Email
The year was 1984: Steve Jobs unveiled the first Macintosh computer, Prince Harry was born, we were all watching Ghostbusters and the average house price was a measly £33,000. It was also the year that ethical investing took off, with the launch of the first ever “green” fund, the F&C Stewardship Growth Fund.
At the time, the Thatcherite City traders dubbed the launch “the Brazil fund” – as they thought the idea was nuts. But fast forward 30 years and investors can now choose from around 100 green and ethical funds that take a wide variety of approaches from investing in “good” causes such as human rights to avoiding “bad” practices such as animal testing. But does all this choice mean ethical investing is easier – and more popular?
According to Ethical Investment Research Services, once the 2013 figures are finalised the amount ethically invested in the UK is expected to exceed £13bn for the first time. However, although screening processes have become increasingly advanced, ethical still accounts for only a tiny percentage of the total number of funds.
According to the Investment Management Association, in August just 1.2% of the money invested in funds went into those with a specific ethical mandate – a figure that has remained practically unchanged for the past 10 years.
So what is ‘ethical’?
Part of the reason the green revolution has yet to take hold may be that it is difficult to construct an investment portfolio that will replicate the ethical beliefs of an individual investor. This is because ethical funds adopt different approaches – one fund may consider a stock ethical, another might not.
“Nothing is straightforward,” says Jason Hollands of financial planning group Tilney Bestinvest. “While there are a handful of activities broadly recognised as ‘unethical’, such as tobacco or pornography, many are neither black nor white but shades of grey. In certain areas, such as pharmaceuticals, there are fiercely differing and sincerely held views.”
He cites the “emotive” area of animal welfare. “Funds managed by Kames Capital and Standard Life exclude all companies that test products on animals, but most others are allowed to invest in those that do for research into the treatment and cure of disease.”
Some funds have “negative” screens that avoid certain sectors and stocks, such as gambling or weapons manufacturers, while others use a “positive” screening approach where they actively target companies which might make positive contributions to society or the environment.
F&C’s ethical funds, which include its Stewardship Growth Fund (or Responsible UK Equity Growth Fund as it is now known) use a combination of both negative and positive screens, and over the years have moved away from the strict avoidance approach of the past.
Alice Evans, manager of the Stewardship International Fund, now the Responsible Global Equity fund, says: “Over time, screening processes have become much more sophisticated. We no longer take the approach of blanket eliminating companies, so we might approve certain businesses because they are making huge leaps forward in making a positive contribution to the world.”
Historically, pharmaceutical companies would have been excluded due to animal welfare, for example. “Now, any companies which test on great apes are excluded,” she says. “Otherwise we look for those which can demonstrate they have replaced, reduced or refined animal testing wherever possible.”
A third approach is for funds to target “best of breed”, says Patrick Connolly of advisers Chase de Vere. “Some ethical funds won’t hold shares in oil companies because they do harm to the environment, while others will hold those oil companies that they consider ‘best of breed’ and think will cause less damage or look for greener solutions.”
Check the facts
It is no wonder that ethical investing is still relatively small scale given the potential confusion from widely differing approaches to stock picking.
Do your own research by using websites such as yourethicalmoney.org, a consumer website of global ethical research company EIRIS and Ethical Consumer, a sort of ethical version of Which?. You can get an overview of the investment criteria of various funds but then you will need to take a detailed look at the prospectuses of the companies that catch your eye.
If all this sounds too time consuming or complicated you might want to take professional advice. “If investors want to be sure their money will not go into funds whose holdings include particular issues, they should consult an IFA able to do a screening exercise which matches their ethical concerns,” says Robin Keyte, chartered financial planner at IFA Keyte Financial Planners.
“There is a nationwide network of such IFAs called the Ethical Investment Association (ethicalinvestment.org.uk).”
Patrick Henry, 42, who lives in south-east London, took advice from Chase de Vere before moving his pension pot. Henry, a curator, lives with his partner, Laura Parker, 31, and holds three Alliance Trust funds: the Sustainable Corporate Bond Fund, the Sustainable Future Managed Fund and the Sustainable Future UK Growth Fund.
“I wanted to avoid the oil industry, the arms industry and big tobacco companies,” he says. “It’s easy not to think about the implications, but I think we all need to take responsibility for the impact these industries have.”
What are the returns?
However good an investor’s intentions, any decisions are unlikely to be taken without considering performance.
Perhaps, surprisingly, many ethical funds have proved the returns can easily keep up with, and even better, those of conventional funds.
According to investment research company Morningstar, the average ethical fund has returned 2.76% over the past year, compared with 2.19% from the average performing fund in the UK All Companies sector.
Five-year performance figures show the average ethical fund returned 42.87%, compared with 55.4% from the average performing UK All Companies Fund.
One of the top-performing over both a one- and five-year period is the First State Asia Pacific Sustainability Fund, which has returned 15.64% over the past year, and 95.38% over the past five years. This is in the Asia Pacific Excluding Japan IMA sector.
In the UK All Companies sector, the top-performing ethical fund over one and five years is the Premier Ethical Fund, which has returned 8.60% over a year, and nearly 75% over five years.
However, investors must be aware of the risks, says Connolly. “Ethical portfolios will tend to be skewed toward mid and small cap companies, as they are less likely to be causing any harm or damage, which can make these portfolios more volatile.”
■ Good Money Week, formerly National Ethical Investment Week, starts today and aims to raise awareness of sustainable, responsible and ethical finance. For more information go to goodmoneyweek.com
BECOMING ‘RESPONSIBLE’
After 30 years of F&C’s range of ethical funds being known as Stewardship funds, investors will now have to get used to calling them “Responsible’.
In March, Friends Life, which owns the Stewardship brand, announced it would transfer £12.2bn of assets from F&C to Schroders by the end of this year. These include the Stewardship life and pension funds. The retail OEIC funds still belong to F&C and won’t be moving.
The changes mean that F&C can no longer use the Stewardship name, so the three F&C Stewardship OEIC funds have been rebranded “Responsible”. Customers were notified in September and they came into effect on 10 October.
The F&C Stewardship Growth Fund is now called the F&C Responsible UK Equity Growth Fund, while the F&C Stewardship Income Fund is the F&C Responsible UK Income Fund. The F&C Stewardship International Fund has been renamed the F&C Responsible Global Equity Fund. The F&C Ethical Bond Fund has also been renamed and will now be known as the F&C Responsible Sterling Bond fund.
A spokesman for F&C said it was otherwise “business as usual” for investors in these funds.
