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Green could turn gold

Investors are sticking with ethical investments despite the recession.

Figures from the Investment Management Association show green and ethical funds with retail inflows exceeding outflows every month since February 2008.

The statistics reveal retail sales with a net inflow in the final quarter of 2008 at £54.8m, considerably higher than the inflow of £20.5m seen in the previous quarter, although significantly down on the same quarter the previous year which saw an inflow of £99.7m.

Total net retail sales for ethical funds for the whole of 2008 were £152.4m. This is a big drop on net sales in 2007 which topped £472m but the fact remains that while they are not ploughing extra cash into funds, ethical investors do not seem to be abandoning their holdings.

Ethical funds tended to underperform for much of last year as many funds did not invest in oil stocks that did well in the first half of 2008. In addition, more commonly held stocks in financial companies fared poorly in the second half.

The typical green fund that might invest in a mix of approved industries, such as recycling operators and suppliers of sustainable energy such as solar and wind power, fell by nearly a third over the 12 months to the end of February, figures by suggest. This 30 per cent fall compares with an average decline of 25 per cent for non-ethical funds.

Baigrie Davies director Amanda Davidson says sales and performance figures have to be put into context as 2007 was a very good year for both for ethical funds. Last year, ethical funds suffered by comparison as the investment market as a whole was moving to large cap firms as a relatively safe haven, leaving ethical investors mainly invested in more volatile mid and small cap companies.

Looking at performance over the last year, several ethical funds are in the top quartile against their non-ethical peers. Henderson global care growth, Schroder global climate change and F&C Stewardship International are among the funds showing solid relative performance, according to figures from Morningstar.

Penny Shepherd, chief executive of the sustainable investment and finance association UKSIF, says: “Ethical issues are material to financial return. Investing ethically gives investors access to the emerging sunrise industries, as opposed to the sunset industries.”

These favoured clean technology companies including firms helping to generate renewable energy and sustainable information technology, as well as green transportation.

But it is more than the performance outlook that attracts the ethical investor.

Davidson says ethical investors, by and large, are in it for the long term. She says: “Those who are attracted to SRI investing are attracted to SRI for a number of reasons in addition to the investment returns. It remains the case that they still want to be invested in these types of funds.”

Shepherd says: “There are a range of reasons why people invest ethically. Increasingly, it is because people are realising it is either the right thing for them or the smart thing for them or the safe thing to do in terms of achieving long-term gains.”

She adds that UKSIF has noticed a broader range of clients and also a wider range of financial advisers now interested in ethical investing.

But although sales of ethical funds have continued at a steady rate, they continue to be a relatively small proportion of the whole.

Perhaps the recession could provide a tipping point that brings ethical investing into the mainstream. Disillusionment with banks has already prompted a boon for ethical banks, with deposits in the likes of the Ecological Building Society, Triodos and Co-operative Bank growing last year.

The ethical cause also received a recent boost when an influential collection of fund managers and investors wrote a joint letter to Prime Minister Gordon Brown at the start of April.

The letter urged the Government to give private investors more opportunities to invest in ethical projects, with the group asking the Government to design financial instruments that will encourage investors to participate in ethical investment.

In addition, the letter also positions the case for any economic recovery plan to include sustainable investment, arguing that private sector investment has a significant role in the recovery of the economy and that investment in low-carbon energy will create jobs and increase energy security.

The high-profile signatories, who include Paul Abberley, chief executive of Aviva Investors London, Alain Grisay, chief executive of F&C Management, and Edward Bonham Carter, chief executive of Jupiter Asset Management, also argue that many private investors want greater opportunities to invest in green projects such as low-carbon energy and energy efficiency.

In terms of attracting talent to the sector, ethical funds have already attracted a number of highly rated managers and he best talent among tomorrow’s star fund managers could well be heading for the ethical sector.

“Everybody wants their friends, family and partners to be proud of what we do – for people in their 20s and 30s. ethical investing passes the girlfriend or boyfriend test,”says Shepherd.



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