09/11/2007
Ethical Investing
The market for ethical investment products has been experiencing strong growth. According to figures from the Investment Management Association, funds under management in ethical OEICs and unit trusts grew from £4.3 billion in June 2006 to £5.7 billion in June 2007. Gross retail sales of ethical funds more than doubled over the period, increasing from £117.4 million in June 2006 to £249.2 million in June 2007. New ethical fund launches have increased the range of products that offer investors the chance to incorporate their values when choosing investment products.
Many influences are driving consumer demand for ethical funds. A heightened awareness of environmental problems such as biodiversity loss and the need for waste reduction, and social issues such as responsible sourcing and human rights, are key factors. The term ‘ethical investing’ is often used to cover a broad spectrum of products, but usually refers to funds that have negative criteria prohibiting investment in companies involved in specified activities. Ethical funds often use positive screening as well, which means favouring investment in companies that are involved in activities that benefit the environment or society, such as developing renewable technology or providing good employee training and development opportunities. However, there has been little research to identify the negative and positive criteria that matter most to ethical investors.
Our Annual Survey of Ethical Investors
Our annual survey of ethical fund investors therefore presents a good opportunity to learn more about ethical investors’ concerns and preferences. Over the years we have had exceptionally high response rates to this survey, which is sent to a representative sample of these investors. In 2007, the 11th annual wave of our research, the response rate was 27%. The survey results are reviewed by the Standard Life Ethical Committee, which is composed of senior Standard Life managers and three individual investors in our ethical funds. The Ethical Committee uses the results to confirm that we are continuing to reflect investor concerns in the criteria for our ethical funds and to develop new criteria in response to evolving issues of concern. While we cannot incorporate every concern of every individual investor, we aim to include as many as possible.
This year’s survey asked investors to consider a list of 41 negative and positive ethical criteria and indicate the relative importance of each on a four point scale from 4 (very important) through to 1 (not at all important) when selecting an ethical fund. A mean score was calculated from the spread of responses and used to rank the issues in descending order of importance. The three top issues of concern are negative criteria, suggesting that it is more important for ethical investors to avoid investing in companies whose activities they disapprove of than to favour investment in companies whose activities are viewed positively. Two related criteria emerged as joint number one concerns: clearing tropical forests unless the company has a policy on reforestation and mitigation and using high volumes of timber without complying with internationally recognised standards. The number three concern is operating in countries with a poor human rights record without having policies in place to address human rights. Table 1 lists the top 10 concerns of respondents.
|
Rank |
2007 Standard Life Ethical Investor Survey Results |
1 |
(Avoid) Clearing tropical forests without reforestation/mitigation policies |
|
1 |
(Avoid) Use high volumes of timber without meeting internationally recognised standards |
|
3 |
(Avoid) Operating in countries with poor human rights without policies on human rights |
|
4 |
(Favour) Have a good policy on conserving biodiversity if company activities directly impact on plant and animal life in a particular habitat |
|
5 |
(Avoid) Pollution conviction |
|
5 |
(Avoid) Manufacture/supply ozone depleting chemicals |
|
7 |
(Favour) Encourage, maintain and improve the quality of working conditions in global supply chains |
|
8 |
(Favour) Good environmental management system |
|
9 |
(Avoid) Manufacture pesticide products |
|
10 |
(Favour) Develop or use renewable technology |
Clearly, environmental issues are of paramount importance to ethical investors, with 8 of the top ten issues covering environmental topics. Human rights and supply chain working conditions are also significant concerns.
In addition to asking respondents to rate each criterion on the four point scale, we asked them to choose the three most important issues which our ethical criteria should favour, as well as the top three to avoid. This question is asked to determine if there are any issues that clearly stand out as being of overriding importance. Respondents selected encouraging the quality of the working conditions in global supply chains, producing products which control pollution and developing or using renewable technology as their top three issues to favour. They chose operating in countries with poor human rights without having human rights policies, clearing tropical forests without having a policy on reforestation and mitigation, and producing or supplying weapons for military use and the top three issues to avoid.
There was a strong thematic consistency between the results of this year’s survey and those of the last few years, but there were some statistically significant differences, with genetic engineering of crops, tobacco sales and involvement in nuclear power ranking as lower priorities this year.
Climate change
The issue of climate change has been dominating the headlines for some time. We know from informal discussions with ethical investors that climate change is a concern, and we reflect this concern in some of the environmental criteria applied to our ethical funds. We decided this year to include a special section in the annual survey asking investors whether climate change is their top concern, one of their top 3 concerns, one of their top 5 concerns or one of their top 10 concerns. The research findings support the conclusion that climate change is a priority for ethical investors. 17% of respondents indicated that climate change is their top concern, and 53% replied that it is one of their top 3 concerns. For 19% climate change is one of their top 5 concerns, while 8% said it is one of their top 10 concerns. 2% responded that they didn’t know.
We also asked whether it is better to invest in companies that are significant contributors to climate change and are doing their best to reduce their impacts on climate change, or if it is preferable to avoid those companies completely. Interestingly, most investors took a moderate approach to this question. Only a small proportion (9%) of respondents felt that it was better to avoid businesses that contribute to climate change, with most people (91%) preferring to invest in companies that are doing their best to reduce their impacts.
A different picture emerged, however, when participants were questioned specifically about airlines. While 70% of respondents answered that it was better to invest in airlines that are reducing their environmental impact, 30% stated that it would be better to exclude all airline stocks completely, demonstrating that for many investors, airlines should not be included in ethical funds.
Overall, the results of our annual survey indicate the importance of environmental issues and human rights issues, and a strong concern about working conditions in global supply chains. They also evidence a sizeable negative attitude about the inclusion of airline stocks in ethical funds. Our Ethical Committee will be reviewing these results and considering what changes, if any, should be made to our ethical criteria.
Julie McDowell, Head of Socially Responsible Investment, Standard Life Investments.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
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©2008 Standard Life Investments.
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