GREEN IS GOOD, FOR RETURNS
DO-GOODERS WANT TO INVEST SUSTAINABLY TO SAVE THE WORLD. KARINA FUNK DOES IT TO MAKE MONEY.
Do-gooders want to invest sustainably to save the world. Karina Funk does it to make money.
As Karina Funk sips a can of raspberry seltzer, she extols the virtues of Ball Corp. of Broomfield, Colorado, which manufactures 43% of the aluminum beverage cans made in North America. The portfolio manager has a big stake in Ball, and she thinks its approach to environmental sustainability gives it a competitive advantage. “They design the top so that it has structural integrity, using less material—that’s a cost advantage,” she says between spoonfuls of lentil soup.
She explains that aluminum is easier and cheaper to recycle than plastic or glass, partly because much less water is used. “Ball is growing in Brazil and helping some of those regions meet their sustainability goals in the shift from glass to cans.”
Funk is in charge of the $1.1 billion devoted to sustainable investing strategies at the Baltimore money manager Brown Advisory. The 45-year-old vegetarian, who works in the firm’s Boston office, cares deeply about the environment—she rides her bike 7 miles to work every day, even in the winter. She and her husband own just one car for their family of four, and they use it only twice a month. Funk manages Brown Advisory’s Sustainable Growth Fund with her Priusdriving comanager, David Powell. They’re both passionate about sustainability, but when it comes to their fund, making a positive impact on the environment is secondary. “Sustainability is a means, not an end in and of itself,” Funk says. “Our end goal is performance. We achieve that by finding fundamentally strong companies using sustainability strategies to get even better.” Since its 2009 inception, Brown’s Large-Cap Sustainable Growth strategy, which holds 34 stocks, has returned 15.6% net of fees annually, compared with 14.5% for the Russell 1000 Growth Index. Although it’s a small piece of Brown Advisory’s $60 billion in assets, it has ballooned 50% since January.
Funk grew up in Indiana but spent many summers in her mom’s native Bolivia. She was inspired by the beauty of the Andes but disturbed when she saw open-pit mines dribbling toxic runoff. She graduated from Purdue with a degree in chemical engineering and then spent a frustrating year working as an environmental engineer. “I was the last person any shift manager or business leader wanted to see or spend time with. I was nothing but a cost sink,” she said in a 2015 TEDx Talk. “They just wanted
me to measure their emissions, rubber-stamp compliance and regulations and get the heck out.” She landed at MIT in 1995 to get master’s degrees in both civil and environmental engineering, and technology and policy. After a few environmental-related stints in consulting, venture capital and institutional investing, in 2007 she became an analyst at Winslow Management, a greeninvestment specialist. Brown Advisory, formerly a part of the investment bank Alex. Brown & Sons, acquired Winslow in 2009.
Funk and Powell’s approach is to find companies that fit three criteria: strong growth prospects, attractive valuation and a proactive investment in sustainability strategies—not just to reduce risks and protect against phenomena like climate change but to seize economic opportunity. Funk says some of the top U.S. companies have told her, “Here’s our sustainability report. Look how much renewable energy we use.” She typically responds, “Okay, why does your CFO care about that?” If they don’t have an answer—if the company isn’t making the connection between long-term sustainability strategy and long-term business strategy—she doesn’t invest.
Environmental, social and governance (ESG) investing means different things to different money managers (see story, p. 100). Many screen out entire industries like fossil fuels and tobacco, and some focus on corporate diversity. Funk and Powell concentrate on environmental and economic development aspects, essentially the “E” and the “S.” Although they don’t own any tobacco, alcohol, gaming, weapon or fossil-fuel companies, they don’t have a rule against investing in them.
One of the fund’s biggest winners has been Ecolab, which makes, among other things, dish-cleaning chemicals for restaurants. It has invested heavily in research and development to reduce the amount of water and energy needed to clean dishes. Its customers have noticed. The fund first invested in Ecolab in 2010 at $47. Today it trades around $130.
American Tower first attracted Funk for its barriers to entry. “I was salivating at their business model,” she says. “They own and operate cell towers. They have huge cash flow and a highly visible revenue stream because when a carrier like AT&T or Verizon needs coverage, there’s not a whole lot of choice. People don’t want more than one tower in an area.”
Funk started to seriously consider investing when an analyst discovered that American Tower claimed to exceed EPA standards. She says she asked senior executives why, and they explained it was helpful in getting permits. They also said they were investing in renewable energy like solar so that they could reliably deliver cell service in emerging markets.
Funk and Powell call a company’s alignment of business and sustainability strategy its “sustainable business advantage.” In order to invest, they need to be convinced the advantage will lead to revenue growth, cost reduction or improved brand value. Some otherwise attractive investments don’t make the cut. Powell thinks Sherwin-Williams is a “fantastic paint company,” but its sustainability report, which mentions things like composting in the break room, doesn’t appear to make a difference to its bottom line. Conversely, Tesla’s disappointing cash flow and Funk’s doubts about its scalability have kept the otherwise environmentally friendly stock out of their portfolio. A top holding, Alphabet, has data centers that are 50% more energy-efficient than its peers’ because it optimizes the way data is stored and accessed. Facebook is also a top holding, despite recent research showing a link between usage and declining mental health. “No investment is pristine,” Funk says. She cites the global efficiencies generated by Amazon’s fast-growing Web services as a reason to own the stock, despite its workplace transgressions. What about gender and ethnic diversity? Funk is forced to ignore it because screening for companies with 20% or 30% female board representation would leave her with too few options.
For investors, the message is clear: Check the returns, then pick your poison.
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