These investments are no longer limited to green concerns and issues such as child labour, gambling, animal testing, input in the local community and attention to human rights are being taken into account by managers and investors.
Yet the environmental element of ethical investing continues to be a major catalyst for the change in investor perceptions. It seems that the political agenda is being taken up increasingly by green issues. With oil breaching the $100 mark, the cost of developing alternative energies does not seem so painful in comparison.
Demographics have also aided the development of the sector as the children of the 1960s and 1970s, who are now the drivers of power and wealth creation, seem to be more in tune with ethical investing than previous generations.
To try to add clarity to their investment strategies, fund managers may adopt a policy not to invest in firms that are perceived to be harmful to the environment, people or animals. Such policies are designed to set a particular fund apart from the mainstream and have become known as socially responsible statements.
From an operational standpoint, funds will put in place criteria that exclude a number of companies, often by refusing to invest in certain sectors such as:
A layer of positive criteria may be put in place for further guidance, including:
Investors need to decide whether a fund’s specific investments sit comfortably with their own perceptions. For example, a number of such funds invest in oil or gas companies, which could seem to be in contradiction of what the average investor believes to be socially responsible or ethical investing. However, the manager may perceive a company’s financial outlay in developing alternative sources of energy as being sufficiently high for it to be viewed as socially responsible.
This is where investors need to scratch beneath the surface and find out exactly what the fund is trying to achieve and what the underlying holdings are.
The asset managers that we use are increasingly asking for our clients’ views on ethical investing so they can take account of these when constructing an investment proposal.
I believe this not only highlights an asset manager’s willingness to build a full profile of potential investors but also shows that the ethical market is mature enough to allow this to be taken on board without compromising the ability to provide competitive returns.
We encourage such conversations between the trustees, beneficiaries and managers, as it will build a better understanding of each other’s motivations and perceptions.
What products are out there? The array of ethical investment products is now pretty comprehensive and ranges from bank accounts to concentrated funds operated by institutions such as Sarasin, Rathbones, Jupiter and Aberdeen. Portfolios may cover a number of markets or concentrate on a particular theme such as sustainable energy.
Many bigger investment houses now have ethical products and the performance of such investments has been improving steadily as society recognises the issues and moves to take action to address them.
The issues addressed by such investments are becoming easier to relate to as we are now hearing about many of the issues in the media on a daily basis. It is also interesting to hear about the technology being used to address some of the problems in the green arena.
The feelgood factor that investors get from being involved with such products is not as prominent as it once was but I think it is still a major reason for new investors entering the arena.
Perceptions of the sector are still playing catch-up with what is actually happening in the marketplace, as illustrated by the fact that such funds now produce steady long-term returns.
Undoubtedly, adopting an ethical approach will still rule out a number of investment opportunities but the scene is changing as firms commit to becoming more socially responsible.
To reflect this changing corporate mindset, ethical managers will often place a lot of emphasis on a firm’s future strategy regarding ethical issues rather than just its current position. For example, does the fact that BP is investing in alternative energy to ensure its future existence suggest that it can be viewed as an ethical investment when its primary source of current revenue is based on burning oil?
There is no right or wrong answer to this but it is important that investors are aware of such issues before making a commitment.