Professional Investor: Ethical is good, but sustainable is the real deal

Ethical funds, "green funds," "dark (and light) green" funds are just a few of the products now open to retail investors, and – contrary to received wisdom – the performance of many of these funds is admirable. Indeed, investors wishing to make a profit with a clear conscience now have a bewildering array of options.

However, there is a new type of fund that's also worth consideration, which encompasses many of the benefits of ethical funds but combines them with a positive investment ethos – looking for "sustainability".

Although ethical funds are growing in popularity, investors may feel that their investment strategy is rather negative. Ethical funds tend to be defined more by what they won't do than what they will. An ethical fund will not invest in tobacco stocks, say, or arms.

Sustainable investing takes a more positive approach. It avoids companies that may have a negative impact on the environment, human health, safety and the quality of life – but it also entails investing in organisations that are positively involved in improving the environment and quality of life, and enhancing human health and safety.

A sustainable fund should not merely "screen out" companies whose activities are regarded as unsustainable; it should seek out firms that are breaking new ground in environmental and social performance.

Fund managers are now using sustainability reports issued by companies to make investment decisions. These reports, readily available from many companies' websites, should now be on retail investors' radar, too. They highlight the risks and opportunities arising from the impact of consumer pressure, regulatory pressure, international standards and environmental and health demands. Such pressures can come from social groups, government, intergovernmental groups, non-governmental organisations or lobbyists.

New funds are investing in businesses that take sustainability issues seriously. A fund manager who is giving due consideration to the wider business risks should be applauded. Emotional and philanthropic responses aside, the net result for investors of focusing on sustainability seems to be better management control of the business, probably leading to a better return on investment

In many cases, sustainable funds have substantially outperformed the rest of the market (but please, always remember that past performance is no guarantee of future performance).

The appeal of a sustainable approach should be clear to investors. A business that is assessing and adapting to external risks and pressures on an ongoing basis – and which tends to apply the latest technology to meet its business challenges – is likely to be well suited to surviving in the modern world.

For instance, 10 years ago, it did not seem credible that every UK supermarket would see "organic" and "fairtrade" as market battlegrounds, but celebrity pressure from chefs such as Hugh Fearnley-Whittingstall and Jamie Oliver changed that. Supermarkets altering the way they work to meet these changing demands are showing a commitment to sustainable practices. In 1997, there were no Fairtrade bananas on Sainsbury's shelves. Its latest advertising claims that all its bananas are certified as Fairtrade.

It's vital for companies, fund managers and investors to consider the potential risks to the future of the business in a proactive way. Sustainability gives us an indicator of how seriously a company, or indeed a fund, is taking those risks. A fund manager who is aware of all potential risks to a business should be one to watch.

So, if you want to consider sustainability as part of your investment strategy, what should you be looking for? Well, the fund houses currently offering sustainable funds are as follows: Virgin Money, with its Climate Change Fund (the most recent example); Norwich Union, which runs six funds; First State, which has an Asia sustainability fund; and CIS, which is offering a sustainable leaders fund.

There is as yet no definite resource on sustainable investing, but the websites http://www.sustainable-investment.org and www.sustainableinvesting.net are good places for investors to begin their research.



Hugo Shaw is business manager at Bestinvest (www.bestinvest.co.uk), the independent financial advisers and investment managers. Sean O'Grady is away

cash@independent.co.uk

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