Do morals or money rule investments?
Can ethical investments really offer decent returns?
Saturday 07 November 2009
Two-thirds of investors are unknowingly ethical, the Co-operative claims. Its new survey of investors, published today, reveals that that there is much more interest in the concept of saving the planet while investing than current evidence suggests.
Only 2 per cent of UK investments are currently ethical but the Co-op says that once investors are given an explanation of sustainable investment themes and opportunities, interest increases significantly to 65 per cent.
Is the survey just public relations puff? It's what you'd expect from Co-operative, as the firm famously specialises in sustainable investment.
The survey has also been published on the eve of National Ethical Investment Week, which runs from 8 to 14 November and is designed to raise awareness of the issue.
Next week, meanwhile, non-profit research organisation EIRIS is launching a new consumer website about ethical money at www.yourethicalmoney. org. The site includes sections on ethical funds and ISAs, sustainable banking, green mortgages, ethical child trust funds and student finance.
All this activity anda wealth of new information shouldn't detract from two key facts. First, ethical investment can help make a difference to the planet. Second, investing ethically can be profitable.
Mark Robertson of Eiris, points out: "There are currently around 90 green and ethical funds available to UK investors and as with any category of investment funds there are good and bad performers. But some ethical funds have consistently outperformed their non-ethical peers, proving it is possible to both make money and make a positive difference to the world when investing ethically."
"You can make money while saving the planet," confirms Emma Howard Boyd, the head of socially responsible investment at Jupiter fund managers. The company has been running its Ecology fund for more than 20 years, showing that ethical investment is not just a new fad. And in the last few years the fund has done better than the FTSE World index, which it measures its performance against.
"Green investment has become a viable investment theme in its own right," she says. "It's underpinned by a lot of things, not least the fact that there is an increasing amount of environmental regulation and policy. At the same time many of the larger companies in the world are introducing policies and commitments that green up there operations. The smaller more product-focused companies that Jupiter Ecology invests in are benefiting from that."
Zack Hocking, head of investments at Co-operative Investments, agrees: "The world is changing and issues targeted by sustainable investment such as the need to tackle ageing populations, global power shortage and climate change are creating attractive business opportunities, which in turn are creating great investment opportunities consumers can take advantage of."
Sounds simple enough, doesn't it? But the world of ethical investment is far from simple with different shades of 'green' in operation and some so-called ethical funds even, in theory, able to invest in companies involved in the production of tobacco, booze or even arms.
The wide variety of investment philosophies stems from the fact that there is, in essence, two different kinds of ethical investment, each with its own selections of different shades. First are the fund managers who use negative screens to avoid investing in firms involved with animal testing, genetic engineering, weapons, alcohol, tobacco or gambling.
Then there are the funds which use positive screening to back companies which make a contribution to the environment or society.
But some negative screening funds have started to widen their remit by including investment in companies which may only make a tiny proportion of their profits from unethical practices. Meanwhile, positive screening funds could, in theory, invest in an alcohol-producing company if it was making efforts to improve its green credentials by slashing its carbon footprint or spending to sustain the local environment.
David Kuo of the website Motley Fool says: "There is no formal definition of "green", "ethical", "sustainable" or "socially responsible" investments. So, investors need to be aware of what they invest in because any form of ethical investing will inevitably involve compromise. After all, you are unlikely to find a provider that has the same ethical principles as you."
If you want to find a fund that matches your moral considerations you need to cut through the confusion and find out just what a fund invests in and what its moral stance is to different activities.
"There is no clear-cut answer to the value of investing in ethical funds but some funds have certainly shown themselves as solid contenders," says Muna Abu-Habsa, fund analyst at Morningstar. "But before taking the leap investors should understand that the funds may not be exactly aligned with their principles. They should also pay special attention to fees. Most ethical funds are burdened with high total expense rations given the higher research costs involved, which represent an additional performance hurdle and eats further into investors' returns."
Morningstar statistics (overleaf) show that there is certainly some difference between the top-performing ethical fund and the worst. Over five years, for instance, the top-rates fund is Jupiter Ecology, which grew by 62 per cent. At the other end of the scale Sovereign Ethical actually fell by 14 per cent over five years, a return that no investor will be happy with.
This year's market rally has seen most ethical funds actually lagging behind. There's one simple reason for that: banks. Ethical funds won't invest in banks because they, in turn, invest in all sorts of questionable companies. But that means they've missed on the massive returns banks have posted since March. It's the kind of thing that you have to except if you choose to invest ethically.
"Investors need to understand that in deciding to buy ethical funds they are accepting inbuilt portfolio biases, which have a significant impact on risk and return levels," says Abu-Habsa. "Most screens tend to eliminate larger companies, leaving managers with an investable universe that is tilted towards mid and smaller companies. The screens also result in sector biases. For example, many energy and mining companies fail environmental screens, while pharmaceutical firms fail on animal testing grounds, and so on. As a result, managers of ethical funds find it harder to outperform when larger-caps rally and when resources and defensives are in vogue."
