After the crunch - Investing ethically? Can it pay?
Monday, 09, Nov 2009 09:25
Ethical investment was riding high on a wave of good will before the financial crisis really took hold.
In 2007, an ethical investment fund comfortably beat all other UK investment funds, showing that money was not necessarily the root of all evil.
Since then, the ethical movement has gathered pace with big corporations and world leaders now keen to identify themselves with the green and fair trade movements.
But in 2008 and 2009, the financial crisis sent investors scurrying to defensive stocks, many of them – tobacco, mining, defence and pharmaceuticals – incompatible with an ethical approach, but which traditionally perform better in a downturn.
As ethical funds are restricted from investing in certain sectors, this robbed them of the flexibility to move their assets and protect themselves from the storm, and ethical funds have moved right down the performance list over the last two years.
Sarah Routledge looks at the future of ethical investment.
According to research from Investment Life and Pensions Moneyfacts last month, only three out of 60 ethical funds posted a positive return in the past year, while over the last three years ethical funds dropped in value by an average of 16.4 per cent – compared to a shortfall of 9.2 per cent on conventional funds.
Over ten years, the situation does not improve – ethical funds are down 4.28 per cent compared to positive growth of 26.74 per cent for conventional funds.
Richard Eagling, editor of Investment Life & Pensions Moneyfacts, says: “Just two years ago, the defence for ethical fund performance was strong, with returns outstripping those of their non-ethical rivals.
“Unfortunately, the performance of ethical funds is now lagging behind that of their non-ethical counterparts.
“Although there is little doubt the past couple of years have been challenging for the green investor, the long term outlook for the ethical sector remains positive.”
While charitable organisations and religious organisations need ethical investment, is it a realistic option for the private investor?
Some funds do perform better than others, however, and Aegon’s Ethical Equities Fund is rated by WWFP to be the best in the UK All Companies sector, followed by the Aviva UK Ethical fund.
In Europe, Aviva’s SF European Growth Fund is currently leading the way, while globally Jupiter’s Ecology Fund or Aberdeen’s Ethical World have shown the most success among their peers.
Kathy Booth, independent financial adviser for The Gaeia Partnership, says the financial climate has not put off their clients – many of whom are private investors.
“I think the people who are ethical remain ethical. Perhaps people with new money might need to be reassured, to see that they are making a sound investment.”
Even without being able to invest in the ‘sin stocks’ of mining and tobacco that have been propping up conventional funds, many ethical funds have held their own, she adds.
Ethical funds are becoming more mainstream, but Ms Booth believes they would be even more popular if there was a greater awareness.
“There is this whole section of middle England – those who do their recycling, buy organic food and try to reduce their carbon footprint – that don’t know what they are investing in.
“The Co-op did a survey and 60 per cent of people they interviewed said they would prefer to invest ethically, provided it wouldn’t reduce the returns by a significant amount.”
If independent financial advisers talked about ethical investments more, investors would be more aware of their potential, she points out.
Of the larger funds, Ms Booth likes the Insight Evergreen Fund, Norwich Union’s range of ethical funds and Aegon’s Ethical fund.
Right environment for green investing
Magazine: FinancialAdviser article by Kathy Booth
- Published Thursday , April 19, 2007
There has never been a better time for retail clients to consider ethical investing
As the saying goes “the times they are a changing”, but will the UK financial services sector lead the pack in the rapidly changing global economic market or fall behind, Ostrich-like, nursing its ego?
Ethical investment has been around now for more than 20 years, and despite the limited investment opportunities available in the early years it has developed over time to offer many top performing unit trust funds in the UK All Companies, Global and European sectors.
The F&C Stewardship fund was the first to hit pole position in the UK All Companies sector in 2004 and is still a superb and popular fund. The NU Sustainable Future European fund holds a strong position in the European Equity sector providing excellent returns for investors and the Aberdeen Ethical World fund remains a highly-rated fund in the SRI Global sector, also returning consistent excellent returns for investors, including many non-ethical investors.
The most recent star performer in the UK All Companies sector is the CIS Sustainable Leaders Trust fund – previously known as CIS Environ Trust – which was launched in 1990 and is currently valued at £146m. The objective of the fund is to invest positively towards a more sustainable environment for the longer term. Therefore, the fund does not chase high performing stocks, but carefully selects stocks that will become stronger and increase in value over future years.
This is partly the reason for the current success of the fund, as there has been much takeover interest from large corporations and utility companies in some of the stocks held within the fund, driving up the share price and ultimately, the unit price.
Such takeovers may have the effect of reducing the engagement powers of the fund manager, but CIS do not feel that this will impact on the overall working practices of the individual companies. The release of capital from the sale of these smaller companies provides an ongoing flow of funds for more new, innovative investment schemes.
With the increased investment opportunities that have become available due to the threats of climate change, oil shortages and the rapid development of countries such as India and China, there has been a huge increase in consumer awareness.
There are also corporate governance issues to be factored into long-term investment planning, as a result of the ever increasing employment and environmental legislation and corporate litigation – let us not forget the Enron debacle.
Recent studies have shown that most consumers would prefer to pay more for quality food and goods, given the health benefits and peace of mind, which stem from the fact that the production has been kinder to people and the environment. Research has shown that ethical consumerism was worth £29.3bn to the UK economy during 2005, more than alcohol and cigarettes.
The retail industry has seen a huge swing towards the demand for organic foods, fair-trade products and goods made from sustainable materials to name but a few, with many of the big retailers including Marks & Spencer, B&Q and the Co-op taking up the gauntlet, as they can see the real benefits of this growing and sustainable market.
