The future of ethical investing
Green and ethical funds have slowly been edging into the mainstream investment space over the past 25 years, gathering more than just hippies and Quakers as investors piggyback on trends such as renewable energy.
However, it has recently come to light how severely these funds have been affected by the recession.
From April to June 2009, ethical funds saw their first net outflow since Investment Management Association (IMA) records began in 1992. Retail sales saw a net outflow of £18.4 million, compared with an inflow of £45.9 million in the first quarter of the year.
Adrian Lowcock, senior investment adviser at Bestinvest, says the shift could be down to investors wishing to diversify. "Ethical funds had the lowest rise in sales [compared with trackers and funds of funds] and, due to the constraints on where they can invest, are less able to diversify than other sectors," he explains.
However, the figures may not be as grim as they suggest. Adam Ognall, deputy chief executive of UKSIF, the sustainable investment and finance association, points out that the HSBC Ethical Charity unit trust closed during this period and therefore wrote cheques out to its investors - creating an outflow.
Ognall maintains that if you look at the funds that are still open for business, most of them are showing positive inflows.
Money Observer, Moneywise's sister publication, asks Lipper to comb through its statistics each month to identify green or ethical funds, and bring them all together to create a new sector.
The funds are still listed in their respective sectors as well. For example, SVM All Europe SRI features in the IMA's Europe including UK sector as well as green/ethical.
The green/ethical sector contains 55 funds. They had a good run in August, with an average return of 6.6%. Nine IMA sectors beat this average, but 23 underperformed it. But it's a different story over the past year. The green/ethical sector only outperformed five others, whereas 27 trounced it.
Top green/ethical performers include SVM All Europe SRI, First State Asia Pacific Sustainable and Ecclesiastical Amity International.
While it cannot be denied that ethical funds have had a bumpy ride, there is a good chance the tide will turn and investors will tune into their merits once again.
One significant initiative that should boost interest is the government's Low Carbon Transition Plan that launched in July 2009.
Emma Howard Boyd, Jupiter's head of SRI, believes it will have a long-term material impact on green investment.
The plan rules that carbon reductions must be a central consideration for every company, and contains the carbon reduction commitment that will come into force next April. It is estimated that it will cost some companies millions of pounds to cut their CO2 emissions.
This article was originally published in Money Observer - Moneywise's sister publication - in October 2009.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.