|
FAQ - What are the risks?
As with all collective investment funds (pooled investments that
invest in equities) there is some risk involved. It depends upon
the length of time you hold the investment and the fund you choose;
you should consider a medium to long term investment period of five
years or more. There are top performing funds and poor performing
funds in every sector and the worst scenario could see the value
of your investment drop.
In the 17 years that ethical funds have been in the market, many
have claimed that the funds have an added risk because of their
limited investment universe created from strict negative screening
methods. Past performance has shown that some ethical funds have
achieved returns better than the average. The introduction of lighter
green funds and new investment processes means that the ethical
investor has a much larger market to choose from.
FAQ - How do I invest in an ethical fund?
An ethical Unit Trust, OEIC or ISA can be bought direct from the
management group, via a stockbroker, financial adviser or fund supermarket.
You can invest in an ethical Investment Trust by contacting the
trust itself or through a stockbroker (there are some web-based
stockbrokers available). You should always check that the fund suits
your ethical principles by reading the Key Features document and
the fund manager's statement.
For the less experienced investor it is always advisable to go
via an authorised Independent Financial Adviser, who can help you
select a fund that suits your needs and also complete all of the
transactions on your behalf.
Ethical Screening
Companies that are included in the portfolio of an ethical fund
are at first 'screened', a process that determines whether the company
matches the fund's investment standards and ethical policy. The
investment objective of a fund may have a combination of negative
and positive criteria, in other words actively avoid those companies,
for example, that are known to harm the environment and invest in
companies involved in socially progressive business. Each fund should
clearly state their ethical criteria and provide you with information
on the companies they invest in.
Examples of negative criteria include: animal testing, gambling,
human rights abuses, military production and sale, pornography,
alcohol, genetic engineering, pollution and Third World concerns.
The areas of positive criteria include equal opportunities, environmental
programmes, conservation of energy, fair trade, education and training
and support of community projects.
Research
Most ethical fund managers choose their portfolio of investments
from an approved list created by a specialised research team. Some
fund management groups have their own in-house research panels,
while others look to external providers for ethical information.
The Ethical Investment Research Service (EIRIS) is the leading
independent provider of research into the ethical performance of
companies and assists many management groups in their investment
decisions. In July 2001, the Financial Times Stock Exchange (FTSE)
with the help of EIRIS created a series of indices called FTSE4Good,
which aims to include companies with strong environmental and social
records. This has prompted some management groups to launch tracker
funds based on the new ethical indices, and requires little ethical
research by the groups themselves.
Ethical or Socially Responsible Investment?
The origins of modern ethical investment can be traced back to the
beginning of the 1900's. The Methodist Church decided to invest
in the stockmarket, purposely avoiding those companies involved
in alcohol and gambling. The church was also behind the proposal
for the first ethical trust in the UK in 1973, but it failed to
win approval. The first ethical fund was finally launched in 1984,
by Friends Provident.
As the ethical investment market has developed, so too have its
terms and policies. If you have ever considered investing ethically
you may have come across the term of Socially Responsible Investment
(SRI). Some believe SRI is interchangeable with the more common
term of ethical, while others believe there is a clear distinction
between the two. Those that think there is a difference describe
ethical investment as simply avoiding companies through negative
screening and SRI as a process that considers all companies for
investment with the aim of encouraging change. This inconsistency
highlights that ethical investment can mean so many different things
to different people. Whatever the opinion the basic concept should
be the same: investment with environmental, social and ethical consideration.
Progress
Along with the growth in the number of funds available in the ethical
investment market, there is also an increase in the demand for ethical
products. Investment providers now offer products for all types
of ethical investor.
Shades of Green
Ethical funds have many different investment objectives. To make
your investment choice easier many groups use a system to categorise
their investment style. The main categories are dark green and light
green, some groups also refer to a fund as medium green. Many believe
that this system has widened the appeal of ethical funds.
Dark green funds use the strictest investment criteria. Suited to
investors with strong ethical beliefs, investment usually excludes
the largest companies in the UK. This type of fund shuns companies
involved in such activities as animal testing, tobacco and arms
manufacture. Investment in oil, pharmaceuticals and banking is also
very limited. Fund managers of dark green funds would employ a negative
screening process. The Aegon Ethical Fund is an example of a dark
green fund; it has recently moved from being 'vegetarian' to 'vegan'.
Light green funds use a positive approach to portfolio selection.
