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ETHICAL INVESTING


ethics I


Environmental, ethical or socially responsible investing is a growth market right now. But just what is driving this growth, and how do you define what is and isn’t ethical? David Burrows finds out


T HAS BEEN argued that one good thing to come out of the financial crisis is that it has made investors far more conscious about where they are putting their money. It’s


also probably fair to say that companies and funds are not only being judged on whether they are worth investing in but whether they are ‘worthy’ enough to invest in. With the environment a concern for


many, and corporate integrity an issue for others, investors are looking more and more for organisations that fit with their personal ethical stance, be that from an environmental or socially responsible investment (SRI) view. Dan McAlister, Head of Investments at


Horizon Group, thinks there has been a shift in investors’ attitudes, but says this is also coming from the companies. “Events in 2008 led to investors looking more closely at the companies in which they invested, but companies themselves are more controlled when it comes to corporate governance,” he explains. “The better companies in the market now tend to be SRI focused.” For those who want to invest ethically,


this tends to be done primarily through funds but also through individual stocks. According to the Investment Management Association, 2010 saw the highest net retail sales of ethical funds since 2007, at £280 million, up 80 per cent on 2009. In fact ethical funds under management totalled £6.6bn at the end of 2010, up 16 per cent on 2009. The funds themselves are exceptionally varied. There are those that are ‘dark green’,


42 businesslife.co August/September 2011


which won’t invest in tobacco, arms, gambling, pornography, oil or any companies that damage the environment. However some funds, rather than follow a black-and- white exclusion criteria, prefer to ‘engage’ with companies and use their influence as shareholders to encourage change from within rather than boycott a sector altogether. This is the fundamental difference between traditional ethical or environmental funds, and SRI or corporate social responsibility (CSR) focused funds. However some investors find it hard to


accept that, for example, an oil producer can be included in an SRI fund and be seen as ethical because they also have ‘clean tech’ and are best in class. Just take a look at the FTSE4Good Index, which over the years has included BP and SHELL – not names you would automatically associate with ‘ethical’ investing. But then the FTSE4Good Index is primarily about identifying transparently managed companies that meet globally recognised corporate responsibility standards. Andrew Neligan, a Chartered Financial


Planner with Informed Choice, can see how the ‘best of breed’ argument can often seem less than convincing, and he stresses that ethical definitions in general are hard to pin down. “We have discussions around what ‘ethical’ means to the client. Is it about avoiding particular sectors or rewarding ‘causes for good’ companies? Transparency will always be an issue because the true extent of a company’s operations will always be difficult for an adviser or client to uncover.”


A question of


clear as mud? So does the distinction between SRI and environmentally friendly need to be made clearer for the sake of investors? Have the lines become blurred? Ryan Smith, Head of Corporate Governance and Ethical Research at Aegon, certainly thinks so. “It’s important that investors in these


types of funds understand the types of screens (positive or negative) and restrictions that different funds apply. The approach determines the types of companies that will be included in the portfolio and also may impact portfolio management.” In terms of negative screening, all of the


major ethical funds screen against tobacco and armaments. However, there are a wide variety of strategies used to screen out other factors, such as animal testing, unsustainable farming techniques and human rights’ abuses. Positive screening actively seeks out firms that make a positive contribution to society. Once again the criteria by which companies are judged vary from fund to fund. For individual investors wanting to do their


own research, a good place to start is Experts in Responsible Investment Solutions (EIRIS) as they break down each available fund into its ethical credentials. EIRIS also allows you to see how your bank (or any bank in your fund portfolio) performs against green and ethical criteria. You can also find out how your pension operates and invests, as well as what you can do to influence it. Mark Robertson at EIRIS says: “There are


now more than 100 ethical funds to choose from, which is a good thing. However, it can also make selection more confusing. We help investors match a fund with their specific preferences – be that negative factors, such as tobacco or gambling, or positive factors, such as sustainability and renewable energy.”


All about performance The big question is: can money be made from ethical investing, or do investment restrictions limit potential rewards? Alexia Zavos, a member of the SRI team at Cazenove points out that a portfolio of ethical funds doesn’t need to result in poor performance. “An example of a negatively screened fund with good performance is Ecclesiastical’s Amity International fund managed by Robin Hepworth,” she explains. “The fund has consistently outperformed both screened and non-screened funds





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