Ecologist guide to ethical investments
Eifion Rees and Matilda Lee
5th November, 2010
All you need to know to start putting your money where your mouth is
Everything about green investment has changed in recent years: from the range of ethical eco funds or pensions available to the type of investor and the extent to which they wish to invest.
Depending on how and where you choose to plough your money, the conflict between profit and principle is disappearing. Environmentally sustainable and socially responsible investment is now a multibillion-pound enterprise that attracts a wide range of investors looking to change the world and turn a profit.
As a UK Sustainable Investment Forum (UKSIF) media roundtable heard in September, 49 per cent of investors now say they want to make money and make a difference, while a recent study by the European Social Forum found that sustainable investment now makes up 11 per cent of the portfolios of high net-worth individuals. The message? This is no longer a minority concern.
When likeminded people pool their cash the impact they can have is huge, and more people stipulating where they don't want their money invested - in coalmining or logging in the Amazon, for example - means companies are taking notice.k
‘Most aren't choosing to do good things because it makes them feel good, but because there is now a clear link between them not doing so and losing money.' says Ketan Patel, a socially responsible investment analyst for Ecclesiastical Investment Management.
There are now approximately 100 green and ethical investment funds, worth £10 billion. Often linked to specific savings vehicles such as ISAs or personal pensions, some focus on climate change and green solutions, others combine a concern for environmental issues with particular social ones.
Underlining the extent to which that concern is growing, consider that many of these funds are now performing in line with the market - if not outperforming it - and 90 per cent of wealth managers surveyed last year by EIRIS said their responsible investment portfolios were doing as well as if not better than their other investments.
The funds employ different approaches to decide on which companies to invest in. Screening means excluding companies from the portfolio based on their involvement in negative activities, or including them for positive ones. Best-in-class (or preference) means favouring companies that have a better ethical or environmental record, when all other factors are equal. Engagement is effectively working from the inside, using shareholder power to encourage the adoption of environmental or ethical best practice.
Engagement has its downsides, however, with several investors discovering to their horror in recent years that their ‘ethical' funds invest in oil, tobacco and pharmaceuticals. Last year it was revealed that one of the UK's first ethical funds, Friends Provident's F&C Stewardship fund, had relaxed its strict ethical policy to include banks such as Barclays and HSBC.
There have been success stories, however: ethical shareholders in BP - including Co-operative Investments - tabled a resolution at the oil giant's AGM in April calling for a review of tar-sands extraction in Alberta. It lost, but a significant number of voters swung behind the resolution.
Because not all funds calling themselves ‘ethical', ‘sustainable' or ‘environmental' are created equal, it's wise to check what screening process they use before investing. Barchester Green Investment sorts the green from the greenwash with an annual ‘heroes and villains' rundown.
Remember too that not all ethical investments focus on profit as the final result. David Vincent of Ethical Investments in Sheffield explains that Industrial and Provident Societies (IPS) put capital to work for the benefit of communities. ‘These are projects rather than funds - wind farms, hydroelectric schemes, local shops, even football teams - tangible products that will create tangible benefits. They raise money and pay investors interest, but the profit is ploughed back into the community.'
‘More people will go into a shop and ask how something was made than will look at the behaviour of the companies in their pension investment,' says Penny Shepherd, chief executive of UKSIF.
This is despite the fact that pension funds account for at least a fifth of share-ownership on the UK stock market - making pension fund activism an under-utilised but powerful tool.
Since a 1999 revision to the Pensions Act, all pension funds have been required to state whether they included social, ethical and environmental factors in their investment policy. After familiarising yourself with the basics of pensions, you can use the information available to decide which fund to choose, and consider the avenues available in shareholder activism.
Tips on choosing pension schemes and investment funds
EIRIS runs the YourEthicalMoney.org initiative to provide consumers with independent information about green and ethical finance, including personal pensions. Click on advanced search and tick ‘pension' to see which funds are available.
‘If your employer provides you with access to an occupational pension fund then it may invest in the stock market as a whole, and something to look at is whether the fund manager has signed the new UK stewardship code,' says Penny Shepherd.
EIRIS recently invited the UK's top 100 occupational pension schemes to take part in a survey to find out the extent to which they incorporate environmental, social and governance (ESG) issues such as human rights, poverty and climate change into their investment process. There was a 40 per cent response rate. If yours is included you can view it here.
Find an independent financial advisor who specialises in ethical funds and is a member of the Ethical Investment Association. You can also contact the UK Sustainable Investment and Finance Association (UKSIF), a network for sustainable and responsible financial services with 200 members.
Get involved in pensions
• Information for trustees can be found here.
• Friends of the Earth's Demand Ethical Investment campaign page has a sample letter than you can send to your pension fund asking what their ethical investment policies are. The address will be in your annual pension report or, if you have an occupational pension, you can get the address from your employer.
• Fair Pensions campaigns to use the power of the shareowner to improve company behaviour. ‘We want investors to act as if they own the company,' says Duncan Exley, Fair Pensions' director of campaigns. ‘They have influence with the companies as shareholders. We also encourage pension fund holders to put pressure directly on companies.'
• Its current campaign Got Oil? aims to shift pension fund investments out of the risky business of oil.
Get involved in ethical funds
• Jupiter Ecology. Nearly £350 million is invested in the UK's most famous "deep green" fundwhich screens out companies and selects stock according to ethical and environmental criteria. Big holdings include Danish wind power firm Vestas and US organic distributor United Natural Foods.
• Henderson Global Care Growth will invest only in companies whose products and practices are considered to ‘enhance the environment and life of the community'.
• Ecotrcitiy EcoBonds. EcoTricity aims to raise £10 million to build new windmills, sunmills and renewable gas sources. Fixed annual interest of 7% (7.5% for its electricity customers) over four years, minimum £500 investment.
• Holden & Partners produced 'A guide to climate change and ethical investing' which examined the top 10 holdings of all ethical and environmental funds available to UK private investors.
Eifion Rees is the Ecologist's acting Green Living Editor and Matilda Lee is the Ecologist's Community Affairs Editor
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