Funds which fulfil socially responsible criteria or steer clear of controversial industries outperform the market, writes Jeff Salway
Investing in line with your principles doesn’t mean sacrificing profit, new research shows – yet demand for ethical funds remains relatively sluggish.
Funds that steer clear of controversial industries or which invest in line with ethical and socially responsible criteria have typically outperformed over the past 12 months, according to figures published to mark Good Money Week, which ends today.
Data from Investment Life & Pensions Moneyfacts found that the average ethical/socially responsible investment (SRI) fund is up 8.2 per cent over the last year, comparing favourably with returns from the average non-ethical fund of 6.8 per cent. The pattern is repeated over three and five years too, although non-ethical funds prevail over the ten-year timeframe.
“Ethical funds have enjoyed a productive 12-month period,” said Richard Eagling, head of pensions and investments at Moneyfacts. “A renewed focus on climate change and the strong performance of ethical funds will hopefully encourage more investors to grasp the opportunities offered by the ethical fund sector.”
Many funds labelled ethical or SRI have benefited from the recent slide in oil and commodities shares, to which they have limited or no exposure. The Good Money Week initiative aims to promote the benefits of ethical investing and boost the number of people willing to put their money where their morals are. More than half of investors want their savings or pensions to have a positive impact, according to research for Good Money Week, with bribery and corruption, tax avoidance and data protection the areas in which they most want the companies in which they invest to behave responsibly.
Simon Howard, chief executive of UKSIF, which coordinates Good Money Week, said: “The clear message from the public to the finance sector is: make our money count. This rising demand for sustainable investment lays down a real challenge to the industry. So far it has responded well with a diverse range of sustainable options from energy efficiency and blue bonds to sustainable investment funds and community crowdfunding – but more needs to be done.”
But while more money is flowing into ethical and SRI funds, take-up fails to reflect greater public interest in other socially responsible products and services.
Julian Parrott, partner at Edinburgh financial adviser Ethical Futures, said: “Research shows that people with absolutely no ethical concerns are actually in the minority, but I’m sure that many people are unclear as to whether traditional ethical investment is for them or failed to understand the potential that their small investments can actually have a wider impact.”
Most of his clients offer lists of areas they want to avoid investing in, such as companies linked to arms, environmental damage and child labour. “Probe a bit deeper and they express concerns about issues such as tax avoidance, executive pay, climate change issues, corporate social responsibility and responsibility to the community in which they operate.”
Among the difficulties those wanting to avoid or invest in certain sectors face is identifying suitable funds. A range of vehicles sits under the ethical/SRI umbrella, from those that invest in specific sectors to those that simply “screen out” certain activities while investing in others that many investors might not consider ethical.
Analysis by responsible investment specialists Castlefield identified the “organisations demonstrating transparency whilst investing positively in companies providing social and environmental solutions”. They include Dundee-based Alliance Trust Investments and the Impax Environmental Markets Investment Trust.
The study also singled out the “spinners” – the ethical and environmental funds investing in companies that contribute to social and environmental problems. They include the Aberdeen Ethical World Fund, due to its investment in shale oil extractor EOG Resources, and the Virgin Climate Change fund, which includes Shell among its top holdings.
“The market has developed in range and complexity and as such it’s hard to communicate to clients,” said Parrott. “Speak to any industry person and they will name a host of terms such as sustainability, environmental social and governance issues, social impact and socially responsible investment which are harder to communicate and explain to investors.”
While the traditional negative screening approach is fairly easy to understand, the issues many people want to influence are increasingly complex and lend themselves more to the positive screening approach, based on engaging with companies to improve their behaviour, rather than avoiding them.
Younger age groups are more likely to invest in companies that achieve “positive environmental and social outcomes”, according to a recent Standard Life Investments paper on millennials and investing. It predicted that values-based ‘impact’ investing would soon enter the mainstream as millennials look “for investment vehicles that make a difference to the world”. That demand has been fuelled by a series of corporate scandals engulfing global brands including BP, Starbucks, Google and, most recently, Volkswagen.
But ethical/SRI investment is a personal matter. “It really depends on what your objectives are, your tolerance of risk and your capacity for loss,” said Parrott. “And of course, investors should speak to an ethical financial adviser.”