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May 19, 2006
Japanese Fund First to Track KLD Global Climate 100 Index
    by Bill Baue

The construction methodology of the Global Climate 100 distinguishes it from other clean energy indexes, and distinguishes this fund from other Japanese eco funds.


It should come as no great surprise that Japan, home of the Kyoto Protocol framework for addressing climate change by reducing carbon emissions, is the first market to field a fund based on the Global Climate 100 (GC100) Index from KLD Research & Analytics. Today, KLD announced the imminent launch next month of the Chikyu Ondanka Boushi Kanrenkabu Fund (or "Global Warming Prevention Equity Fund"--nicknamed Chikyuryoku) by Shinko Investment Trust Management of Tokyo.

"One of the main reasons the first fund based on our GC100 Index is launching in Japan is because investors there are very responsive to environmental issues--there are a number of environmentally focused funds in the Japanese market, said Tom Kuh, KLD's managing director of indexes. "The other reason is the effective work of Sunrise Advisors as our licensing agent in Japan--Sho Ikeda did a very good job promoting the index in Japan."

Mr. Ikeda helped create the Nikko Eco Fund, the first socially responsible investing (SRI) fund launched on the Japanese market in 1999 and joined by three other "eco" funds that year--including one offered by UBS Global Asset Management. Since then, about a dozen SRI funds have hit the Japanese market, including one in 2004 from Nomura Asset Management tracking the Morningstar SRI Index (launched in 2003) and two corporate social responsibility (CSR) funds from AIG Global Investment Corporation last year. FTSE4Good launched a Japan SRI Index two years ago, though no investment products have yet been launched to track it. The Tokyo Stock Exchange (TSE) recently announced plans to develop the TOPIX 1000 CSR Index.

Shinko Investment Trust Management was likely impressed the GC100 Index's performance so far. The index was launched on July 1, 2005 and has a total return of 31.71 percent from launch through April 30, 2006. This compares favorably to 21.53 percent for the MSCI World Index.

Global clean energy indexes and funds, such as the WilderHill NEX Index (NEX) have been in vogue recently and can also be considered to be capitalizing on change risk. KLD's GC100 and the Chikyuryoku fund distinguish themselves from these counterparts by focusing more broadly to include companies (large and small) advancing diverse solutions to climate change.

"The index is focused on leaders in three climate-related themes: renewable energy, clean tech and efficiency, and future fuels, spanning from natural gas to hydrogen. What we're looking for is global leaders in each of those three themes," Dr. Kuh told SocialFunds.com. "The index covers the complete value chain--on the one end the producers of the equipment and systems, in the middle the suppliers of electricity generated using that equipment, and on the other end we're looking for those companies that have demonstrated a strategic position by making large subscription to energy sourced from renewables on the demand side."

"In the alternative energy area, you think mostly of producers of solar panels or hybrid technology, which we include in the index, but we also feature companies we think are leaders as consumers of alternative energy, so you'll see United Parcel Service [UPS], FedEx [FDX], Johnson & Johnson [JNJ], and BT Group [BT.L] in our index," explained Andrew Brengle, a senior analyst at KLD who heads GC100 research. "These companies are making alternative energy commercially viable because they are willing end-users--they will enable the producers to make money."

The GC100 is the only KLD index to date with a dedicated research team, according to Dr. Kuh, with Mr. Brengle as leader, Megha Doshi as project manager, and Katy Chapdelaine, Sally Newman, Arthur Peterson, and Brian Farnkoff as team members.

The GC100 uses a straight equal-weighting strategy.

"The GC100 is equal weighted largely because we wanted to include both the smaller pure-play companies as well as the larger ones that are market leaders, and equal weighting essentially discounts for the fact that major parts of the businesses for the Shells [RD] and the BPs [BP] and the Toyotas [TM] are not related to these beneficial climate-related businesses," said Dr. Kuh. "It also creates a level playing field, bringing up the visibility of some of these smaller companies in the index like Evergreen Solar [ESLR] or Vestas Wind Systems [VWSYF.PK]."

"It would be more attractive to someone looking for a climate-related investment opportunity that is not as volatile as one focused primarily or exclusively on renewables--it fall somewhere on the spectrum between the S&P 500 and a renewables index," Dr. Kuh added.

Renewable energy companies in the index include Germany-based Solon (SGFRF.PK), maker of photovoltaics built into roofs; Spain-based Gamesa (GAM.MC), the world's fourth largest maker of wind turbines; and New Zealand-based Contact Energy (COENF.PK), which produces hydroelectric and geothermal electricity. Companies in the clean technology and efficiency segment include UPS, whose fleet includes 8,800 low-emission vehicles; Echelon (ELON), which helps companies to reduce energy consumption by Internet monitoring; and Japan-based Toray Industries (TRYIY.PK), which makes carbon fibers for wind turbine blades and lighter vehicles. Companies in the future fuels segment include Distributed Energy Systems (DESC), which makes hydrogen and fuel cell products for decentralized energy markets; UK-based D1 Oils (DOO.L), which produces biodiesel from Jatropha Curcas trees; and France-based Air Liquide (AIRP), which is active in hydrogen fuel cells.

"While these companies alone won't solve global warming, the Index focuses investors' attention on where the possibilities lie," said Peter Kinder, president of KLD.

Initial subscription for the Chikyuryoku Fund begins June 5, 2006, with a June 30 launch slated.

"We're talking with potential licensees for the GC100 in the US as well as in Europe," Dr. Kuh said.

 

 
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