WE’RE fond of telling banks to focus on principles as well as profits – and it seems Scots are increasingly willing to walk the talk and put their money where their morals are.
Investors in Scotland are more likely to want green and ethical concerns to be factored into their investment decisions than those elsewhere in the UK, new research shows.
The study, commissioned to mark the start today of National Ethical Investment Week, found that 55 per cent of savers and investors north of the Border want at least some of their money decisions to reflect their ethical and green concerns, compared with 44 per cent across the UK.
Penny Shepherd MBE, chief executive of the UK Sustainable Investment and Finance Association and co-ordinator of National Ethical Investment Week, said: “This year has seen the shareholder spring and a summer of banking scandals, and it’s clear that more people than ever want to make money and make a difference with their savings and investments.”
The campaign aims to promote awareness of green and ethical investment and convince more people to think about their principles when it comes to saving and investing their money.
Private investors hold more than £11 billion in green and ethical funds in the UK, according to the Ethical Investment Research Service (Eiris), with the number of ethical investors tripling to more than 750,000 over the past decade.
Friends Provident was the first to promote ethical funds in the UK when, in 1983, it launched its Stewardship range, which is now under the F&C brand.
The market has grown steadily since, with more than 80 ethical funds available to investors. They range from funds that merely rule out investing in “sin” industries such as tobacco and oil to those that seek to engage with companies to improve their behaviour, and the choice is increasingly varied.
But while more people want their principles and beliefs to help shape their investment choices, ethical funds account for just 1.5 per cent of the value of managed investments in the UK.
That the growth of ethical investing has not been more rapid reflects low awareness, lingering cynicism over its worth from an investment perspective and the difficulty of defining ethical stocks and funds.
One charge frequently levelled at the sector is that investing ethically comes at a price. Some claim that ethical funds are inherently hamstrung by having to adhere to particular criteria, which reduces the manager’s room for manoeuvre during times of volatility. There’s also a natural weighting in many ethical funds towards smaller companies, with the added volatility which that implies.
But the perception that investing ethically means sacrificing profit is wide of the mark, according to one of the UK’s biggest ethical IFA firms, Barchester Green Investment. Its new report on the “winners and sinners” of the ethical sector found that many green and ethical funds have produced strong returns in recent years.
The top ten funds in the sector have all returned between 13 and 19 per cent in the last 12 months, compared with the average UK All Companies return of 18.7 per cent over that time.
The top fund over both three and five years – the First State Asia Pacific Sustainability Fund – boasts growth of 56.8 per cent and 78.6 per cent over those periods respectively.
John Ditchfield, managing partner of Barchester Green, said: “The strong financial returns being delivered by many ethical funds hasn’t gone unnoticed and we’re seeing an increase in enquiries, with many savers having lost faith in the activities of the banks and the pitiful savings returns that they offer. Increasingly, people are realising that they can invest in something they believe in, as well as making a financial return.”
As Ditchfield admits, however, it’s easier said than done, thanks to the array of approaches that come under the ethical umbrella.
Broadly speaking, ethical funds tend to be classed as “dark green” or “light green” and either “screen” out non-ethical criteria or use positive screening to identify suitable stocks. Yet the relatively small ethical fund market houses dozens of different themes and strategies.
Jason Hollands, managing director at Bestinvest, said: “The commonly used classifications of ‘dark green’ and ‘light green’ are woefully inadequate in our view, since this masks the fact that there is no common approach to policy across various providers offering highly differentiated funds and processes.”
He uses the example of animal testing to illustrate the choices facing ethical investors. While some ethical investors consider animal testing completely unacceptable, said Hollands, others view it as necessary for firms involved in the research of treatments for life-threatening diseases.
That underlines one of the chief problems in the sector: defining what is and isn’t “ethical” and, for investors, being able to identify funds that accurately reflect their preferences.
“Potential investors need to decide what the key issues of concern to them are – in particular whether they want a broad-based ethical approach or a more narrow focus on the environment – and then select a fund with a set of policies that appeals,” said Hollands.
So ethical investors have to be pragmatic about what they want and expect, according to Julian Parrott, partner at Edinburgh IFA Ethical Futures.
“There is no one definition of ‘ethical’, and this applies to investment funds as much as anything else and it’s difficult to take an absolutist approach,” he said.
The Ecclesiastical Amity International fund, for example, has holdings in an investment trust that, in turn, has holdings in tobacco companies. “It’s alarming to find that such a highly regarded ethical fund takes its duties to act as a responsible investor so lightly,” said Ditchfield.
Parrott countered: “When dealing with investments with multi-billion-dollar companies with many subsidiaries, it is difficult to be absolutist about some issues.”
As an adviser, Parrott seeks to diversify risk by investing in funds that invest across a range of sectors. Sometimes ethical conflicts will override financial concerns. On other occasions they will be considered minor issues worth tolerating. “We feel it’s better to invest money in funds that do have a core approach to investing with ethical criteria and put money into funds that will try to engage with companies on issues rather than just ignore it altogether,” he said.