The launch of the Government’s Green Investment Bank has raised questions about how you can make money with a social conscience and whether ethical investing is set to move into the mainstream.
The Government has pledged £1bn to the GIB for building carbon-harnessing power stations and wind farms and hopes to get a further £2bn from asset sales such as its one-third share in uranium-enriching company Urenco.
The initiative has garnered widespread support, and not only from ethical banks. Senior figures from seven major UK investment institutions, including Aviva and Henderson Global, wrote to Prime Minister David Cameron express-ing their support for the pro-ject. Together, they represent over £500bn in assets.
Triodos Bank is an ethical organisation which aims for sustainable banking and investor relations manager Alex Connor says there is a need for raising the profile of ethical investing. She says: “Most investment houses do not incorporate sustainability into their recommendations but it is the socially responsible investment funds that have seen the exciting growth stories recently.”
Mainstream funds such as Rathbone’s ethical bond fund are seeing increased growth – over three years it has made a return of 12.86 per cent compared with a sector average of 11.07 per cent. F&C’s ethical bond fund has returned 15.61 per cent, demonstrating that ethical investing is a going concern.
Investment Management Association statistics also show sector growth, with net retail sales of ethical funds up by 80 per cent on 2009. Connor believes a post-recession realisation of the volatility of investing as well as concern over climate change have contributed to this.
She says: “If you invest in oil you may be subject to environmental shocks, as we saw with BP. As ethical investing is sustainable, it makes you less likely to come unstuck.”
FTSE Group director of responsible investment David Harris says: “We have seen growth in the number of products based on the FTSE4Good index to around 70-80 companies. Both what you would class as ethical investors as well as investors who would not call themselves ethical, are seeing it as a route to long-term returns.”
He believes the broadening of the concept of ethical investing to include social as well as environmental concerns has been a factor in the market’s success. “Social issues such as how you treat your staff are affecting company value more, so FTSE clients are exploring environmental and social considerations for investment rather than ethical reasons.”
Swip international equities investment director Johnny Russell thinks this expansion of criteria will lead to ethical investing infiltrating the mainstream. Investors’ desire to see broader social returns will grow the market,” he says. “You get more than what a general tracker would provide – a social return on top of a financial return.”
However, growth in ethical investing does not necessarily spell success for the GIB. Ernst & Young predicts the bank would need to have a lending capability of £450bn to have any financial clout and despite Energy Secretary Chris Huhne’s push to make the GIB a private institution, it looks set to operate as a public bank with strict lending criteria.
Connor believes this will have an impact on its effectiveness. “We are not expecting the GIB to make any substantial sea-change,” she says. The fact remains that banks increase their influence by generating returns, not by acting morally, and strict Treasury control will restrict the GIB’s ability to drive change more than a normal ethical fund.
Funding is not the only issue. Harris says: “The concept of the GIB is welcome but it is the incentive structure of the banking system that needs to change to support low-carbon projects. The investment cycle generates pressure to meet short-term return targets rather than future considerations.”
Connor says: “I do not think most financial institutions recognise the growth value that social investing offers.”
She believes valuation of returns over ethics is symptomatic of a problem within the financial system that can only be remedied by a fundamental change in attitude. “If people and investors are made aware of the long-term potential of social funds we will see continued momentum in this area,” adds Connor. “But I do not think one initiative from the Govern- ment will make a tremen- dous amount of difference to a sector that is already growing.”