Ethical investment: After the crunch
Monday, 09 November 2009 09:25
Ethical investment was riding high on a wave of good will before the financial crisis really took hold.
In 2007, an ethical investment fund comfortably beat all other UK investment funds, showing that money was not necessarily the root of all evil.
Since then, the ethical movement has gathered pace with big corporations and world leaders now keen to identify themselves with the green and fair trade movements.
But in 2008 and 2009, the financial crisis sent investors scurrying to defensive stocks, many of them - tobacco, mining, defence and pharmaceuticals - incompatible with an ethical approach, but which traditionally perform better in a downturn.
As ethical funds are restricted from investing in certain sectors, this robbed them of the flexibility to move their assets and protect themselves from the storm, and ethical funds have moved right down the performance list over the last two years.
Sarah Routledge looks at the future of ethical investment.
According to research from Investment Life and Pensions Moneyfacts last month, only three out of 60 ethical funds posted a positive return in the past year, while over the last three years ethical funds dropped in value by an average of 16.4 per cent - compared to a shortfall of 9.2 per cent on conventional funds.
Over ten years, the situation does not improve - ethical funds are down 4.28 per cent compared to positive growth of 26.74 per cent for conventional funds.
Richard Eagling, editor of Investment Life & Pensions Moneyfacts, says: "Just two years ago, the defence for ethical fund performance was strong, with returns outstripping those of their non-ethical rivals.
"Unfortunately, the performance of ethical funds is now lagging behind that of their non-ethical counterparts.
"Although there is little doubt the past couple of years have been challenging for the green investor, the long term outlook for the ethical sector remains positive."
While charitable organisations and religious organisations need ethical investment, is it a realistic option for the private investor?
Peter McGahan, independent financial adviser for World Wide Financial Planning (WWFP), says ethical investment just isn't on the average investor's radar.
"From a green point of view, I don't think people really believe it," he says. Consumers faced with a slew of slick marketing and green taxes tend to be cynical when it comes to products with a green or ethical tag, Mr McGahan explains.
And the poor long-term performance of ethical funds has not helped either.
"When push comes to shove, people want to keep their money safe - especially in a financial crisis. And ethical funds can't really compete with conventional funds, as they are restricted."
Some funds do perform better than others, however, and Aegon's Ethical Equities Fund is rated by WWFP to be the best in the UK All Companies sector, followed by the Aviva UK Ethical fund.
In Europe, Aviva's SF European Growth Fund is currently leading the way, while globally Jupiter's Ecology Fund or Aberdeen's Ethical World have shown the most success among their peers.
Kathy Booth, independent financial adviser for The Gaeia Partnership, says the financial climate has not put off their clients - many of whom are private investors.
"I think the people who are ethical remain ethical. Perhaps people with new money might need to be reassured, to see that they are making a sound investment."
Even without being able to invest in the 'sin stocks' of mining and tobacco that have been propping up conventional funds, many ethical funds have held their own, she adds.
Ethical funds are becoming more mainstream, but Ms Booth believes they would be even more popular if there was a greater awareness.
"There is this whole section of middle England - those who do their recycling, buy organic food and try to reduce their carbon footprint - that don't know what they are investing in.
"The Co-op did a survey and 60 per cent of people they interviewed said they would prefer to invest ethically, provided it wouldn't reduce the returns by a significant amount."
If independent financial advisers talked about ethical investments more, investors would be more aware of their potential, she points out.
Of the larger funds, Ms Booth likes the Insight Evergreen Fund, Norwich Union's range of ethical funds and Aegon's Ethical fund.
Saran Allott-Davey, senior planner for independent financial advisers Heron House, explains ethical funds are more heavily exposed to small companies, so have been hit harder by the recession - but will recover faster.">
Existing clients are happy to wait out the downturn she adds, as their ethical stance has not changed.
"But new investors, given that many funds have an emphasis on smaller companies may be more volatile, so may take more of a safety-first approach."
There are differences between ethical funds that consumers should be aware of, she adds. While many work by excluding companies whose ethics don't make the cut, others focus on a small number of companies that are making a difference with socially and environmentally sound initiatives.
These funds with a 'positive' investment strategy can have a higher risk than bigger funds with a 'negative' investment strategy, which seek to exclude companies that do not fit the profile, such as defence or tobacco firms.
But investors can feel that they are really making a difference - for example, microfinance in Africa is enabling local people to set up their own businesses.
"My view is putting 95 per cent of your portfolio in conventional funds and five per cent in funds that are really going to make a difference," says Ms Allott-Davey.
"It's not very realistic to think every penny of your investments should be dictated by conscience."
Funds like Quadris - which is not regulated by the FSA - that invest in sustainable forestry plantations in Brazil should be more mainstream and more available, she says.
Ms Booth says many investors like to have an interesting or alternative investment product in their portfolio and this could be an ethical investment.
"We do have an investment called Green Pastures, which invests in social housing for ex-offenders. You get a return and can make a difference to society."
Despite the financial crisis, ethical funds clearly still have a role to play, and that role will become larger as environmental and social concerns grow.
"If anything, the financial crisis has increased interest in ethical finance, as more people are thinking about what ethical behaviour means in a financial institution," says Mark Robertson, site editor for www.yourethicalmoney.co.uk.
"I think we are looking at an irreversible switch in the way we are looking at banking and financial products," he adds.
"Ethical finance is not just about investing in line with your beliefs, but also realising that issues like climate change are not going to go away."
Climate change will effect long-term investments and fund managers need to be aware of how this can affect their holdings, whether they are investing ethically or not, Mr Robertson explains.
And with world leaders pledging action on environmental issues, more opportunities will emerge for companies with an ethical agenda, he adds.
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