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July 16, 2008

The Very Rich Green Their Portfolios

With European and Middle Eastern investors leading the way, high-net-worth investors are putting their money into green technologies and alternative energy sources.

SocialFunds.com -- Double-digit millionaires. Triple-digit millionaires. Billionaires. High-net-worth individuals or HNWIs. The very rich. The ultra-rich. No matter what you call this group of people with at least $1 million in financial assets, their numbers are growing. The 12th annual "World Wealth Report 2008" released by Capgemini and Merrill Lynch states there are over 10 million people globally with at least $1 million of financial assets in 2007, an increase of 6% over 2006.

While emerging markets and IPOs saw strong growth from HNWIs in 2007, HNWIs invested in safety last year with 44% of their financial assets in cash and fixed income securities. Uncertainty in 2007 lead these investors away from alternative investments, such as hedge funds, although hedge funds still make up 30% of alternative investments.

Yet even with 2007's market uncertainties, green investing show marked growth in 2007 among the very rich. The "World Wealth Report 2008" postulates the growing awareness of climate change and new investment opportunities in green investing has lead to the growth in green sectors investments, with more growth to follow in coming years.

"Growth in green investment is expected on the basis of growth in the green sector," said Ileana van der Linde, Principal, Wealth Management Practice at Capgemini Financial Services. "Looking ahead, environmental concerns and means of sustainable development will increasingly weigh on business and investor decisions. That coupled with the sheer size of the energy market and the fundamental need for energy to drive economic growth underpins the long-term viability of green investing."

Individual venture investors pumped $5.2 billion in 2007 into the green sectors globally. In the US alone in 2007, $3.9 billion was invested in green technology.

Worldwide, 12% of HNWIs allocate part of their portfolios to green sectors including alternative energy. Fourteen percent of ultra-HNWI investors-those with $30 million in financial assets-have part of their portfolios invested with green companies. HNWI investors in Europe and the Middle East lead the way in green investments. While only 5% of North American HNWIS show a green portion of their portfolio, 17% of European HNWIS are invested in green and 20% of Middle East HNWIS have some green investments.

"In line with the scope of analysis, this report does not address the regional differences in HNWI preferences at a granular level, nor does it attempt to explain variations in social or cultural motivations across regions," van der Linde told SocialFunds.com. "That said, possible explanations may lie in European culture's longstanding commitment to environmental preservation and the development of green initiatives, while Middle Eastern economies may want to retain their historical positions of net providers of energy into the future by pioneering green initiatives and/or implementing economically viable solutions on a mass scale," continued van der Linde.

The wide range of definitions applied to green investing makes sizing the green sector very difficult the report notes, with both "best in class" oil rigs and new clean technologies called "green."

More telling perhaps as a measure of interest in the environment is the increase of socially responsible investing (SRI) among the rich and very rich suggests "World Wealth Report 2008." However, although the green and SRI markets can overlap, they are distinct and conclusions drawn from SRI market research can't necessary be applied to the green sectors.

HNWIs and institutional investors accounted for over 70% of the $2.71 trillion SRI assets under management in 2007 Merrill Lynch and Capgemini's report offers. The report states, "Given the high development risk associated with the sector, green investing caters largely to institutions and HNWIs-more sophisticated investors willing to assume greater financial risk in hopes of high returns."

Returns are the number one reason for HNWIs to invest with green companies although SRI motivation changes from region to region. Explained van der Linde, "slightly more than one-half of HNWIs globally allocate to green investing primarily on the basis of investment return, whereas roughly one-third point to social responsibility as their motivating factor. This trend holds true in all regions but North America, where a majority of HNWIs claim social responsibility as their primary reason for participating in green investing."

The renewable energy sector had record IPOs in 2007, with overall investments in clean technology increasing by 35% to $117 billion.

The changing energy market and concern for the environment will continue shape and grow the green sector concludes the report.

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