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October 20, 2005
New Index and Exchange Traded Fund Expose Risks and Potentials in Nanotech
    by William Baue

The Innovest Nanotech Index assesses social and environmental risks, while the PowerShares Lux Nanotech Portfolio focuses more on investment opportunities.


Last week, Environmental Defense announced a partnership with DuPont (ticker: DD) to identify and mitigate potential environmental, health, and safety (EHS) risks associated with nanotechnology. Nanotech deals in materials measured in nanometers (a billionth of a meter) that abide by the laws of quantum physics, which can eclipse the laws of classical physics. Reinsurer Swiss Re recently issued a report underscoring potential risks related to inhalation exposure and describing experiments showing particles passing through the blood-brain barrier.

"An early and open examination of the potential risks of a new product or technology is not just good common sense--it's good business strategy," said Environmental Defense President Fred Krup and DuPont Chair and CEO Chad Holliday in a joint statement.

Dupont is included in the new PowerShares Lux Nanotech Portfolio, an exchange traded fund (ETF) based on the Lux Nanotech Index created by nanotech specialists Lux Research that is slated to launch next Wednesday. However, Dupont is not a constituent of the Nanotechnology Index released last month by Innovest Strategic Value Advisors, an investment research firm that assesses corporate environmental, social, and governance (ESG) performance.

"DuPont doesn't make it into our index which is selected, in part, from Innovest-rated companies in the AAA to AA range as well as companies that had relevant strategies in place to offset perception risk," Innovest Senior Analyst Heather Langsner told SocialFunds.com. "Innovest downgraded DuPont from AAA to BB based on a variety of different ESG issues in February 2002."

The Innovest Nanotech Index, which is intended to provide information to clients as opposed to serving as a tradable benchmark, specifically focuses on companies' abilities to anticipate risks and avoid any potential dangers that could lead to public backlash. Exemplifying such backlash was a nude protest in May at a Chicago Eddie Bauer store by a group called Topless Humans Organized for Natural Genetics (THONG) who cautioned against the "radical, unpredictable, untested, unstable new technology" in clothes with a "Nano-Tex" stain-resistant coating.

"The safety of nanomaterials represents a significant uncertainty factor," states Ms. Langsner in a report issued with the launch of the index. The report identifies 15 companies (from a universe of 200) best positioned to mitigate both actual and perceived risks of nanotech. "These companies may lead the way in uncertainty reduction, which could mean the difference between market acceptance and product boycott."

Besides assessing the risks, Innovest also sees the potential for nanotech to contribute positively and proactively to social and environmental sustainability.

"Nanomaterials and nano-enabled devices may hold many possibilities for energy and clean water applications," said Ms. Langsner. "As well, the use of nanomaterials for advanced catalysis should significantly enhance the prospects for 'green' chemistry."

The PowerShares Lux Nanotech Portfolio, an ETF that bundles multiple securities like a mutual fund but trades by real-time pricing (unlike mutual funds that set their net asset value only once a day), takes a different approach from Innovest in choosing constituents.

"The selection process is based upon our rigorous analytical frameworks on the business and economic impact of nanotechnology but does not take social and environmental sustainability issues into account," Lux Research CEO Peter Hebert told SocialFunds.com.

However, there is significant overlap in index constituents, including BASF (BF), GE (GE), Altair Nanotechnologies (ALTI), Biosante Pharmaceuticals (BPA), FEI Company (FEIC), Flamel Technologies (FLML), Headwaters (HW), And Veeco Instruments (VECO). Perhaps the biggest distinction between the indexes is a number of well-known companies included by PowerShares but screened by Innovest, including Hewlett-Packard (HPQ), IBM (IBM), General Motors (GM), and 3M (MMM). Also, Innovest includes a number of lesser-known companies not found in the PowerShares index, including Nalco (NLC), Plug Power (PLUG), and Starpharma (SPHRF.PK).

 

 
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