19/03/2007
Ethical investments don't have to cost the earth
When the Chancellor stands up on Wednesday to deliver his budget speech, environmental concerns are bound to be high on the agenda. Many investors also have a keen interest in ethical and environmental issues and wonder how these concerns can be aligned with their investments – without having to sacrifice the returns they need.
Strong concerns about environmental and social issues are making ethical funds a popular choice for many people. These funds specify the types of companies they won't invest in and give investors the opportunity to avoid putting their money into companies whose activities they disapprove of. The typical exclusions rule out investment in companies that contribute to environmental pollution or are involved in tobacco or alcohol production, weapons, nuclear power and animal testing. Companies that fail to respect human rights in their operations are often excluded as well.
Many ethical funds recognise that investors want to do more than simply screen out the companies that fail these criteria. Investors want to put more of their money into companies that are trying to make the world a better place in which to live by developing or using environmentally friendly technologies, contributing to improved living standards in emerging economies and adopting good employment practices. Some ethical funds reflect this desire by having a preference for investing in companies that meet these positive standards.
As you would expect, individuals have different views about what is ethically acceptable or preferable. An interesting question, rarely discussed, is how ethical fund providers decide on the criteria for their funds. Some fund managers set up committees of experts to provide advice on what criteria should be used. An alternative approach is to survey the fund's investors to determine their concerns. We have surveyed our investors' attitudes every year for the last ten years and have used the results to make sure that our criteria reflect their top priorities. These surveys give investors the chance to highlight new and emerging issues that can subsequently be included in the criteria, such as concerns about genetic engineering, bribery and corruption.
Ethical fund providers will include as many investor preferences as possible in their negative and positive criteria. However, it is important to acknowledge that not every issue can be included in an ethical fund's policy. When adopting criteria fund managers must strike a reasonable balance between the desire to reflect investor views and the need to provide returns.
Many ethical fund providers will engage with the companies in which they invest to encourage higher standards on environmental, social and ethical issues. They do this through meetings and written communications which emphasise that good management of these issues contributes to long term success in building brand and reputation, better risk management, improved cost structures and improved employee productivity. This type of responsible engagement ensures that companies get the message that it is important to focus on and invest in programs that address environmental, social and ethical issues.
Sceptics of ethical investing have argued that adopting exclusionary criteria makes ethical funds less likely to produce good financial returns in years when companies in the excluded sectors are market favourites. There is however a wide range of ethical funds on the market which dispel this theory boasting performance which is either aligned with or beating mainstream equity funds.
The ethical fund market has experienced significant growth over the last few years, with pooled ethical funds growing from £3.3 billion in 2000 to £6.1 billion in 20051. More providers are also offering an ethical approach to bond investments in addition to equities. Furthermore, we think it likely that investors will see more ethical offerings in asset classes such as property and private equity in the future. It's definitely worth investors noting these funds and taking time to weigh up their principles and priorities when it comes to ethical investing!
1 EIRIS, www.eiris.org
Julie McDowell, Head of SRI at Standard Life Investments
First published in Scotland on Sunday on 18 March 2007.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
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