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Green room

Gregor Watt reports on growing inflows into ethical investments

Climate change has been brought into the spotlight for business with the Stern review which was commissioned by Chancellor Gordon Brown and which published its findings recently.

It broadly concluded that climate change is a serious threat for the economy and investment over the next 20 years will have a major effect on the future of the planet.

How much of an effect does this have on investors’ awareness of the issues?

Financial Express head of marketing and communications Paul Wynne says: “Public consciousness of green issues will be heightened greatly by the launch of Sir Nicholas Stern’s report into the effects of global warming. Many people may want to do their bit, with investors proving no exception.”

It seems that ethical investments have already seen new inflows of cash. Manager of F&C’s long-standing Stewardship fund Ted Scott says funds under management in the sector have been rising for some time.

He says: “It all adds to the momentum of money coming into ethical investments. Funds under management have grown a lot over the last five years. The markets have been rising but there has also been new money coming in.”

Morley Fund Management head of SRI and fund manager Peter Michaelis says green trends can be seen in changing habits.

He says: “If you look at how people are choosing to spend their money, they are realising that they can influence companies behaviour.”

Fairtrade products and ethically sourced and produced products are changing the way that businesses treat customers and the same realisation is starting to dawn on investors.

Michaelis says: “They can see it being about more than just investing. Money is not neutral. People can see that they can use their money to make investments but they can also help make it a better world.”

Ethical Investor director Lee Coates says individual announcements or new reports do not, by themselves, change people’s attitudes to ethical investing as he believes it is more of a dripfeed effect with a steady increase in awareness on ethical investments and a corresponding increase in the amount of money flowing into these investments.

Coates says: “The biggest problem is that the level of financial literacy is so low that people do not make the connection between where their money goes and the underlying issues.

“The minute that most people realise that they are part of the problem, they consider ethical investment.”

There has traditionally been a perception that ethical investment does not result in top performance but those involved in the area say this is a misguided view.

Coates says that although the choice of fund is more limited, this does not hamper investment prospects.

He believes that because of the investment restrictions on ethical funds, investors are likely to get a better managed fund with a green fund than with a standard equity fund.

He says: “On average, they are likely to be better managed and better researched because of their investment restrictions. Even if you are not interested in ethical investing, you should consider investing in ethical funds.”

Coates also says the argument about ethical funds suffering because some sectors are off limits is not as straightforward as some people say. Ethical funds may have missed out on the booming mining sector but he points out that they have also managed to avoid the sustained poor performance of pharmaceuticals.

But Hargreaves Lansdown head of research Mark Dampier injects a note of scepticism. He says: “If you are a fund manager not running an ethical fund, you have the freedom to invest in ethical companies. If there was money to be made, they would start to move more money into these companies.”

However, money is moving into green investment vehicles. Figures from the Investment Management Association show that there is now 4.3bn invested this way and although this is only 1 per cent of the market, it looks set to continue growing.

Coates says he is getting 150 enquiries every month, mainly from clients whose advisers do not offer any ethical options at all.

He says: “Most advisers will say it is hard enough to attract new business anyway. Why make it harder by not offering this option?”

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