Can you afford ethical investments during tough times?
With fewer pounds in our pockets, it’s hardly surprising we’ve had to become much more conscious about how we spend our money. And whether we’re tightening our purse strings by using less gas and electricity, or walking or cycling when we would normally have jumped in the car, it’s clear the global credit crunch has at least benefited the environment – even if it has been at the expense of our wallets.
Unfortunately, the same can’t be said about giving to charity. Research from fairinvestment.co.uk found that 22% of us have already cut back on this area since the credit crunch began.
Yet, in these leaner times, being shrewder with our money doesn’t have to mean simply watching where every penny goes. By becoming more conscious of where you invest your money, you can actually be rewarded for helping the planet and its people.
Socially responsible investing
Ethical investing, or as it’s more commonly known – socially responsible investing (SRI), is a way to ensure your money isn’t being used to damage the environment, exploit people in developing countries or fund companies involved in activities that you might disapprove of.
Ethical Investment Research Service (EIRIS) figures show that there are currently 95 UK-domiciled ethical funds available to investors. According to EIRIS a fund is considered ethical if it “avoids certain types of businesses while investing in socially and environmentally beneficial ones”.
Such funds are often categorised in various shades of green, depending on the strictness of the criteria they apply to their investment decisions.
Gavin Haynes, managing director of Whitechurch Securities, explains that ‘dark green’ funds have a narrow investment remit as they employ strict ‘negative screening’ before investing in a company. “This means these funds will exclude companies that are involved in unethical activities, such as making or selling weapons, promoting or manufacturing tobacco, or abusing peoples’ human rights,” he says.
So-called ‘light green’ funds, meanwhile, adopt a more balanced approach, using ‘positive screening’. Instead of excluding certain sectors, they invest in companies with a good ethical track record. As this can include larger companies, they also tend to be less risky than their darker-green cousins.
However, Haynes also points out that in recent years funds have come onto the market that combine the traditional positive and negative screening methods with a ‘best-in-class’ approach, so while they will invest in oil companies, for example – which are typically shunned by those with dark green ethical views – they will only invest in those that are trying to limit their environmental impact.
But if picking a fund based on its shade of green seems too limiting for your investment goals, an alternative is to consider a fund with a manager who will actively engage with senior management on investors’ behalf to encourage good behaviour – often by lobbying or attending annual shareholder meetings.
“Investors who choose these types of funds want exposure to the BPs and Shells of this world, but still want to know that the fund manager is doing their best to improve these companies’ standards,” Haynes says.
However, while this methodology may go some way to help work out if a fund can be classed as ethical or not, it has been impossible to pigeonhole these very different ethical investments into one specific sector and so compare their performance. “Who is to say what’s ethical and what’s not?” asks Meera Patel, a senior analyst at Hargreaves Lansdown. “Testing drugs on animals to find a cure for cancer or Alzheimer’s is a case in point.”
Moreover, as there’s no standard measure of performance for the industry, ethical funds have been unable to shake off the perception that, while they may have the odd profitable year, they don’t hold their own against more mainstream funds over the longer term. Investors think that ethical funds lose out as they invest in only a limited number of companies or exclude entire sectors.
“If you want to take an ethical stance you may have to accept it as an investment in its own right,” says Patel. “Not only is there a narrow universe of funds from which to choose, but ethical investors need to be prepared for underperformance when other sectors do well.”
This is a view shared by Haynes, who says that this has generally been the case performance-wise over the past 12 months because more defensive stocks, such as oil and gas, tobacco and pharmaceuticals, have held up reasonably well in market turmoil.
“Unfortunately, these sectors and industries are simply inconsistent with the beliefs of the majority of ethical funds,” he says. Patel agrees: “Ethical funds can’t chop and change their investment approach just because markets are volatile.”
A profitable conscience
But the really thorny question is: do investors need to accept poor returns in order to have a clear conscience?
Sue Round, head of investment at Ecclesiastical Investment Management, says: “It’s far too easy to say investors have to sacrifice performance to be ethical. Consumers are growing ever more concerned about the environment and the abuse of human rights, and a well-managed fund can more than hold its own and even outperform its peers.”
She also believes that if a fund actively engages with companies this not only improves the company’s behaviour, but benefits the investors too. “We find that, by actively engaging with the companies in which we invest, we gain a better understanding of their business model, while convincing them at the same time that it’s in their best interests to improve their policy for the future,” she says.
Recent examples include discussions with GlaxoSmithKline regarding witholding clinical trial result details.
“So, if we have questions about a businesses practice, we talk to the company, rather than just walk away. After all, it’s better to have them improve their standards than leave them to it. For example, we engaged Tesco over crop spraying in South Africa and how pesticides were being handled by their workers there.”
It’s a belief that may hold water. If the World Trade Organisation continues to crack down on the most polluting and exploitative companies by imposing more regulatory fines and environmental clean-up costs, those companies’ share prices will be hit hard and their shareholders may turn to their more ethical peers.
Although Mark Robertson acknowledges that most ethical funds won’t shoot the lights out over the next year, he claims it is dangerous to dismiss them outright.
“Many of the issues which some ethical funds seek to address, such as human rights and HIV/Aids, won’t disappear just because of freefalling markets,” he says.
