What is ethical and green investing?

Following last week’s column let’s take a closer look at ethical and green investing.

Trying to pick the best individual ethical stocks can be very tricky so ethical funds have become more and more popular. Ethical investment funds select what stocks to invest into, and assist you by spreading your capital across a wide range of holdings they feel are appropriate and meet the relevant criteria. When choosing an investment provider for your ethical investment, consider their selection process very carefully.

Ethical investment basically highlights an investment process that screens for or against certain criteria. Since its development nearly 23 years ago, ethical investment has evolved from a sales idea to a sophisticated process.

There is no doubt, however, that you are giving up considerable choice by way of investing in such funds, and the potential for underperformance has led to many ignoring the sector.

Unlike other sectors of the market, ethical investment is not easily comparable. You are never really comparing an apple to an apple. Analysing on performance alone is a journey to nowhere and could cost you dearly in terms of ethics and potential future underperformance.

Ethical/green funds for example are restricted to around 30% of the FTSE 100 and as a consequence have a bias towards small to medium size stocks to invest into. ¹

In certain market conditions these stocks can outperform but vice versa.

Be mindful also that by their nature, smaller companies are also more volatile than their larger counterparts meaning that fluctuations can be more severe.

When selecting an appropriate ethical fund to invest into, you should carefully consider what your ethics are and match that with the relevant funds.

Consider whether or not you are a green or ethical investor as the two can easily be mixed up.

Ethical funds, for example, avoid investment in companies with significant exposure towards activities such as armaments, tobacco & alcohol, gambling, animal testing etc.

Environmental or ‘Green’ funds avoid investing in companies whose activities are thought to contribute towards global warming, ozone depletion, pollution etc.

Given the extremely restrictive nature of this type of fund, it’s fair to say it’s not for the faint hearted, or the ethical token gesture approach with your capital.

Let’s look at some of the issues with ethical and green investing.

Ethical funds generally screen against or for certain criteria. Some however, agree to a slightly more relaxed or grey approach. It may surprise you to know that some screening takes this grey approach. For example, some allow investment in firms where the sale of alcohol accounts for less than 10% of their turnover. How confusing. Surely if alcohol is ethically bad it should be a black and white approach to it with a 100% negative screen? ¹

The investment funds will be your block to this, so you should be fully aware of their approach to screening. Some investment houses purchase their research from an external organisation such as Eiris, and other larger organisations, such as the highly successful Morley and Jupiter team, have their own research screening team. ¹

Aegon is one of the funds that uses a wholly negative screening process i.e. they avoid, but don’t look for positives. Aegon is one of the more successful funds in the market place and customers can be comfortable with their negative screening. They typically avoid companies involved in animal testing, intensive farming, meat & poultry producers or retailers, armaments and military, nuclear power, ozone depleting chemicals, pesticides, political contributions, genetic engineering, gambling, alcohol, tobacco, pornography, banks with exposure to Third World debt, oppressive regimes. ¹

The longest running fund, F&C Stewardship has a wider net and looks at both positive and negative screening. Examples of positive screening are investing in companies that are supplying the basic necessities of life, providing high quality products and services which are of long term benefit to the community, conservation of energy or natural resources, environmental improvements and pollution control, good relations with customers and suppliers, good employment practices, good health and safety policies and practices, training and education, strong community involvement, a good equal opportunities record, openness about company activities, good corporate governance. ¹

Consider all of this carefully as some companies may not be negatively screening against a factor that is very important to you.

For a fact sheet on the best performing funds or if you have a financial query, call  0800 0112825 to speak to an Independent Financial Adviser or e-mail info@wwfp.net

Source:

(1) Sesame Ethical Fund Review R04-039, April 2004

The value of shares and investments can go down as well as up

Tags: ethical investing, fund, green investing, performance, screening

This article is filed under Investment, Weekly Articles. You can follow any responses to this entry through the RSS feed. You can leave a response, or trackback from your own site.