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Market Embraces Environment-Friendly Funds

September 22, 2000
Japan's "ecofunds" are investment trusts that plough the bulk of their funds into the shares of companies whose business practices they consider to be environmentally sound. These "environment-friendly financial products" debuted in Japan in August 1999 and have proved popular with investors; as of May 2000 the five trusts had already attracted over 200 billion yen (1.8 billion U.S. dollars at 110 yen to the dollar) in investments. Ecofunds are now offered by regional banks as well as major securities firms and leading commercial banks. This growing trend is forcing corporations to step up their environmental efforts. The time has come when corporations are judged on their environmental as well as their business performance.

Investment Tops 200 Billion Yen
Ecofunds differ from other trusts in that decisions about which companies should be in their portfolios are based not just on financial criteria, such as business results, but also on the companies' overall environmental considerations, including their environmental policies and accounting standards, whether their parts and raw materials are environmentally friendly, and their recycling efforts. These ecological judgments are mostly undertaken by independent assessment firms. Based on such criteria, these trusts have chosen to invest in about 50 to 100 of the approximately 3,300 companies listed on the stock market or traded over the counter.

The first ecofund in Japan--the Nikko Ecofund--went on sale in August 1999 and initially attracted more than 20 billion yen (182 million dollars), much more than expected. Four months later, at the end of 1999 that amount had topped 100 billion yen (909 million dollars). The vast majority of people who have invested in the fund are individuals, more than half of them women. At first, the only financial institutions that offered these products were major securities firms, top commercial banks, and trust banks, but this range has now expanded to regional banks and others. In line with this expansion, the number of ecofund products has also risen, with five trusts on offer as of May 2000.

The ecofunds have all performed reasonably well. From the time of their inception to the end of April 2000, most of them have seen the stocks they carry rise higher than the TOPIX index of all companies listed on the First Section of the Tokyo Stock Exchange. Because 80% to 90% of the trusts consist of stocks, though, they run the risk of depreciating in value.

Twin Corporate Concerns: Profits and the Environment
Japanese ecofunds are following in the footsteps of the trend in Europe and the United States for socially responsible investment in companies that make positive contributions to society, such as through their environmental and employment policies. Since the Japanese ecofunds have not been around for long and are mainly aimed at those with little experience investing in stocks, however, most of the companies offering them are conscious of the dual expectations of investors--kindness to the environment and profitability. Most of the principal stocks in ecofund portfolios are therefore blue-chip companies from a variety of industries. Decisions about changing the lineup of stocks in the portfolios are mostly based on company results.

Some incidents reveal how difficult it is for the trusts to balance profits with environmental protection. For example, in March 2000 there was a serious accident caused by a pipe-laying error, in which waste water containing highly concentrated levels of dioxin was released into a river by a major environmental machinery manufacturer. The company had a good environmental record, having, for example, met international standards for environmental management. All the trusts had about 1% to 2% of their funds invested in this company, but after the accident the firm's share price fell sharply and affected the market value of the ecofunds themselves.

Ecofunds are also changing corporate management styles. The funds have begun receiving inquiries from some corporations as to why their stocks have not been included in the funds' portfolios, and more and more firms are actively seeking certification from environmental assessment firms.

Financial institutions are now looking to launch new ecofunds. As the number of ecofunds rises, investors will become more choosy about where they invest their money, which could lead to the funds' placing even greater importance on environmental considerations. Corporations will therefore face further pressure to pursue profit in harmony with, rather than at the expense of, the environment.

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Trends in JapanCopyright (c) 2000 Japan Information Network. Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.