Now it can pay to go green

Investing ethically doesn't mean you won't make a healthy profit too, says Kate Hughes

Shocking predictions of rising sea levels and distressing reports of human exploitation for the sake of profit are finally starting to change the way we live, play and invest.

Research carried out by the Investment Management Association shows that ethical funds under management reached £5.9bn in the last quarter of 2007, up 18 per cent on the year before. Meanwhile, the Co-op has found that interest in ethical investment also increased by 18 per cent in the past year.

In theory, ethical investment is a great way to further both your financial future and the health of the planet. The widely held assumption is that a fund manager only puts your money into companies that promote a change for good environmentally and socially, while providing you with competitive returns.

But this is a sector that is riddled with misunderstanding about just what constitutes an ethical fund. Despite good intentions, it is all too easy to put money into "responsible" investments that are anything but, including those that fly the conscientious flag despite having airlines, oil companies, and arms manufacturers on their books.



How green is green?

The first hurdle is in the name. Environmental or climate funds deal with our effect on the planet. Ecological and socially oriented funds, commonly known as socially responsible investments (SRI) deal with both human and environmental welfare.

"Environmental funds themselves break down into three approaches," says Peter De Graaf, of environmental research organisation Trucost. "Firstly, clean technologies funds will only invest in companies that produce technologies promoting a cleaner environment. The second is the more traditional approach, when funds exclude certain companies or sectors that challenge the environment, such as oil and gas companies.

"Finally, some environmental funds will include companies that are most efficient when conducting their business, using the least resources or producing the least emissions."

This often includes so- called "climate change" funds, which, despite the name, may not invest in ecologically friendly companies at all. Virgin Money's new climate change fund is one of the latest to get in on the action. It can invest in companies from all sectors, including the most polluting types of industries, "but will only invest in those which have a lighter than average environmental footprint for their sector".

This means a company could be included simply because it is not quite as bad as the others. Some of the companies included in the Virgin portfolio include French car manufacturer Renault and UK energy producer BG Group. And many climate change funds invest in companies that will gain from climate change – even if they are not necessarily helping the environment themselves.

There are also engagement funds and strategies, offered by managers such as Aberdeen and F&C for example, which buy into companies on the condition that the company will commit to improving its ethical credentials.

If you add social responsibility into the mix, the options available follow the same pattern, says Adam Ognall, deputy chief executive of the UK Social Investment Forum (UKSIF). "Just like green funds, investors have a choice of screening options when it comes to SRI funds.

"For example, some SRI funds will employ strategies that screen out all arms producers or companies testing on animals, for example, known as negative screening. But others will include car manufacturers who occasionally produce armoured personnel carriers, or companies that use animals, but only for medical experiments."

And then there are the companies that may have a great environmental record, but a bad humanitarian one, or vice versa.



Picking an ethical fund

Because there is such a variety of SRI funds available, investors need to decide how strict they are or what their shade of green is, and then find the fund that matches it, says Alex Davies, head of socially responsible investment (SRI) at Hargreaves Lansdown.

"The darker green the fund claims to be, the stricter its ethical rules," he says. A dark green fund could focus on alternative energy producers or organ-isations promoting social welfare. But a light green fund could include an oil producer or a company with a sideline in armaments.



Principles and performance

Ethical investments have long laboured under the reputation of sacrificing returns for morality, but it appears that is becoming a myth. Hargreaves Lansdown's latest league table of the top 150 funds includes three ethical contenders – Jupiter Ecology, Aegon's Ethical Equity and F&C's Stewardship Income fund.

"People imagine that the restrictions on ethical funds hinder their performance," adds My-Linh Ngo, of SRI Research for Henderson Global Investors. "But investors should remember that most funds are restricted in some way, be that geographic regions or the size of the companies, for example. SRI is simply operating within parameters that exist across the investment world."

As the UK and the EU become more focused on social and environmental responsibility, new legislation could boost the attractiveness of SRI, she adds. "SRI investing is about focusing on promoting more environmentally sustainable, and socially responsible practices. Environmental regulation is a key driver for many of the companies we invest in, and those companies are better positioned to benefit from this trend than traditional companies."

To find out more about ethical investing, the UK Social Investment Forum runs an information website at www.investability.org, and the Ethical Investment Association, ( www.ethicalinvestment.org.uk), provides lists of ethical financial advisers in the UK.

For more in-depth research information, Trucost, ( www.trucost.com) and the Ethical Investment Research Services ( www.eiris.org) provide independent research into the social, environmental and ethical performance of companies. The UK's first National Ethical Investment Week ( www.neiw.org ) runs from 18 – 24 May.



To find a list of ethical fund performance, visit www.trustnet.com or www.morningstar.co.uk.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
News
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Sport
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
News
The Speaker of the House will takes his turn as guest editor of the Today programme
arts + ents
News
people

Watch the spoof Thanksgiving segment filmed for Live!
Sport
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
books
Sport
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
boxingAll British heavyweight clash gets underway on Saturday night
News
i100 Charity collates series of videos that show acts of kindness to animals
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game