Indeed, despite the market turbulence over the last year, recent figures from the Investment Management Association show that ethical investors aren’t jumping ship. Sales of ethical funds totalled £27.1 million in December 2008, compared with £20.5 million in December 2007.
“Even during the months of volatility, where total fund sales were witnessing overall outflows, ethical fund sales were generally positive,” says Noreen Shah, spokesperson for the IMA. “In fact, ethical fund sales are holding firm.”
This is a view also held by Mark Robertson, a spokesperson for the EIRIS, who believes that ethical investors are in it for the long term. “These investors realise that issues such as climate change require real long-term solutions,” he says. “And so, for them, it makes sense to focus on companies who are performing better on environmental, social and governance issues.”
Choosing the right home for your money will always depend on your investment goals, attitude to risk and timeframe, but if you also take a little time to explore the benefits of ethical investing, you will see that a clear conscience needn’t be yet another credit-crunch casualty.
Case study: Giving hope to the children of Sierra Leone
One example of how an investment can have an ethical twist is HSBC’s recently launched Vaccine Investment Individual Savings Account and Vaccine Investment Plan.
The bank has teamed up with the International Finance Facility for Immunisation (IFFIm) to link investments to an immunisation scheme for children in developing countries. The IFFIm was launched in 2006 by the British Government and is supported by a number of western countries, which together have pledged US$5.3 billion over 20 years. The World Bank is acting as IFFIm’s treasury manager and is managing its finances.
To get access to the funds immediately, the IFFIm raises finance by issuing bonds in the capital markets and so converts the long-term government pledges into cash resources. These are used by the Global Alliance for Vaccines and Immunisation (GAVI), a public-private partnership with stakeholders such as Unicef and the World Health Organisation, to reduce vaccine-preventable deaths among children under the age of five in some of the poorest countries in the world.
For every £1,000 invested into one of these plans 130 children will be immunised against five of the most common life-threatening diseases.
One country benefiting from these funds is Sierra Leone, in West Africa. Sierra Leone is one of the poorest countries in the world, torn apart by a 10-year civil war, which only ended in 2002.
The war left tens of thousands dead and many more crippled. It also led to an exodus of skilled people and large-scale internal displacements.
The country is now struggling to rebuild its infrastructure. Around 70% of the 5.7 million population live in extreme poverty (on less than US$1 a day) and one in four children under the age of five die. Many of these children die from diseases such as diptheria, pneumonia and diarrhoea.
To try to combat this problem, GAVI funding in Sierra Leone supports a new five-in-one combination vaccine, which immunises against diphtheria, tetanus, pertussis, Hib (which causes meningitis and pneumonia) and hepatitis B. GAVI hopes the immunisation programme will help to drastically reduce the number of children dying in Sierra Leone.
While the country still has a long way to go, this immunisation scheme will help the children of Sierra Leone towards a brighter future.
HSBC’s Vaccine Investment Plan and Vaccine Investment ISA aim to provide a fixed return of 16.2% (about 3.2% a year), together with the original capital repaid in full at the end of the fixed five-year one-month term.
Minimum investment is £1,000. Investors will be purchasing government-backed bonds which finance projects operated by GAVI. For more information go to hsabc.co.uk/vaccine or call 0800 3281293.
Ethical fund recommendations
Gavin Haynes, managing director, Whitechurch Securities:
* AEGON Ethical Equity
Manager Audrey Ryan has a proven track record of delivering solid returns in the UK All Companies sector, despite her strict ‘dark green’ approach to choosing companies to invest in. The fund returned 3.15% over five years, compared with the sector’s 0.71% fall.
* Aberdeen Ethical World
Run by Aberdeen’s global equities team, this fund invests in companies worldwide that have a green focus and good employee relations. Although it has fallen in line with the global growth sector average over one year, it has outperformed it by 8% over five.
Alan Smith, managing director, Capital Asset Management:
* Standard Life Ethical Corporate Bond
This fund is ideal for today’s circumstances because of the defensive stance it takes. Alasdair MacLean chooses companies that limit environmental damage and promote sound employment practices. The fund has fallen by 1.5% over the past 12 months, but it is still 8.4% over the sector average.
* Insight Evergreen
This global equity fund has slightly outperformed the global growth sector over the past 12 months. With the US predicted to be the first economy to bounce back, the fund’s exposure to ethically screened large-cap US stocks will be appropriate for those seeking capital growth.
Meera Patel, senior analyst, Hargreaves Lansdown:
* F&C Stewardship Income
If you want an income as well as a clear conscience, this fund is for you. Hilary Aldridge invests in UK companies that he considers benefit society, but the fund has also returned 6% for investors over five years.
* Jupiter Ecology
This is a well-respected green global fund that should do well on the back of President Barack Obama’s commitment to green energy. Over five years, Charlie Thomas has returned an impressive 29.8%, compared with the global growth sector average of 7.4%.
Socially responsible investing
An investment strategy that seeks to maximise both financial return and social good. In general, socially responsible investors favour corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some (but not all) avoid businesses involved in alcohol, tobacco, gambling, weapons, and the military. Ethical investment reduces the number of shares, securities or funds available to the investor and it tends to increase the volatility of a portfolio and therefore the risk profile. Also, because of the time-consuming ethical screening, ethical funds charge slightly higher fees.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.