If you go back 10 or more years there were only about 25 funds offering ethical investment with assets of about £1.5 billion. Today those numbers have swelled to around 100 available funds and over £10 billion in UK green and ethical retail funds. SRI (Socially Responsible Investment) is becoming much more popular. Originally the choice was limited primarily to UK equity funds, now it is possible to invest in overseas funds and fixed interest/corporate bond funds which follow an ethical approach.
If you are interested in making such an investment it is very important that you identify for yourself how you define ‘ethical’ investing because you will need to match your vision with the aims of the fund. There are a number of different methods of investing ethically as shown below:
How do fund managers choose to invest ethically?
There are three main approaches to identifying suitable investments:
- Screening – both positive and negative Screening is the practice of ‘screening in’ companies making positive contributions such as providing renewable energy, waste and recycling services, or engaging in organic farming whilst ‘screening out’ the heavy polluters, and avoiding arms companies and animal testers.
- ‘Best-in-class’ Best in class policies use social, environmental and ethical guidelines to give a preferred fund choice where other factors are equal. Thus, the fund may choose to invest in the oil and gas sector, but would chose to invest in the oil company which has the best record on environmental issues and human rights matters.
- Engagement Engagement means that the investors and fund manager seek to actively encourage the companies in which they invest to adopt best social and environmental practice. This is promoted by meetings with senior management and voting at relevant AGMs
Including ethical funds in your portfolio
Even if you have never thought about investing in ethical funds, you should consider investing a small percentage of your portfolio in funds focusing on shares in companies wanting to deliver environmental solutions in water, waste or energy. Such a fund could be a long-term hold which would provide good returns as well as helping the environment.
Ethical investment – is it worth it?
Obviously, it is very worthwhile from a moral stand point and some clients are specific in their request for ethical investments, others say it is a question of “I would like to invest in this way but I cannot afford to forgo too much in the way of performance”. So, is it possible to invest ethically and still obtain a reasonable return? Diversification is very important in any investment plan and it is possible to diversify both asset allocation and geographical spread and still stay within the ethical investment space.
Performance and risk
The essence of investment is to achieve the maximum return for the least exposure to risk within the environment of the investment, so for example the risk and return on a fixed interest fund is different from an overseas equity fund. When you invest in an ethical fund you must remember that there is additional risk because the choice of holdings is restricted. The manager must exclude certain shares or bonds from the portfolio or invest in a very specialist area. Frequently the manager finds the shares in mid-size companies and this may make performance more volatile. Investors may need to select an investment trust rather than an OEIC to obtain the required environmental exposure. Investment trusts present a higher risk than OEICs because, on sale, the return you obtain may be less than your share of the fund if the trust is trading at a discount.
How Nicholls Stevens can help
At Nicholls Stevens we create bespoke portfolios for each and every individual client, to suit their attitude to risk and their financial and personal objectives. We work personally with individuals to develop how they wish their money to be invested so creating an ethical portfolio or incorporating ethical investments into the range of holdings can simply be a part of this process.
We do regular reviews of ethical funds to keep our research and knowledge up to date and we are currently looking at other ways of analysing funds across the board (i.e. not just ethical), to rate each fund’s environmental and social impact. More on this soon!
If you want to find out more about ethical investing please do email us or contact us using the form below.