Defaqto

Ethical investment?

We all have some idea of what it means to be ethical in our approach to others, to animals, to the environment. But what is ethical investing and will it produce good returns as well as salving my investment conscience?
 
Ethical investment, often known as Socially Responsible Investment (SRI), can be confusing as there are many shades of “green” funds available through unit trusts, open ended investment companies and investment trusts. One man’s green is another man’s black, so how do you know what criteria the fund manager is using when selecting investments?

Your requirement may be for the fund manager to avoid investment in tobacco, alcohol, armaments, gambling, pornography and child labour, but avoiding all these areas could be difficult unless you opt for a dark green fund. If you only want to avoid, say, armaments, you may be able to find a light green fund which meets your concerns.

For example, if you were against investing in tobacco you would have to rule out investment in companies such as BAT. But the same company has a better record on working conditions and improving human rights issues in its overseas operations.

Some people like to invest money in ethical or climate change funds for their children, as they want a better world for their children and grandchildren to grow up in.

How can I find out which companies have ethical policies?

Some UK and global companies have adopted strict disclosure policies, which means they are making more information about their business practices publicly available. You can access this on from company websites or literature.

However, not all companies do this and it can be difficult to get this information, let alone make an informed choice about investing in the company. Organisations such as Greenpeace, Amnesty International, the World Trade Organisation and the Ethical Investment Research Information Service (EIRIS) can supply you with information or point you in the right direction.

EIRIS acts as an adviser to a number of fund management groups on what global companies are doing. It has also defined some key criteria for assessing various business practices and how these can impact on human rights or the environment.

Buying direct shares

If you want to build up your ethical portfolio yourself, an IFA specialising in ethical investment should be able to advice.  However, unless you are familiar with buying individual shares, this can be expensive and time consuming. It may be better to ask your IFA to recommend an ethical fund where the manager can do the stock selection, management and research for you.

How do funds managers pick ethical stocks?

Fund managers have different ideas about which companies are the most socially responsible and ethical, while providing good returns. Managers can select their stocks in a variety of ways, so it is worth finding out what the fund’s ethical criteria are before choosing a fund with your IFA.

Here are some of the ways that fund managers do ethical investment:

• negative screening
  Some funds actively screen out companies listed on the UK or other global stock markets that are involved in businesses such as tobacco, alcohol, de-forestation, the arms trade and animal testing. This is known as negative criteria. Not all managers screen for the same things – a point you should discuss with your IFA.
• positive screening
  Some funds prefer to use positive criteria such as looking for companies that produce things to help the environment, such as sustainable energy or recycling companies.
• via engagement
  Other funds managers ‘engage’ with the companies they invest in by using the fund management group’s power as a major shareholder to push for improvement in the company’s policies on issues such as human rights, the environment and corporate governance.

What’s the performance like?

You may have been put off ethical investment because you believe that screening out tobacco, gambling and arms companies, will cause the fund to under perform mainstream funds which can invest where they like.
 
There can be some truth in this argument. Oil and tobacco stocks have performed very strongly in recent years and tobacco companies are renowned for paying strong dividends, especially when stock markets are not performing well. A fund screening out these companies could have lost out on these returns.

However, the policy of engaging with companies, rather than negative screening, allows you to have exposure to these companies, while knowing that the fund manager is pushing for improved standards at the same time.

But even ethical funds which engage in negative screening have performed largely in line with ordinary equity funds over the medium term, so underperformance is not necessarily a risk of ethical investment.

Which fund management groups offer ethical, environmental or climate change funds?

Friends Provident has the longest track record in ethical investment, having launched its Stewardship fund in the 1980s. Other groups offering ethical funds include Credit Suisse, Jupiter, F&C, Insight, HSBC, L&G, Norwich Union, Prudential, Schroder, Scottish Widows and Virgin.

How do I invest?

For details of IFAs who can advise you on ethical investment, call the IFA Promotion free phone on 0800 085 3250 or click online at http://www.unbiased.co.uk/.

Further contact information contact:
Ethical Investment Research Service
Website http://www.eiris.org/ tel. 0207 840 5740.
UK Social Investment Forum (UKSIF)
Website http://www.investability.org/ tel. 020 7405 0040.