Jeff Salway: Make it less hard for ethical investors to profit from principles

Published on Wednesday 11 November 2009 20:52

EVEN where individuals see the value in changing their behaviour, human nature dictates that many will only act if it is made easy for them to do so.

Recycling of household waste is a prime example, as is, for a different reason, ethical investing.

At a time when personal values influence all manner of day-to-day decisions, the ethical investment industry is in danger of being left behind. The message is more compelling than ever, but evidence suggests the battle to persuade us to invest according to principles is a long way from being won.

The argument in favour of ethical investment – currently being promoted in the form of National Ethical Investment Week – is more than persuasive, particularly with the climate change summit in Copenhagen just weeks away.

But while roughly 7 billion is invested in ethical funds today, compared with 1.5bn a decade ago, some 400bn is invested in non-ethical funds. This suggests that, a quarter of a century after Friends Provident kickstarted the sector by launching its Stewardship fund range, the investment industry has not tapped the ethical pound as successfully as might have been expected.

Why is that? The most commonly cited objection to ethical investing is the performance, with a perception that ethical investors pay for their principles. But a bigger problem is that investors are increasingly confused by the range of ethical funds on offer and the way ethical and socially responsible investments are promoted by the financial services industry.

Research shows just 12 per cent of investors would look at green and ethical investments if their financial adviser raised it with them. Nearly 50 per cent believe that to attract more money, the financial services industry must provide clearer evidence of the green and ethical impacts of investments. Of that there is no doubt.

The very size of the ethical investment arena is now one of the sector's problems, with the ethical tag increasingly misused. There are over 100 funds purporting to invest along ethical, environmental or socially responsible lines, with dozens of different themes and numerous different investment strategies, from negative and positive screening to engagement and "best in class".

And that's before you consider the fundamentals, such as risk appetite, investment objectives – income or growth, for example – and asset class mix.

Those investing without taking specialist advice risk being stranded in funds that fall well short of their own interpretation of what it means to be ethical.

Does it mean avoiding the banks, whose reckless lending practices helped cause the credit crunch? Or does it mean investing only in firms dedicated to the fight against climate change? Are you happy to invest in companies with dubious practices, in the hope that positive engagement will improve their behaviour, or would you prefer to invest in firms demonstrating high standards of corporate responsibility, regardless of their primary activities?

There are funds to meet the various criteria, but finding them is difficult without expertise or expert guidance. Recent analysis by advisers Holden & Partners found that many ethical funds' top ten holdings feature companies such as oil firms BP, Shell and Total, stocks that many ethical investors would seek to avoid.

Under the ethical roof you can find funds as diverse as the Jupiter Ecology and Henderson Global Care vehicles, which focus on environmental protection, to funds such as the Marks & Spencer Ethical, which holds companies including Tesco and Shell. Whether such companies can be considered ethical depends on your personal view, but the point is that the M&S fund and others with similar holdings, such as Legal & General Ethical, carry the same label as funds with entirely different criteria and definitions. More detailed ethical sector classifications are required, with funds doing more to quantify their moral stance and their investment policy, rather than merely jumping on the bandwagon with vaguely ethical themes.

Ethical funds can be a powerful force for positive change, influencing decisions taken at the highest corporate levels. But perhaps it's time for the industry to take ethical investing to the next level by heeding the lessons learned in the battle to promote recycling and making it easier for investors to profit from their principles.