of global warming beyond its own corporate measures. It has joined forces with the UK prime minister’s office and a dozen UK household names such as retailer Marks & Spencer and high street bank HSBC to promote products for the home that save on energy consumption or otherwise help the environment. And Man has sponsored the first annual Man Group International Climate Change award, which highlights the efforts of a company or organization from anywhere in the world that demonstrates innovation and leadership in the battle against climate change.
If all this sounds a bit warm and fuzzy, think again. You won’t see Clarke hugging trees. Being green is good for business. “We’re not fanatical,” he says. “It’s about being sensible and pragmatic and setting a good corporate example. Further, whenever we speak with investors about environmental investment opportunities there is a very positive reception.”
Feedback from Man’s investor base strongly supports the company’s foray into environment-friendly activities, particularly in demonstrating innovation. Man says it cannot definitively claim that this new initiative, or the firm’s overall corporate support for combating climate change, has supported its share price. But Man’s shares, which trade on the London Stock Exchange in the FTSE 100 index, have certainly not been hurt by its green stance, having doubled in price in the past 18 months. Since the company floated in 1994 it has enjoyed a hefty 18-fold rise overall.
With its own house in environmental order, the group is now committing additional resources to the fast-growing environmental finance sector. It is doing so through two routes – first, via a newly formed team in its London-based central investment management (CIM) unit that is focusing on direct investments in environmental projects, and second via a dedicated unit in its primary fund of funds house, Zurich-based RMF. Together the groups at CIM and RMF plan to more than triple their size by the end of the year, to 12 professionals.
Private equity propositions
Man’s CIM team, run by Man veteran and former Schroders M&A banker Nick Wood, launched its first big product in April, targeting institutional investors in most leading markets. Called the China Methane Recovery Fund, the investment supports an ambitious project in China involving the capture of methane gas at coal mines and other locations. Methane, which is more than 20 times more potent than carbon dioxide as a contributor to climate change, is a natural by-product of coal production. Under normal conditions in China, coal miners simply burn off the gas or, worse, vent it into the atmosphere. The fund invests in technology that captures methane and then uses it for efficient production of electricity, which is sold to Chinese utilities. But what really makes the fund economically interesting to clients is the added revenue kicker – carbon credits awarded under the Kyoto Protocol agreement.
“These credits can be sold up to 2012, when it becomes unclear what will replace the Kyoto Treaty. Risk associated with that transition, however, can be properly hedged,” says Clarke. “Overall the returns should be in the mid-teens, and carbon credit prices are readily available so investors can see what they are getting.”
Besides allocating money directly to the fund, Man has taken an 80% stake in the fund’s management company, MTM Capital, a boutique fund manager. MTM specializes in investment prospects in China, with offices in London and Beijing.
“The risk levels around the China fund are comparatively low, as the technology is well proven and MTM has well-established ties with the appropriate Chinese authorities which have been developed over a long period of time”, Clarke says.
The challenge of putting together just one fund – the methane recovery fund is able to accept only a few hundred million euros in investment – indicates the resources required to make a substantive entry to the environmental finance sector. “We are looking for these types of long-term projects but the challenge lies in finding projects that are robust and offering persistent and good returns,” Clarke says. “Let’s not forget that we’re asking investors to put their money into emerging markets in this case. We need expertise and experience and a scaleable proposition. We don’t want to be in the technology game or the venture capital sector. We’re not about to take a leap of faith on our investors’ behalf.”
Further, any preconceptions about investors in green finance products accepting a lower return because it was somehow good for the planet went out of the window quite quickly.
“Most investors expect appropriate levels of return for a given risk, regardless of the environmentally positive attributes of the project,” says Clarke.
Hedge fund opportunities
At RMF, the Swiss leadership team has been rapidly expanding its new alternatives unit, led by former energy trader Michelle McCloskey. For more than a year the team has been scanning the hedge fund landscape for well-run funds that are plying environmental territory, with the goal of constructing a fund of funds around them. Until recently that territory has been the purview of less-liquid investment styles with long lock-ups or the equivalent, such as venture capital, private equity or simply direct investments. “A year ago only about 10 hedge funds existed in the world that truly focused on environmental issues and had some hope of limiting climate change or making a difference overall to the environment. We’ve seen that number more than triple as client interest has grown exponentially. That means we now have the critical mass necessary in the industry to offer our first product to investors,” says McCloskey.
RMF is in the process of launching this product, which will allocate client money to a group of funds that focus on four areas: carbon and emissions trading, water resources and infrastructure, clean technology, and renewable energy. It will be aimed at institutions and family offices in RMF’s traditional client bases of Europe and Asia Pacific/Japan, but also in the US and other mature markets. RMF believes this is the first pure play fund of hedge funds that focuses solely on environmental opportunities.
“This is just the start for us, as we intend to roll out several additional products in the years ahead,” says McCloskey. “We will be able to do so because we believe the number of quality new managers in this space will continue to grow substantially. A further factor supporting that growth is that we are seeing entire new industries being born in the wake of governmental action focused on the effects of pollution and resource scarcity. Hedge funds are well positioned to take advantage of that.”
Partnership
That Man Group, the world’s largest hedge fund group, is dedicating so much time and money to building out an environmental finance business is a clear sign that there is investor appetite for such products, and that there is money to be made. “We’re not embarrassed about this being a business proposition,” says Clarke. “There is a large GDP cost to global warming, and there is a pot of money out there that needs to be spent on coming up with solutions. And it’s not governmental money at this stage. There are many phenomena occurring globally that are creating shifts in capital flows around the world – the dollar not being the primary currency of debt issuance of choice, the dollar market not being the primary equity market, the development of China, for example. All those shifts create opportunity. And I see the environment and climate change as being another one of those places to which capital is being shifted, and I don’t see that stopping.”
There is, of course, a natural suspicion that such products are being created merely to take advantage of a growing social conscience regarding global warming. Clarke agrees that investors should be aware of this. “The sceptics will say that investment firms are simply creating a lot of hot air around these products, and that some may be meeting demand with superficially attractive products.” But it actually demands a lot of work to put together a good investment proposition in the environmental finance sector. And, yes, some strategies that claim to be environmentally positive might not actually be so, and might not be able to produce the returns they claim. Investors need to do their due diligence.
“But you shouldn’t let that scepticism, which is natural and healthy, undermine the basic proposition,” says Clarke. “With proper construction you can build something meaningful and do something constructive at the same time. Yes, it is a business proposition but at the end of the day we are doing something constructive.”
And who better to create solid business propositions in environmental finance than alternative investment firms? Clarke says: “Finding new sources of uncorrelated returns is what hedge funds do, and there are opportunities within environmental finance. In addition, hedge funds are used to dealing with difficult investment opportunities, creating innovative products and working on an international level. Also, the complex hedging and liquidity characteristics of these investments make them suitable for alternative investment managers given their wide mandates and their ability to offer tailored investment solutions to investors. For private equity firms there are opportunities as well, for some long-term projects that will offer significant paybacks. All this means that alternative investment products and environmental finance are in fact proving a very good match.”
