Ethical investment combines the social or environmental considerations of the investor with their financial objectives. It can be found throughout the industry, in the form of Unit Trusts, Investment Trusts, pensions and savings schemes, and is growing at an impressive rate. Traditional ethical funds are involved with a positive and negative selection process, where money is invested in companies that make a positive contribution to the world and withheld from companies that do not. This strict screening method has perhaps fuelled the idea that ethical funds have been unable to compete with their unconstrained counterparts in terms of performance, but it is not true to say that following your conscience will mean poor performance and ultimately poor returns on your investment.
The first ethical fund was launched in 1984 and there are now around 100 retail ethical funds in the UK. Further interest in the sector can be seen in the Ethical Investment Research Service (EIRIS) figures, which state that the ethical funds industry totalled £9 billion in 2008, up from £1.5bn in 1998.
The Government has started to pay serious attention to the ethical issue, as displayed in its involvement in the UN’s 2009 Climate Change Conference in Copenhagen. It also demonstrated a growing interest in ethical funds when it enacted a law requiring pension funds to disclose whether or not they incorporate any social, environmental or ethical assessments into their funds’ investment strategies in July 2000.
The developments in the ethical sector suggests that we are changing the way in which we make our investment decisions, thinking more about our influence as shareholders.
Ethical investing begins with your ideas and principles; what issues you believe to be important. Just as different people have different views on the definition of ethical, not all funds have the same objective.
Companies that are included in the portfolio of an ethical fund are at first ‘screened’, a process that determines whether the company matches the fund’s investment standards and ethical policy. The investment objective of a fund may have a combination of negative and positive criteria, in other words actively avoid those companies, for example, that are known to harm the environment and invest in companies involved in socially progressive business. Each fund should clearly state their ethical criteria and provide you with information on the companies they invest in.
According to EIRIS, examples of negative criteria include: animal testing, gambling, human rights abuses, military production and sale, pornography, alcohol, genetic engineering, pollution and Third World concerns.
The areas of positive criteria include equal opportunities, environmental programmes, conservation of energy, fair trade, education and training and support of community projects.
Most ethical fund managers choose their portfolio of investments from an approved list created by a specialised research team. Some fund management groups have their own in-house research panels, while others look to external providers for ethical information.
The Ethical Investment Research Service (EIRIS) is the leading independent provider of research into the ethical performance of companies and assists many management groups in their investment decisions. In July 2001, the Financial Times Stock Exchange (FTSE) with the help of EIRIS created a series of indices called FTSE4Good, which aims to include companies with strong environmental and social records. This has prompted some management groups to launch tracker funds based on the new ethical indices, and requires little ethical research by the groups themselves.
Ethical or Socially Responsible Investment?
The origins of modern ethical investment can be traced back to the beginning of the 1900′s. The Methodist Church decided to invest in the stockmarket, purposely avoiding those companies involved in alcohol and gambling. The church was also behind the proposal for the first ethical trust in the UK in 1973, but it failed to win approval. The first ethical fund was finally launched in 1984, by Friends Provident.
As the ethical investment market has developed, so too have its terms and policies. If you have ever considered investing ethically you may have come across the term of Socially Responsible Investment (SRI). Some believe SRI is interchangeable with the more common term of ethical, while others believe there is a clear distinction between the two. Those that think there is a difference describe ethical investment as simply avoiding companies through negative screening and SRI as a process that considers all companies for investment with the aim of encouraging change. This inconsistency highlights that ethical investment can mean so many different things to different people. Whatever the opinion the basic concept should be the same: investment with environmental, social and ethical consideration.