Over the last 30 years environmental issues on a broader scale have increasingly moved to center stage as there is wide acceptance that environmental problems are not going to disappear. Environmental problems, particularly those associated with climate change, freshwater scarcity and pollution, are believed to be amongst some of the greatest issues facing the world today. The sustainability of global energy and climate change issues are increasingly seen as a global problem and therefore require global solutions. It is clear that society will need to change and those companies who are best placed to take advantage of these changes are likely to do well in the future. Companies that embrace a green investment focus can gain a competitive advantage.
By spotting trends in environmental technologies at an early stage they can aim to be in a prime position to make the most of any new government regulation or scientific breakthrough. As the global economy seeks out new energy sources to feed growing demand, there is clearly strong growth potential in the renewable energy industry. These issues and the increased usage of renewable energy sources are some of the reasons why a green approach to investing can be beneficial for investors.
Socially Responsible Investment
Socially responsible investment (SRI) covers a very wide mandate of investing in companies involved in benefitting the environment, or wider social issues whilst avoiding companies which cause harm. Funds often use 'negative screening', where they avoid investing in sectors such as alcohol, tobacco, animal testing or gambling. Other funds, which are often seen as "darker green" also utilise 'positive screening', actively seeking to include companies who have demonstrated that they benefit the environment or society. Choosing an ethical fund can be confusing as there are so many shades of "green" funds available through unit trusts, open ended investment companies and investment trusts. To assist in this, we have devised an ethical filtering module which can help you screen out funds you wish to avoid or include. We have also suggested model portolios as well as an ethical fact find to help you devise an acceptable asset allocation.
What is ethical investment?
Ethical Investment has been defined as putting your money where your morals are, or investing according to your beliefs. The term "ethical investment" has been in circulation for over 20 years, since the first ethical fund was launched in 1984. The idea behind the ethical philosophy is that the fund manager will pick companies that have the potential to do well both socially and financially. The roots of SRI can be traced back to the nineteenth century where religious orders such as Quakers and Methodists were concerned with issues such as temperance and fair employment. At the beginning of the 1900s the Methodist Church decided to invest in the stockmarket whilst specifically avoiding companies involved in alcohol and gambling. This trend accelerated as more churches, charities and individuals began to take ethical considerations into account when investing. The first ethical fund in the UK was launched in 1984 by Friends Provident.
Ethical investment allows individuals, companies and charities to invest in a socially responsible way, without compromising their beliefs and principles. Most investment wrappers (ISAs, pensions etc) will allow you to choose a fund that suits your beliefs, so that you can make a positive statement with your money. The careful selection processes involved in ethical investment can help to identify companies that have the potential to do well, both socially and financially. An ethical fund manager will judge stocks on both their positive and negative attributes, examples of which are shown below:
Government legislation of pension funds have contributed to making ethical investment an issue for pensioneer trustees. Pensioneer trustees now have to disclose the extent to which social, ethical and environmental issues are taken into account when constructing fund asset allocations.
Ethical fund managers now have considerable influence in the policy making decisions of multinational companies. This makes running a business without a robust SRI policy is against the commercial interest of companies who can be held to account by shareholder engagement.
Companies who attract negative publicity and fines because of poor ethical practices will are increasingly in the spotlight and will underperform. Well run companies with a good SRI policy will not be tarnished by future issues and are likely to be attrative for investors along with start-up companies producing sustainable energy products as alternatives to relying on unsustainable fossil fuels.
The origins of ethical investment
The roots of ethical investment can be found among religious orders such as the Quakers and Methodists, who were concerned about issues such as temperance and humane working conditions. As early as the beginning of the 1900s, the Methodist Church started to exclude investing in companies promoting alcohol and gambling.
This trend spread as more churches, charities and individuals started to consider ethical criteria when making investment decisions.
In 1984 the UK's first ethically screened unit trust was launched by Friends Provident - the Stewardship Fund.
There are now approximately £6.5 billion of funds invested in ethical funds which given that ethical funds only really started appearing in the late 1980's is a phenomenal increase in funds under management.
- "Research conducted by Jupiter shows that clients rate climatic change, bio-diversity and pollution as the most pressing environmental concerns. 59% believe that the UK will be significantly affected by climate change and more than two thirds put the responsibility for limiting these changes at the door of both individuals and governments."
- 29% of investors questioned by Jupiter were already invested in a green fund. Of those who had not invested ethically, 24% said this was because they were not aware ethical funds existed. 21% expressed concern that ethical investing could adversely impede performance.
- Increased awareness and changing buying patterns of investors demonstrates that far from producing below average returns, investing ethically has the potential to boost returns going forward. This can be explained in many cases by a "virtuous circle" developing among consumers, corporations and governments increasing the demand and supply of environmental solutions. Government incentivisation through taxation incentives are helping businesses become increasingly green. Companies have identified compelling opportunities within this sector and are developing increasingly environmentally friendly produce.
- Not just for tree huggers
Light green screening allows funds such as Allchurches Amity fund to invest in Chinese equities, overlooking the country's track record on human rights. Further, some funds may not completely exclude investing in companies which use animal testing but invest in companies who use animal testing for pre-clinical medical trials and still avoid those testing for cosmetics.
Dark green funds may favour companies working with technology based solutions for environmental problems such as energy efficiency, water treatment and pollution control.
"Best of breed" funds invest in companies displaying the most environmentally responsible behaviour in sectors which would normally be excluded.
Individuals can assess their own impact on the environment by working out their own "carbon footprint" which measures the amount of greenhouse gases produced by different activities. If you log on to www.carbonfootprint.com you will be asked questions about household fuel usage and travel in order to determine the size of your footprint.
Paying lip service to environmental issues is referred to as "greenwash".
Research indicates that ethical fund performance is broadly in line with non ethical performance. An in depth study commissioned by EIRIS revealed that over the longer term, ethical investments are usually slightly less volatile but returns only marginally less than non ethical investment. The study made the point that there was no material disadvantage to ethical investment. For more, see: ethical investment research