Jeff Salway: Does it pay dividends to be an ethics man?

Many investors wish to use their money in a way that suppports companies making a positive contribution to the environment. Picture: Getty
Many investors wish to use their money in a way that suppports companies making a positive contribution to the environment. Picture: Getty
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Sticking to your principles can be far from easy, says Jeff Salway

Savers and investors in Scotland increasingly want their money to make a positive change to society and the environment, a study has found.

But while the appetite for ethical products and investments is stronger than ever, working out how best to invest in line with your principles is far from easy.

Almost two-thirds of investors in Scotland want their money to support companies that are not only profitable, but also contribute positively to society and the environment, according to research by Triodos Bank.

The same proportion believe people should use their money in a way that supports companies making a positive contribution to society, people and the environment. The survey also found that four in ten people would move their money if they thought it was invested in companies that conflicted with their own values and ethics.

Huw Davies, head of retail banking at Triodos Bank UK, said: “Our research reveals that a majority of investors now want sustainable and ethical investment options, and the industry must respond to this demand.”

The research was conducted to mark Good Money Week, which ends today (5 November). Almost four in ten Scots surveyed by Triodos believe long-term investments are likely to perform better in sustainable and ethical funds. And there is evidence to suggest they might be right.

More than half of ethical equity funds have outperformed the FTSE All share over 10 years, analysis by fund firm Architas shows. The FTSE4Good UK index has also outperformed both the FTSE All share and the MSCI World indices over the past five years.

“Because ethical funds do tend to avoid certain sectors and companies it means that there can be periods of performance which will differ from the market and the fund could lag a broader market rally,” said Adrian Lowcock, investment director at Architas.

“However, ethical investing has evolved significantly over the past ten years and today there are plenty of companies investors can choose from which actively endorse ethical investment.”

The problem for investors is identifying the most suitable options. The growing range of ethical and socially responsible investing (SRI) funds available to UK investors houses a number of different approaches. Some simply “screen out” certain sectors – such as gambling, tobacco, alcohol, pornography and animal welfare – while still investing in areas that some investors may feel are not especially ethical or socially responsible.

Other funds take the engagement approach, investing in companies with the aim of improving their behaviour and policies.

But Triodos found that many investors want the fund industry to do better in this area by improving transparency, offering more SRI options and disclosing where their money is invested.

“We see a growing awareness amongst investors that their money has an impact on the world in which we live through how it is used by banks and funds,” said Davies. “We want all banks and financial providers to be more transparent and open about where they invest people’s money, so that investors can make informed choices.”

Investors may also struggle to find options that reflect their own principles. The issues becoming more prominent include tax avoidance, executive pay and the living wage. The latter has been highlighted during Living Wage Week, which also ends today, as pressure grows on companies to pay employees a minimum of £8.45 an hour (rising to £9.75 an hour in London).

Investors are now likely to take it for granted that ethical and SRI funds will avoid areas like arms and tobacco, according to Julian Parrott, partner at Edinburgh-based adviser Ethical Futures.

“They are therefore more likely to address other more topical issues such as fossil fuels and climate change issues. People are not immune to headlines, so they tend to lead on issues like executive pay, corporate tax avoidance, and they also express concerns on the living wage and the expectation that investee firms should pay this.”

However the investment industry is still behind the trend on this, said Parrott.

“These are areas that ‘ethical investment’ has not really caught up with as regards traditional screens,” he said.

“That’s where we add value because our knowledge allows a more considered approach to understand which organisations have an actual investment philosophy regarding positive investment policy and which just buy a list of negative screens and invest in what’s left.”