Ditching ethics in investments over the recession?
Friday, 20 February 2009 05:16
Ethical investments are now more mainstream, but are morals being dropped with the economic crisis focusing investors' minds on the bottom line?
Or is disillusionment with mainstream banks and investors, encouraging people to invest with a conscience? Daniel Barnes looks over investments as Fairtrade Fortnight (February 23rd to March 8th) puts ethics on the agenda.
My-Linh Ngo, associate director of SRI Research at Henderson Global Investors, explains the financial crisis may have affected people's financial attitudes, but they were still thinking ethically.
"The bigger trend of investing ethically is not going away - but there have been short-term changes and adjustments.
"But we are finding on the high street people are trading down to cheaper products - but within the spectrum - so they are moving from organic to free-range."
With the desire for people to continue to act on the high street and invest ethically, she expects the sector to prosper still.
Investing ethically
Ethical investment funds obviously usually avoid certain areas - such as firms that pollute heavily, mines or those with poor labour relations.
However, there are some grey areas. Some people might deem tobacco not to be ethical - but what of a fair trade organic grower? Or an energy giant that among many activities does invest in wind power?
Jupiter's socially responsible investment (SRI) fund range focuses on clean energy, water management, green transport, waste management, sustainable living and environmental services - and assesses firms it invests in on how they improve their environmental or social performance through their products and processes.
The Henderson Global Care Growth Fund meanwhile over the last year has looked at areas that could benefit from the US economic stimulus plans, environmental consulting companies, energy efficient lighting, videoconference equipment manufacturers, and the producers of magnets for hybrid cars.
The Henderson Global Care UK Income Fund meanwhile has looked at rail and bus operators, and pharmaceuticals.
Ethical: From sandals to brief cases
Ethical investments have become far more mainstream in the last decade - with some estimates putting the level of SRI funds under management as high as one per cent of the whole market.
Brigid Benson, managing director of GAEIA, a Manchester-based independent financial advisers, specialising in ethical investment, explains over the 16 years the firm has been running, there has been a change in the type of people coming to ethical investment and how much she needs to explain the principles.
"It is definitely more mainstream and we don't have to explain the fundamentals of who we are and what we do," she explains.
"Once people discover the difference in investments, and that positive things can result from their investments, they really like it.
"There is more to life than making money, but you can make money and be ethical along the way.
"People have a care about the world and a social perspective and want to take action."
She adds the current financial crisis could be positive for ethical investment.
"Mutuals have not needed public support and are a model of prudent banking. It is shame the big guys did not stick to the fundamentals," she says.
However, Ms Benson explained ethical investments have not been insulated from the falls in the stock prices.
"Clients have experiences falling investment values - it is the nature of the beast.
"The crisis has made some people more wary about investments - both in and out of ethical investments."
However she describes her outlook as "controlled optimism".
"Ethical investments avoid defensive stocks like pharmaceutical and mines, and so tend to be more volatile. But over five or ten years they perform as well as the mainstream."
Ethics hit by the financial crisis
There is no use pretending stock markets falls have hit ethical funds as well as conventional ones - as investors have been losing faith in stocks across the board, explains Ms Ngo at Henderson Global Investors.
"It is stupid to say it will all be rosy. Some areas are not performing as we would like to see. But the consensus is there are no final penalties at all from investing in SRI."
She explained the outflow of funds out of equities had also been seen by SRI - but not as strong.
"In the markets there has been an outflow of equities. But the rate of outflow for SRI is less.
"We know SRI investors are sticky and people stay on after one bad quarter. They take a holistic picture and investment matrix, not just performance."
The ethical and the long-term view
One of the reasons, ethical investments are maintaining investors is the long-term view they take towards a company and its position when investing.
"SRI puts the fundamentals of a company through another lens to assess its quality," says Ms Ngo.
"SRI is a long-term investment."
She added the drivers of SRI were strong - with President Obama pledging to invest in infrastructure and energy efficiency.
Ms Ngo also warned people not to pull out now. "Pulling out now will crystallise losses - but if you stay it will recover."
She added fund managers not focusing in SRI were still looking at these issues in their analysis at the longer terms prospects of companies. "It is commonsense for funds to look at the longer-term investment horizon."
After the crisis
Mike Fox, fund manager at The Co-operative Asset Management, explained the recent bank crisis has changed many people's attitudes to money.
"How you make money is now as important as how much money you make.
"A quest for profits now seems unethical, and people are preferring to be aware of a broader view."
He reported a 16 per cent increase in the number of investors - while most unit trusts have seen redemptions, as people cash in.
"We have seen inflows at a time when industry is seeing outflows," he said.
He added while ethical investments can be more volatile, they do not present more risk.
"If you are investing ethically you can screen out certain companies. If you are not in the whole of the market, then you will be more volatile.
"But don't confuse volatility with risk. We invest in stable businesses where the risk is low. A bit more volatility, but I would argue there is less risk."
He adds there is no evidence ethical funds were slow and constant, "if anything they provide better returns".
"Over the first ten years we attracted the hard core ethical investors. But in the last five years performance has been very very good and so people have come looking for profits," he says.
Mr Fox highlights healthcare as an ethical area for growth - as the baby boomer generation retires.
Also greater use of wind power, social housing and government initiatives for widespread insulation create themes for growth.
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