As with any investment decision, backing the right funds or stocks is crucial. Anyone in Jupiter Ecology for the past five years, for instance, would have done better than if they had invested in many of the other funds in its Global Growth sector. The Jupiter fund gained 11.2 per cent on average per year over the last five years compared with just 6.6 per cent for the IMA Global Growth sector as a whole.
"With the right strategy there's no reason why you can't outperform with an ethical fund," says Jupiter's Emma Howard Boyd. "We have a strong engagement programme with the companies we invest in which means we raise issues from a risk or opportunity perspective.
"To help our investors we write a profile on every single company that is invested in the fund. It's important as they are not household names, although we only invest in listed companies. We're not aimed at people looking for short-term gains. We suggest people invest in the fund for the long term, say five years."
A younger ethical fund also performing well is the SVM All Europe SRI fund, up 28.6 per cent since it was launched three years ago and up 89.9 per cent in 2009, to the end of October. Like Jupiter Ecology, SVM says its strong performance is due to its encouraging improved transparency and behaviour in the businesses that it invests in. It focuses on four main aspects of a company's business personnel, society and stakeholders, human rights and environment. By engaging with companies that have less well-developed sustainable policies, SVM claims it can use its position to influence change.
Fund manager Neil Veitch says: "Profitability and social responsibility need not be mutually exclusive, and socially responsible investment funds should deliver performance which is competitive with conventional funds." He says he focuses on identifying companies which are willing to develop and improve on environmental, social, ethical and governance issues. "If our investments do not make the necessary progress against these criteria we will sell our shareholding," he says. That positive approach can help positive change happen in companies that an ethical investor may not normally have considered. By doing so, is that more or less ethical than funds which simply ignore the bad firms? The choice is yours.
For more information about National Ethical Investment Week go to www.neiw.org. For information about ethical money go to yourethicalmoney.org
For a discount on the initial charge of one of Co-operative's sustainable funds invest before 26 November; co-operativeinvestments.co.uk
Ethical funds: What the experts recommend
Adrian Lowcock, senior investment adviser at Bestinvest: "Investors' ethical criteria are set ahead of fund performance. That is not to say they don't want to get positive returns, they just don't want to compromise their principles. Ethical funds had periods of strong performance during the technology boom. For long-term investors, periods of under-performance are a natural characteristic of a more restricted investment approach. The performance of ethical funds has shown the effects a lack of diversification can have on returns. The criteria for choosing a good ethical fund are the same as for any fund. Their universe may be smaller but there are still opportunities. Our preferred ethical funds are Jupiter Ecology and Aberdeen Ethical World. Both invest globally and their performance has been better than their UK peers."
David Kuo, of the financial website The Motley Fool (fool.co.uk), says cost should be a major consideration for anyone considering ethical funds: "The F&C Stewardship Growth fund is the UK's oldest ethical fund in existence, with more than 500m invested in it. There is an initial charge of 5 per cent and an annual charge of 1.50 per cent much higher than for a non-ethical fund. Its current performance lags behind the FTSE All-Share, but it is a market leader in ethical investing. The Henderson Global Care Growth Fund is another reputable ethical fund with an initial charge of 4.5 per cent and 0.75 per cent a year thereafter. Investing is difficult at the best of times, so strait-jacketing yourself with additional ethical principles could make things even harder."
Case study: 'Ecological solutions'
Being given a 10,000 lump sum by his mum got Gavin Anderson into ethical investment. "She gave me some cash towards buying my own home but I don't want to make the move right now when the property market is so volatile," says the Gavin, 30, who works in the care sector in Sheffield.
"Instead I've invested the cash in the hope that it grows by the time I'm ready to get my own place. I chose the Jupiter Ecology fund for a long-term investment as I thought that as the years go by the need for ecological solutions will grow. However I needed it to be sound financially and the fund has done well.
"I'm now in a position to put a bit more away so I'm on the verge of putting 250 a month into the fund on top of the lump sum I started it with. In five years I hope to be able to use the money as a down-payment."
Case study: Saving for our baby's future
Electrician Craig Richardson puts 100 per month into the Sustainable Leaders Trust, The Co-operative Investment's ethical fund. "We've been saving regularly for some time but the birth of our son, Sam, last December made us think more about the future," says the 33-year-old from Manchester.
"We started a monthly direct debit into a tax-free ISA to save money for our baby's future but now we are thinking about doing want we can to see if we can get a decent future for him. We've told a lot of our friends in similar circumstances about it and they all think it's a good idea too."
As far as performance goes, Craig is happy with the way the fund is going. "I have a look at the paperwork when it arrives and all seems well so far. I also like investing in as ISA, as it means we don't pay tax on any of the profits."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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