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
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.
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."
happened to us," Mr. Henningsen told SocialFunds.com. "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
"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.
21's holdings include Whole Foods Market (WFMI), Wild Oats (OATS),
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
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 SocialFunds.com. "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."