Investing and the human rights tack
Interest in ethical investments is growing, so why are funds not responding, asks Jeff Salway
Investors and pension savers in Scotland are unwittingly ploughing their money into companies and industries that they consider unethical, a new report reveals.
Almost eight in ten people in Scotland with products including Isas and pensions would like more of their cash invested in companies in environmental and social industries, according to Triodos Bank.
Yet the study found that 65 per cent of investors north of the Border have no idea how ethical their investments are. Just 11 per cent of investors are aware that they can put their money in funds that invest along ethical and socially responsible criteria.
That means thousands of Scots are paying into investment and pension funds that support companies and sectors with which they are morally conflicted.
Those holding Isas and personal pensions are least likely to be aware of the activities in which their money is invested.
The research was published to mark Good Money Week (formerly National Ethical Investment Week), which ends today.
Huw Davies, head of personal banking at Triodos Bank, said: “While it’s clear there’s strong demand from investors to support more sustainable sectors, a lack of awareness may mean their investments are actually doing the opposite, supporting industries they are ethically opposed to.”
Some of the responsibility lies with the industry, he added, calling on investment providers to make it easier for investors to understand where their money goes.
Almost £10 billion is now held in ethical funds, according to the Investment Management Association (IMA), but that represents just 1.2 per cent of the industry’s total funds under management.
The responsibility lies partly with the fund firms who have so far failed to tap into the “latent interest” in ethical investments, claimed Jason Hollands, managing director at Tilney Bestinvest.
“Fieldwork undertaken for us some months ago revealed that two-thirds of UK adults polled indicated they would take exception to having their money invested in certain types of companies and only 21 per cent said they were happy to go wherever the best returns were to be found,” he said.
Investors in Scotland are particular opposed to holding money in funds exposed to human trafficking and forced labour, Triodos found. Pornography, arms/munitions, animal testing and tobacco are also prominent among the activities that would deter them from investing in a particular fund.
The overarching concerns for ethical investors tend to be environmental and social, rather than specific areas such as alcohol, gambling and tobacco, according to Julian Parrott, partner at Edinburgh-based adviser Ethical Futures.
“Currently there is quite a lot of concern over fracking and to a lesser extent about oil, mainly in relation to the fossil-free disinvestment campaign. From a social perspective, the issues tend to centre around what we refer to as governance issues in particular multinational tax avoidance (Amazon, Google etc) and executive pay.”
Investors have also become more eager since the financial crisis to avoid certain banks, Parrott reported. But he also expressed dismay at the “wholesale abandonment” of the Co-operative Bank by large numbers of ethical investors.
“The mere mention of hedge funds seems to have been enough to send them running, even though the bank itself continues to adhere to strong ethical guidelines and, with the exception of Triodos Bank, is stronger than any other bank in the marketplace.”
One barrier to wider adoption of ethical investing is a perception that it requires an acceptance of lower investment growth. Yet there is little evidence that there is a disadvantage to investing ethically, according to Parrott. “In fact in the last three or four years ethical funds have outperformed mainstream funds quite significantly,” he said. The average ethical fund is up 3.4 per cent over the last year, compared with growth of 3.2 per cent in the average non-ethical fund, analysis by Investment, Life and Pensions Moneyfacts shows. The average ethical fund also outperforms over three and five years, although non-ethical funds have been stronger over ten years.
Richard Eagling, of Investment Life & Pensions Moneyfacts said: “The latest ethical fund performance figures once again demonstrate that investors can stick to their principles and still enjoy healthy investment profits.”