Although these funds are still opposed to those companies involved
in areas such as animal testing and tobacco, they do consider investment
in mainstream companies that have shown an improvement in their
environmental or social policies. For example, an oil company, rejected
by a dark green fund could be considered for a light green portfolio
if the company had taken positive action to help the environment,
such as the use of solar power. This approach is commonly termed
'best of sector' or 'best of class'. These funds are considered
a less risky investment due to the increased number of companies
available to light green fund managers to choose from when investing.
Developments
There has been a renewed investor interest in ethical investment
over recent times. Public awareness of environmental and social
issues has been heightened, which has prompted some change in government
attitudes. In July 2000 the government introduced new pension fund
regulation. The regulation requires pension fund trustees to disclose
the extent to which ethical, social and environmental factors are
considered when making investment decisions; the first time that
a government has enforced such a rule.
There have also been developments in the investment process of
ethical funds. While the traditional negative and positive screening
approach is still used by many ethical products, other concepts
have started to emerge from this new investment environment. Engagement
is an attempt by fund managers to engage the companies in which
they invest in a discussion about their social and environmental
policies. For example, if a fund invests in a company that is involved
in arms manufacture, engagement does not ask for the fund to withdraw
its investment, but to use its power as a shareholder to question
the decisions being made.
Friends Provident has developed the engagement concept which they
call 'Responsible Engagement Overlay'. The group has applied the
concept to its major equity investment portfolios, a total of £15
billion of assets. Prudential, Schroders and CGNU have also now
adopted this approach. Ethical funds are defined by their active
avoidance of those companies that harm the world, but without investment
in those companies they have no power to change them. The light
green approach of engagement may help ethical investment gain the
support it needs to effect real change.
Risk
Understanding the risks associated with this type of investment
is equally as important to some investors as identifying the ethical
areas in which you want to invest. Are ethical funds more risky
than conventional funds and how is performance affected, if at all?
Performance
Traditional ethical investing, because of its negative screening
methods, is often perceived as a risky investment. Dark green funds
tend to exclude larger companies from their portfolio, such as oil
and pharmaceuticals, areas that have been known to provide the best
gains. They also invest a higher percentage of shares in small to
medium sized companies, sometimes considered unpredictable investments.
All collective investment funds both ethical and non-ethical have
an element of risk. It can alter with your investment choice and
the length of time you invest.
New ideas and approaches, the introduction of light green funds
for example, are changing the way in which ethical funds are perceived.
Fund managers of light green funds have a broader selection of investments
to choose from. They may also take advantage of market trends, offering
better potential for higher returns. Past performance suggests that
some ethical funds have equalled or beaten their conventional counterparts.
Although past performance is not necessarily a guide to the future,
the new developments to the industry may strengthen this record.
Ethical Indices
The performance of a Unit Trust or Investment Trust is generally
measured against an index, so investors can easily view the direction
of a particular area of the market in comparison to their chosen
fund. A conventional fund and an ethical fund may both be compared
to the same index, for example the FTSE All Share Index. A conventional
fund has many companies to choose from that satisfy its investment
objectives, whereas an ethical fund can be restricted somewhat by
negative screening. As a result some ethical funds may under-perform
the benchmark they have been measured against.
Some groups have indicated a need for a suitable ethical index,
while others believe ethical funds should continue to be compared
with mainstream indices to dispel ideas of under-performance. The
FTSE4Good indices, a series set up by FTSE and EIRIS, have generated
equal amounts of praise and criticism since launch in February 2001.
The criteria for stock selection include the environment, universal
human rights, social issues and stakeholder relations. It is the
first ethical benchmark to be set up by an independent body in the
UK.
FAQ - What types of ethical investment are available?
There are ethical Unit Trusts, OEICs, Investment Trusts, life and
pension funds, Individual Savings Accounts and other savings schemes.
You may also have an ethical mortgage. The majority of funds that
invest ethically are Unit Trusts or OEICs.
There are noticeable differences in the investment strategies of
the funds available. Some funds use a negative screening process
to actively avoid companies others take a positive stance and invest
in companies that have for example, good environmental performance.
Other funds may have an engagement approach, where no companies
are excluded, or combine screening with engagement. On the opposite
level are cause based investments that are used to back a specific
cause or project. This type of investment may give a lower rate
of return than other ethical funds in order to give more to the
cause. It is down to you to choose the fund most suited to your
ethical and financial principles.
FAQ - Who determines what is ethical?
Ultimately it is you who decide what is ethical. A non-smoker for
example, may not want to place their money in a fund that invests
in tobacco companies, or a vegetarian may want to avoid any fund
that has holdings in meat retailers. Each fund will also have a
different idea of what is acceptable. Some management groups have
an in-house team who screen companies for investment and decide
what issues are most important, others use external consultants
such as EIRIS to guide them.
|
