The ethical investment market is currently going through an interesting transition. It is moving fir...
The ethical investment market is currently going through an interesting transition. It is moving firmly into the mainstream. Its origins go back a long way, particularly noticeable in the saving patterns of the Quakers. But its modern-day guise began in the UK and the US with people wanting to make a stand against apartheid.
Over the last three decades or so, various minority interest groups have recognised that the allocation of their financial resources might make a difference. The climate change levy, European directives on waste and social employment, the Health & Safety Executive, and pension fund legislation are all changing the way management teams run their businesses. The tightening guidance on corporate governance with the associated environmental reports and risk management also put ethical considerations at the heart of decision making.
Much of this change has passed the investment community by. Many still regard ethical, or socially responsible, investment as strictly the province of the tree-huggers on behalf of rather eccentric clients. But this misses a number of points.
The first is the cost to companies of not going along with the spirit of the changing approach to management. Retail boycotts can impact the top and the bottom line. Much corporate value is stored in brands and corporate imagery. To alienate customers on issues they feel important is likely to cause considerable negative publicity.
So management approach affects balance sheets. In a tight labour market, it makes it difficult to attract the right calibre of employee. From the social perspective, poor working conditions lead to increased staff turnover, again a substantial cost for a business to bear.
Second, a management team tackling environmental and social issues head on, or, better still, pre-empting them, is likely to be a team that will be able to anticipate and deal with other business issues. Third, many of the positive environmental strands of ethical investment are in areas with strong secular dynamics, often led by the positive legislative framework referred to above. Witness alternative, distributed and renewable energy, recycling, environmental consultancy and urban regeneration, to name but a few.
There is still uninformed scepticism about the performance potential of ethical investment. It is undoubtedly true that excluding large segments of the market can increase volatility. It is true that some sectors, such as TMTs will have a higher weighting in quasi-indexed portfolios. But it is also the case that ethical funds that have a longer-term performance record of three or five years more than hold their own compared to the UK All Companies comparison.
The new indices, FTSE4Good, being launched in the summer and the proposed Autif sub-sector will keep the sector at the forefront of the news.
Fiona Orford Williams is the lead fund manager of the Gerrard Ethical Fund.
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