Interest in ethical investments and Islamic finance products has soared in recent years, but the implications for independent financial advisers are far from straightforward - Maryrose Fison investigates
Demand for ethical investment funds has grown considerably over the past decade with a proliferation of funds now available from mainstream fund houses, as well as increasing social conscience among retail investors.
Public scrutiny on companies that have harmed the environment – such as BP, following the Deepwater Horizon oil spill last year – or that are falling short of corporate governance have heightened investors’ understanding of the indirect effect their money can have on the planet and its inhabitants.
The latest figures from ethical investment research consultancy EIRIS show that the volume of assets under management in ethical funds has grown six-fold over the past 12 years. In 2007, the amount of money invested in Britain’s green and ethical funds stood at £9bn, up from £1.5bn ten years earlier. By December 2009, assets in pooled socially responsible investment (SRI) funds had reached £9.5bn.
As demand for ethically screened funds has grown, so too has interest in products that select stocks based on widely held religious principles. The latest figures from Ernst & Young’s Islamic Funds & Investments Report 2010 show that more than $50bn (£31bn) has been invested in Islamic funds globally and an estimated pool of investment worth between $360bn and $480bn remains available for future investments.
That interest in these funds is growing has further been exemplified by the National Employment Savings Trust’s announcement in April that it has awarded both Shariah and ethical mandates to HSBC Global Asset Management and F&C Asset management respectively.
The ethical fund is to initially invest in actively managed, screened global equities and some UK government bonds. The Shariah fund will invest solely in HSBC’s Life Amanah Pension Fund, which passively tracks Dow Jones’ Islamic Titans 100 Index, a global equity index.
Ian Hudson, principal of Salisbury-based IFA Hudson Green & Associates, says a number of his clients have opted for a 100% ethically screened retirement portfolio. In his discussions with clients, he says key themes have emerged as motivating forces.
“The main drivers are nuclear energy, the environment, animal testing and arms. My clients are also concerned about third-world employment practices, so they certainly don’t want to see their money contributing to companies that are exploiting young labour,” he says.
While some of his clients choose to ethically screen all of their retirement portfolio, he says others want to screen segments of a portfolio, such as 30% of overall savings.
Yet for all the appeal of these products, financial advisers say there are a number of challenges when handling complex and, sometimes, divergent investment wishes of clients.
Managing different views
Saran Allott-Davey, a senior financial planner at Heron House Financial Management, says aligning clients’ ethical wishes with the limited pool of ethical funds on the market is not always straightforward. Married couples with different views on what should be ethically screened in a joint investment portfolio can also add complexity.
She says: “I have got one couple who are both solicitors. The husband is incredibly strong on animal welfare, so wants nothing to do with any form of farming. He is also very concerned about leather goods, so companies that retail leather goods are not ethical as far as he is concerned, which makes it incredibly hard to find suitable investments for him.
“His spouse is much more interested in the human side of things. She is more concerned about exploitation and investing in companies that don’t have good corporate governance where individuals or children might be exploited. So they are coming at the ethical investment approach from completely different angles.”
To manage the situation, Allott-Davey says she has in-depth discussions with her clients, explaining the likely effect that applying a particular ethical screen will have on overall diversity, volatility and ultimately performance on the retirement portfolio.
“I will normally try to steer people towards a more pragmatic approach. In some cases, when you explain to them that implementing their approach to the letter would almost exclude creating a balanced portfolio, then sometimes they can take a step back and we can agree a more pragmatic approach that includes some investments, which are ethically screened but, perhaps for diversity, some that are not.”
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