By Robert Getting Is there a sound investment argument for ethical funds, or are they just a social...
By Robert Getting
Is there a sound investment argument for ethical funds, or are they just a social trend?
To examine the upturn in the development of ethical funds one first needs to consider why the personal or institutional investor puts their money into equities, The straight answer is "to maximise all opportunities for monetary gain."
Despite government warnings that investments can go up or down, over any prolonged period, regardless of economic environment, it is extremely unlikely that sustained growth can be achieved by any monetary vehicle, other than the one that follows the stock markets.
Few building society accounts, gilts or insurance bonds can outperform even third-quartile collective investments. Whether you consider active or passive funds, the overall result is invariably the same.
Following its own Quaker philanthropic roots, Friends Provident launched its Stewardship fund into the UK market in 1984.
Previously, the only considerations an investor needed to make were if they wished to follow large, medium or smaller companies funds, investing in a specific region or industry sector.
It was a particularly astute investor who actually analysed a fund manager's choice on a specific share selection. If the investor did have time to ponder the stock choices made by the fund manager, they may as well manage their own portfolio. Nobody really bothered or overly cared about how a fund manager decided on which company they were going to invest into or whether it was ethically correct.
The most important factor for the investor was to maximise their growth potential and to deliver the best possible returns for their initial investment. Considering ethical funds was a totally new concept in investment management, although it raised a number of complex and difficult issues for both the fund manager and investor.
Since the launch of the Stewardship fund, which has attracted around £1bn under management in 15 years, a number of other funds such as NPI's Global Care Growth, Norwich Union's UK Equity Ethical and Jupiter's Ecology funds have enjoyed considerable success. There are now around 50 funds one can choose from. Even the Co-Op Bank and the Dutch Triodos Bank have followed the trend to conduct and market themselves as ethical banks.
Investors are now faced with two considerations, growth or social responsibilities to the environment?
These considerations should surely be combined to give the best of both worlds. Before a conscious decision can be made on ethical funds, how are they actually defined? The philosophy of an ethical investment is that the fund provides positive benefits to society and a return on investors' money.
Those funds you may wish to actively promote would be categorised as follows: best employment practice, charitable works, education and training, environmentally friendly products, health and safety, medical advancements, natural energy, organic farming, recycling process, sustainable forestry, waste management.
The companies you may wish to avoid would be categorised in the following areas: alcohol, animal testing (cosmetic and/or medical), armaments, environmental destruction, fur trade, human rights violation, nuclear fuels, pornography, tobacco and tropical hardwood.
As you can see there is a plethora of decisions every ethical fund manager needs to make, while striving to deliver real growth.
During my research I was informed of an actual example of these problems that occurred in the early days. An ethical fund manager was undertaking a visit to one of their top performing companies.
He was most complimentary about the company's increase in share price, but he had one particular dilemma he was struggling to to resolve. He explained he had noticed that the company manufactured parts for tanks and he wanted to find a way to hide this from his investors. He confronted the company with this problem and his need to skate over its links with the armaments industry.
The directors were perplexed at the fund manager's morals, as the company actually made parts for water tanks. But if it did make military components how could this be justified in any ethical fund? I am certain these thoughts simply would not occur to a fund manager today.
Not every company has specific funds dedicated to ecological or environmental issues, but they are nonetheless aware of the issues. For instance, Schroders has an ethical investment unit that undertakes research into companies that conduct themselves in an ethical manner and considers them purely from an investment perspective.
Robin Stoakley, client services director, states that "Schroders is aware there is an increasing demand to run assets with an eye on ethical issues. In reality, a bad company is one that pursues anti-ethical and anti-environmental policies and ultimately the shareholders will pay for these policies."
The over-riding factor is that green issues are no longer confined to socially responsible investment managers, but are now being embraced by the entire fund management industry.
As proven by the countrywide autumn floods, environmental changes are affecting us all and appear to be increasing.
The past 10 years have seen an explosion of environmental legislation across Europe, and this has raised the share price of ecologically sound companies.
Companies that adopt a green stance in their business dealings are likely to become a strong investment prospect.
Green considerations will eventually become the mainstream investment process, and I am sure we will move much closer to this concept over the next 10 years.
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