9th March 2012
What ethical funds stood for used to be relatively straightforward – a manager would simply avoid stocks if they were associated with industries such as tobacco, brewing, armaments, oil or pornography.
But now, the vast majority of green funds focus on "socially responsible investment'', or SRI. This means that rather than screen out stocks, funds that follow the SRI route take a more positive approach, investing in companies that adopt good environmental and social practices, regardless of sector.
This is the "engagement" approach
It can, however, be difficult to decipher what funds stand for, which is why some ethical funds invest in companies that many may not appear to be environmentally friendly, such as oil companies, for instance.
However, if companies measure up poorly, managers will go back and talk to the board and encourage them to do better.
There are various means of finding a list of companies deemed ‘ethical'. For example, The Ethisphere Institute, a New York City think tank, has a list of the World's Most Ethical Companies. The selection, open to every company in every industry around the globe, gives its winners an opportunity to trumpet their do-gooding ways.
But sometimes it is just down to personal opinion. Some would argue that British Gas is more ethical than it used to be, but for other investors, simply because it does provide energy in a way that is environmentally questionable, it should be excluded.
However, companies are improving their ethical stance in general.
Mark Robertson, head of communications at EIRIS, the Ethical Investment Research Service, says: "If you think about high profile company failings over last few years, BP, News Corp, Vedanta, and Olympus spring to mind – these are all companies with high profile failings across a diverse range of areas. At its best responsible investment is about identifying what's wrong – such as the problems with these companies – and engaging with them on how to put them right.
"Things are changing partly because of increasingly awareness of ethical/sustainable stances, and also companies are changing for the financial returns this brings – as investors are interested in companies performing well because of their ethical considerations. They tend to be less risky investments and perform better over the long-term. So if you're a pension investor, for example, this is particularly attractive – climate change will, for instance, shape the success of companies who are adapting to its challenges."
He singled out Vedanta, the resources company, in particular, as one that has suffered high-profile failings in terms of the environment and displacing indigenous people. "A bunch of investors put pressure on the company to improve its act – and as a result it's appointed a group sustainability officer and linked salaries to the management of risks such as health, safety and the environment," says Robertson.
Sectors that aren't typically deemed ‘ethical' are improving their ways, says Ketan Patel, senior SRI analyst at Ecclesiastical Investment Management Ltd and a Mindful Money blogger.
He writes on his blog: "The exponential growth in the luxury sector, fostered by strong demand from China, raises compelling issues for the responsible investor; is luxury by definition sustainable, and moreover in times of austerity and recession, can it be considered as part of an ethical portfolio?
He adds that the sector is seeing innovative policy changes occurring with corporate social responsibility initiatives becoming more prevalent within many companies. "Swiss luxury goods giant Richemont (Cartier, Mont Blanc, Dunhill) has published a ‘green handbook' that assists architects with environmental considerations when designing new buildings, while another of the group's bands, Chloe, has reviewed its packaging with 80% now produced from FSC (Forest Stewardship Council) board," says Patel.
"…The industry is changing, and discarding a view that sustainability does not matter. The luxury industry is aiming to redefine itself so that products embody highly valued social and environmental criteria that set them apart from other cheaper, more disposable products. By these means we believe sustainability and luxury will no longer be seen as antagonistic ideals. All stakeholders – investors, suppliers and consumers – need to engage the luxury sector to assist in the journey towards greater sustainability."
However, the choice when it comes to picking an ethical fund can be overwhelming. Asset managers set different ethical criteria and one ethical fund may be very different from another. Like conventional investing, investors can do their own research or buy through an adviser. But a popular option is to go to an ethical specialist independent financial that will pay an ethical screening service to carry out the research for them.
But if you want to make a difference, put pressure on the companies you invest in. The more companies hear from their investors about issues which are close to their hearts, the more likely they are to polish up their act.
So making ethical changes to your stock selection lies partly in your hands…
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