More individuals taking moral high ground on investing

Record numbers of individuals are investing with a conscience. The level of investment into ethical retail funds is rising as more investors take the moral high ground on a wide range of issues, from weapons development to tobacco production to nuclear energy.

Ethical — or socially responsible — investment is influenced by social, environmental or political issues. Ethical funds typically either look for companies that are actively pursuing ways of improving the environment, international relations or the economy, or avoid companies that they consider have a potentially negative effect on the way we live.

Mark Mansley, an investment director at Rathbone Greenbank Investments, says: "Many clients wanting ethical investment do so because they want to have some connection with their money and how it is being used. Ethical investors want to be participants in the real economy, with all the risks and opportunities that entails."

Background

It dates back to the 19th century, when religious movements such as the Quakers and Methodists voiced concerns over issues such as fair employment. At the turn of the 20th century, the Methodist Church began investing in the stock market, but avoided companies involved in alcohol and gambling.

The first ethical fund — the Pax World Fund — was set up in the US in 1971 as a stance against the Vietnam War. In the 1980s the apartheid regime in South Africa accelerated the promotion of ethical investment. Eiris formed in 1993 to provide independent research for ethical investors and the UK's first ethically-screened unit trust — Friends Provident's Stewardship Fund — was launched in 1984.

The range of funds has grown enormously over the past decade. There are currently 75 ethical funds in the UK, and three more are to be launched this summer. Some funds avoid companies that, say, manufacture weapons, develop nuclear power stations or produce cigarettes and alcohol. Others invest in companies that are actively looking to better the environment by developing renewable energy techniques, recycling or helping poorer economies. There are also funds that invest in "vegan" companies, which avoid anything to do with meat or meat products.

Most funds have their own ethical committees to decide the criteria. The fund's objectives are usually set at launch and do not vary. Some committees have the power to veto every stock, while others will take a more advisory role.

There are different levels of screening. A "positive" approach means that the fund manager will only invest in companies that are actively working to improve the world in some way. These invest in the so-called "industries of the future".

"Negative" screening excludes those companies that are deemed to have a bad influence on the environment, or on our health. The strictest funds in terms of excluding "bad" companies have "dark green" strategies. "Light green" funds may invest in some of the companies that are considered harmful, but only if the company is willing to engage in talks to bring about positive change.

People are becoming more aware of the environment and are starting to realise the impact their investments can have. There is an increasing desire among investors to make their funds do some good as well as generate returns.

Is there an impact on performance? Mansley believes not.

"Returns are important to our clients - we often think ethical investors are more demanding than most as they want to be ethical, as well as having good returns with reasonable risk," he says. "Fortunately the evidence is that with care this is entirely possible."

He says the choice of fund manager and asset allocation/approach is more significant than whether it is an ethical or non ethical fund.

Choosing a manager

Much like any other fund, a good investment process is critical. For example, Mansley says integrated ethical research is ideal — so the managers understand the ethical issues.

Investors should look for openness and honesty in a manager, particularly over the risks of their particular approach.

There are a growing number of "social" or "impact" investments which aim to make a real difference while generating a return e.g. microfinance, community owned renewable energy, says Mansley. However, a risky and complex area — seek specialist help.

Ethical funds will not suit everyone and it is wise to have a clear idea of your objectives before you start looking for a fund. Make sure you find a fund that matches your principles, and check the experience of the fund manager and the costs.

 Points to consider before committing cash

Before you decide to invest in an ethical fund, be aware that the same considerations apply as with any investment. These include your attitude to risk, timescale, whether you're likely to need to access the fund, fund management fees and the financial strength of the fund provider.

As with all share-based investments, your investment can go down in value as well as up. Also, because many ethical funds exclude or screen out certain industries, their diversification (variety of different funds invested in) may be lower than other more mainstream funds, and this increases the risk of major fluctuations.

- Source: www.which.co.uk