Green, ethical or socially-responsible investments are all strands of the same movement aiming to combine social and environmental concerns with traditional financial investment in the world's capital markets.
In the UK, the origins of ethical investment lie with certain religious groups which wanted to avoid investments in areas which they considered to be morally questionable, such as alcohol, gamb-ling, tobacco and arms. This gave rise to a number of ethical funds that avoided shares in a number of no-go areas.
In the US, and latterly in the UK, socially-responsible funds have focused on investing in companies that provide a product or service with a social and environmental benefit.
In the UK, there has also been an increasing emphasis on constructive engagement where the overall objective of the fund itself is to promote environmental and social best practice within UK industry.
Socially-responsible funds invest in a wide variety of companies from a broad range of sectors. One investment process is to focus on two types of companies: “best in class” and “industries of the future”.
Investment in “industries of the future” might include companies such as Vestas Wind Systems.
“Best in class” companies are in sectors such as retailing or banking where there can be a great deal of variation in how they run their businesses, treat their employees and suppliers and deal with environmental issues. For example, BT has been innovative in its development of community involvement, training and equality schemes and a clear leader in the introduction of environmental initiatives.
Constructive engagement is another important element of socially-responsible investment. Constructive engagement is a process by which the fund manager attempts to influence the behaviour of companies in the portfolio through company meetings, site visits, letters and discussion with senior management.
Through constructive engagement, investors have the knowledge that their money is helping to encourage companies to become more socially responsible.
What else should you be looking for from a fund? Expectations vary but the most important features you should expect from a socially responsible investment fund are:
Some level of accountability.
An internal research team.
Some fund managers publish newsletters and most publish manager's reports, all of which will give a better idea as to the criteria, investment process and portfolio. A number of providers also have advisory committees which check that the fund managers are “walking the talk”.
A research team is also an important element, particularly if you are keen on constructive engagement. Encouraging best practice requires in-depth knowledge on environmental and social issues, hence the importance of a research team.
But the million dollar question is are you likely to lose performance in a socially-responsible fund? Arguments are still raging as to whether investing ethically contributes to under or overperformance. As with any fund, taking proper advice is always important.
Possibly the easiest way to access information on ethical or socially-responsible investment is to contact either the UK Social Investment Forum on 020 7749 4880 or the Ethical Investment Research Service on 0845 606 0324. The UKSIF website at www.uksif.org is also a mine of information on socially-responsible investment and well worth a visit.