Seventy per cent of people in Great Britain consider their outlook and lifestyle to be green and ethical, and 49% of people with savings and investments would like to make a difference with their money, according to the UK sustainable investment and finance association (UKSIF).
Interest and trust in ethical investments is growing. Independent ethical research specialist EIRiS reveals there is currently £7bn invested in ethical funds in the UK, compared to £1.5bn ten years ago.
How do ethical funds invest?
Ethical funds limit their investment strategy to those companies that match their ethical criteria. They do this in two ways.
Some funds use ‘positive screening’ to include companies that are strongly pro-environment. These include companies which manufacture environmental products, encourage biodiversity, or promote renewable energies.
Other ethical funds seek to exclude companies involved in various ‘unethical’ industrial sectors such as tobacco, alcohol, meat, nuclear power, defence, or intensive farming. Activities that can be avoided include deforestation, exploitation of workers, or animal testing.
The definition of what is ethical is sometimes problematic, however. The critics say that ethical funds are not transparent enough to convince investors they are genuinely ‘green’.
Potential investors sometimes claim that the screening process limits the number of companies available to ethical fund managers, and therefore hampers their ability to maximise returns.
By avoiding investing in global banks, for instance, some ethical funds are said to have missed out on the recent rally in economic markets.
The energy issue
If we consider an ethical investment as a means of bringing about real progress in, for instance, developing renewable energies, we raise an important question.
It has been said that the oil giants, normally shunned by many ethical funds, invest more money in researching alternative energies than smaller ’boutique’ companies specialising in wave energy or wind power – and that Texaco and BP therefore have a right to be included in our ethical portfolios as well.
Some funds which market themselves as ethical do invest in oil and gas, believing these to be essential to produce a competitive return for their investors. However, they claim to select those energy companies which have an environmental policy in place, and are making some gestures towards respecting the environment, insofar as that is possible in their industry. The phrase ‘least worst’ has been coined to describe the oil and gas companies concerned, when compared to others in their sector.
Investment policies, therefore, are far from black and white. Investors remain sceptical on the subject of how ethical so-called ethical investments really are, with 44% of UK investors claiming that the financial services industry needs to provide clearer evidence of the green impacts of ethical investments. As a result, only 8% of UK investors currently hold an ethical investment or savings product, according to EIRiS.
Principle First Chartered Financial Planners is one of the leading UK independent financial advisers and distributors of mortgages, insurances, pensions, investments, and ISA accounts. In 2008, Principle First became one of the few financial advisers to achieve the status of Chartered Financial Planners, the UK’s ‘gold standard’ in financial advice. Find ethical funds advice at principlefirst.co.uk.