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April 03, 2003
When Lightning Strikes: Portfolio 21 Applies The Natural Step's Sustainability Theories
    by William Baue

Portfolio 21 applies environmental screens based on the principles of the Natural Step, which promotes sustainability.

Socially responsible investment (SRI) firms base their investment decisions not only on companies' financial performance, but also on their environmental and social performance. Portfolio 21 (ticker: PORTX) takes this strategy one step further. It bases its investment philosophy on the Natural Step, a set of scientific and economic principles that promote sustainability.

Dr. Karl-Henrik Robčrt, an oncologist in Sweden, founded the Natural Step in 1989 after recognizing that increasing environmental toxicity was leading to a rise in childhood leukemia cases. In the early 1990s he collaborated with physicist John Holmberg to establish the Natural Step framework, which provides a blueprint for the establishment of a sustainable society based on the laws of thermodynamics and natural cycles.

Paul Hawken, author of Natural Capitalism, helped export that blueprint across the Atlantic in 1995 by serving as chair of the U.S. arm of the Natural Step. Two years later, investment advisors from Progressive Investment Management, the firm that founded and manages Portfolio 21, attended a Natural Step training session.

"Usually, when people go through a Natural Step training, a bolt of lightning strikes and they 'wake up' to the ecological crisis in front of us," said Carsten Henningsen, chair of Progressive Investment Management. "Hopefully, they awaken with an action plan or solution."

"That's what happened to us," Mr. Henningsen told "We said to ourselves, 'Obviously, we should create a portfolio of companies that also recognize the ecological crisis and are implementing sustainability strategies into their business practices."

In addition to applying standard SRI screens covering such issues as tobacco, gambling, nuclear energy, weapons, human rights, and community involvement, Portfolio 21 developed environmental sustainability criteria that distinguished it from other SRI funds.

"It took us a year to develop the criteria on how to evaluate these companies from a sustainability perspective," said Mr. Henningsen. "When we began applying our criteria to the selection process, we looked at over 2000 companies, out of which we've been able to qualify 52 so far."

"This gives you an idea of how stringent the screening is and how few companies really do 'get it.'"

One company that "gets it," according to Mr. Henningsen, is the Swedish household appliances manufacturer Electrolux (ELUX), the world's largest producer of washing machines.

"Electrolux has completely embraced the Natural Step philosophy throughout the entire organization, right down to R&D [Research and Development]," said Mr. Henningsen. "As a result, they now have the most efficient washing machine in the world in terms of water usage."

Once Electrolux developed that technology, it looked at global market demand and found that China is currently purchasing 25 percent of all washing machines in the world.

"They projected the number of washing machines that will be sold in China over the next several years and the resulting water usage, and told the Chinese government, 'At that rate, the Yangtze River won't make it to the ocean,'" explained Mr. Henningsen. "The Chinese government now requires all washing machines sold in China to meet a water efficiency standard that only Electrolux does."

The Electrolux example illustrates how embracing sustainability can create competitive advantage and thereby contribute to the bottom line. Portfolio 21's performance since inception exemplifies this same point.

"Since the fund was started in September 1999 through the first quarter of this year ending March 31, it has outperformed both its benchmark, the Morgan Stanley World Equity Index, as well as the S&P 500," said Mr. Henningsen.

Portfolio 21's holdings include Whole Foods Market (WFMI), Wild Oats (OATS), and Horizon Organic (HCOW). Paul Hawken, who has resigned from the Natural Step, criticized the business practices of each of these companies as unsustainable in a recent editorial in Green Money Journal.

"Why tout Whole Foods and Wild Oats and then talk of boycotting Philip Morris [MO] when in fact Whole Foods and Wild Oats continue to buy from Phillip Morris?" asked Mr. Hawken. "Why not discuss [Whole Foods'] founder John Mackey's views on big box retailers and why he supports Wal-Mart and other 'category killers' who contribute to traffic, sprawl, and the loss of union jobs?"

Mr. Hawken questions the SRI community's investment in companies with sustainable business practices but whose business models are not themselves sustainable.

George Basile, the Natural Step's executive vice president and senior scientist, defends the Natural Step's engagement with such companies.

"You can't get there, there being sustainability, without them, because they're such a giant piece of the economic pie," Dr. Basile told "These are big resource users with a big fat footprint on the economy and what they do makes a big difference; they could just squash the whole thing."


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