By ADRIAN LOWCOCK 20/04/2009
Early indications have pointed at a Budget with a green agenda, including plans to invest in the electric car infrastructure. There are an increasing number of investors taking an interest in green and ethical issues. The subjects that this area covers are becoming more diverse ranging from the environment to gambling, tobacco to GM foods. You may be interested in ethical investments if you are worried that the companies in which you invest might be exploiting third world countries or damaging the environment, if you have concerns that you may be supporting company activities that you don’t approve of or you want to partake in the environmentally themed recovery hinted at by Gordon Brown.
However, not all ethical funds have the same objectives - traditionally, ethical funds would avoid sectors such as mining, oil, tobacco and arms or healthcare. These days the list is much longer and the approaches are more developed. The term “ethical investing” has evolved to reflect this and is more frequently known as Socially Responsible Investment (SRI).
SRI means you can invest in funds that specifically avoid certain industries, whilst others will invest in companies that make a positive contribution. Some ethical funds will avoid harmful activities, whilst others will not work with companies using child labour or testing on animals, but there may be funds that are mix of the two.
Unfortunately, many unethical sectors tend to be defensive in nature e.g. alcohol and tobacco are addictive and people don’t quit because of a recession. Healthcare is a necessity and expenditure doesn’t get cut until the last. Over the last year, the major unethical sectors have outperformed other sectors and over a 5 year period, with the exception of electricity, have topped the performance charts.
We have started to see more funds focusing on alternative energy; wind farms are becoming more prevalent and hydrogen fuel cell technology is being developed. If the Budget is to have a green theme, then we may see investment or tax reliefs benefiting companies involved at the grass roots. Funds such as Impax Environmental Leaders and Virgin Climate Change provide access to this area, although the managers do not have a sufficient track record to warrant a Bestinvest rating.
Key themes
- Light Green – Reflects the weightings of the conventional equity market and focus on large cap companies. Funds will include investments in Oil, Pharmaceuticals and banks but not tobacco, armaments or animal testing.
- Medium Green - Applies a stricter criteria but still allows exposure to oil, banks and pharmaceuticals. Investments will be made mainly in the UK, Europe and the US and will invest into smaller companies
- Dark Green – Exposure to oil, banks and pharmaceuticals is very limited as well as the exclusions applied by light green funds. Performance of these funds may be limited by exclusion of whole sectors. These funds will also invest more in smaller companies.
Choosing ethical funds
Investors’ ethical criteria are set ahead of fund performance. That is not to say they don’t want to get positive returns, they just don’t want to compromise their principles to do so.
Ethical funds have previously had periods of strong performance, during the technology boom. For long term investors periods of under performance are a natural characteristic of a more restricted investment approach. Effectively the performance of ethical funds has demonstrated the effects a lack of diversification can have on investment returns.
The criteria for selecting a good ethical fund remain the same as for any fund. Their universe maybe smaller but there still remain opportunities and just because a company may be run following SRI criteria that does not prevent it from being successful.
Recommended funds
For ethical investors, our preferred funds are Jupiter Ecology Fund and Aberdeen Ethical World Fund. Both invest globally which enables them to find plenty of opportunities and performance of these funds has been better than their UK peers. A full list is below;
For more information on investing in ethical funds, please call our Investment Advisers on 020 7189 9999 or email best@bestinvest.co.uk.