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Steering through the maze of ethical investing

This weekend sees the start of the ethical investment industry’s annual effort to raise its profile with its previously branded National Ethical Investment Week this year renamed as Good Money Week (19-25 October). According to the event’s co-ordinators, the name change aims to make it ‘relevant and accessible to a much wider audience’.

Jason Hollands Jason Hollands
17 October 2014

However despite the hard work of this segment of the financial services industry, evidence suggests that ethical investment has failed to make a decisive breakthrough into the mainstream. According to figures from the Investment Management Association (IMA), funds under management for ethical funds were £9.7 billion at the end of August 2014 meaning their share of the industry’s £823 billion total funds under management was just 1.2%, the same percentage as this time last year.*

While at a headline level ethical investing appeals to some investors, when you look beneath the bonnet it is far from straightforward as it is catch-all for a wide range of strategies, trying to cater for a smorgasbord of different concerns and audiences, with policies varying from fund to fund.

Emotive issues such as animal testing for example can split opinion. While some ethical investors are resolutely opposed to animal testing in any shape or form, others support it in the cause of medical research to alleviate human suffering.  The Kames Ethical Equity and Kames Ethical Corporate Bond funds avoid companies involved in any form of animal testing (and also avoid meat, dairy and fishing), while many other ethical funds allow animal testing stocks where it is for medical research purposes. Indeed, the UK’s largest pharmaceutical firms, AstraZeneca and GlaxoSmithKline, are top 10 holdings in a number of ethical funds.

The reality is that most businesses do not neatly fit into black or white definition of good or bad. So ethical or responsible investing is all about navigating through the shades of grey and identifying companies that are ‘best of breed’ for corporate responsibility and then ‘engaging’ with investee companies on social, environmental and corporate governance issues. In the main this means the largest holdings of most ethical funds are littered with well recognised big companies, including banks, insurers, utilities and healthcare companies, not social impact projects or renewable energy firms.

We would also highlight that some ‘ethical’ funds have the flexibility to review and change policies over time, in light of the evolution in the concerns of the public and reflecting debate, either through use of committees or by surveying investors. There is much to merit in the adaptable approach, especially where these committees are independent of the investment teams. However, their investors who may have very firm ‘red line’ positions on a particular issue need to recognise that today’s policies may not be set in stone for all-time and therefore investors need to keep abreast of such developments. Keeping a beady eye on investment performance is a vital for investors in active funds but when it comes to ethical investments, investors also need to follow policy developments closely.



The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Current or past yield figures provided should not be considered a reliable indicator of future performance. This article is not advice to invest or to use our services.

Due to their nature, specialist funds can be subject to specific sector risks. Investors should ensure they read all relevant information in order to understand the nature of such investments and the specific risks involved. Please note that ethical funds may, by definition, have a limited investment universe; this may affect performance.