It is essential that the financial services industry accepts and embraces the new challenges and opportunities ahead. Lack of awareness and understanding of the pressing issues will be at a massive cost to not only the financial sectors, but also to developing industries. Ultimately, the financial sector will be trailing behind the retail consumer market.
One recent survey by the Co-op showed that when customers were given the ethical choice, 82 per cent said that they would choose an eco-friendly product to do their bit for the environment and help the fight against global warming. In another survey, seven out of 10 people said that they wanted to invest in a scheme that had a positive environmental impact.
Well, carbon credits are a reality and you should think about buying in now, while stocks last. Marks & Spencer has declared that it intends to be carbon neutral within five years and Scottish and Southern has already begun to invest in carbon-capture technology.
It is this type of company that will flourish – Scottish and Southern is already held in most ethical funds.
Conversely, the dirty industries who have grown fat at the expense of the environment, will need to drastically reduce their emissions and will suffer the additional costs required for them to meet the targets outlined in the Climate Change Bill. This is likely to have a severe impact on their profitability over a sustained period of time – pay-back time, but sadly, possibly too late to turn back the clock.
The good news for ethical investors is that the new Climate Change Bill will lead to more investment opportunities in green innovation. So who would you invest in? A green innovative company without the costly baggage or a quick fix with a company holding the loaded dice?
There is no shortage of ethical investment opportunities, with up to 40 ethical unit trust funds available, investing over the UK, European, Global and Emerging Markets and Specialist sectors, most of which are available through fund supermarkets such as Cofunds, Fidelity FundsNetwork and Selestia.
As with the non-ethical funds, the wrap accounts which include Isas, bonds and self-invested personal pensions provide the opportunity to mix and match funds to suit your client’s needs and investment objectives. There are also thematic funds that specialise in a particular area of ethical investment, for example the environment and sustainability, and these can be useful for clients who wish to concentrate their investment in this way. Jupiter, Insight and Norwich Union all offer superb funds in this sector.
For clients who have larger portfolios requiring professional management, Rathbone Greenbank, the ethical arm of Rathbone Investment Management, offers a first-class service for both their Managed Ethical Collectives Portfolio service and their Managed Ethical Stocks and Shares Portfolio service, which is more suitable for larger accounts of £150,000 to £200,000 plus.
There are also ethical VCT and EIS offerings from Keydata and Rathbone Greenbank. Onshore investment bonds offered by insurance companies provide access to their in-house ethical funds, and most offshore investment bonds offer access to the full range of external ethical funds.
For cautious investors, the new Ethical Bond from F&C provides access to its Stewardship Safeguard Optimiser fund, which has an element of capital protection plus access to several external ethical funds.
Triodos Bank offers a fixed-rate Renewable Energy Bond, plus a variety of cash Isa accounts which invest in worthwhile projects worldwide.
The Children’s Mutual provides access to the Insight Evergreen and European ethical unit trust funds as an add-on to their with profits savings plans, and although the with profits element is not ethically screened, lump sums can be added to the ethical element as and when required and so this is a reasonable compromise.
For clients who do not want to compromise their principles, Healthy Investment offers an ethically screened investment bond and a with profits savings plan, and is shortly looking to introduce a mainstream unitised ethical fund as an add-on to the with profits element. So. watch this space.
So who decides – choice or no choice? With so many ethical investment opportunities, is it treating customers fairly not to give them the ethical choice?
When your grandchild asks you, “where were you when the lights went out?” What will your response be? “Up at the front or flailing behind?”
Kathy Booth is an IFA The Gaeia Partnership
- Ethical investment now offers many top performing unit trust funds in the UK All Companies, Global and European sectors
- The new Climate Change Bill will lead to more investment opportunities in ‘Green’ innovation
- There are plenty of funds to invest in for the ethical investor
Investors’ bid to clean up their act
- Magazine: FinancialAdviser
- Published Thursday , April 19, 2007
With knowledgeable investors demanding ‘green’ products, IFAs must catch up
A new breed of consumer has risen from the ashes of the hedonistic 1980s – the asset-rich ‘baby boomer’ generation has grown a conscience, and consequently ‘ethical’ consumerism outstrips alcohol and cigarettes in the UK. The market was worth £29.3bn in 2005.
With green issues high on the political and social agendas, shrewd investors have diversified out of traditional ‘dirty’ stocks – such as oil, and tentatively invested in new ‘green’ technologies and companies. Product providers have responded in kind by introducing ‘ethical’ products that allow these consumers to put their money where their ethics lie.
While big-name companies such as Marks & Spencer Money and the Co-operative Bank have thrown their weight behind ethical and socially responsible investing, financial advisers have been sceptical of the concept and reticent to commit to what they mostly consider a fringe investment principle with limited financial grounding.
However, IFA Promotion has found that of its 9030 membership base, 1019 IFAs list ethical investments within their top eight areas of expertise. Whether this demonstrates a rising belief in the SRI phenomenon and the ability to derive healthy returns for their clients, or whether it is a commercially motivated “flavour of the month” move to attract new business, remains open to debate.
Whatever their motivation, financial advisers must ensure that they are not caught off-guard.
Baby boomers – now in their 50s and holding on to 80 per cent of the UK’s wealth – are the ‘bread and butter’ business of financial advisers and, perhaps unlike the generations before them, will be the first generation of well-educated investors to have unprecedented access to the same information as fund managers. Amendments to the Companies Act will kick down the doors barring company information from shareholders and make it easier for switched-on, motivated investors to rip away the marketing ‘fluff’ of ethical investments.
They will be able to find out to what extent a company complies with its investment mandate. If that mandate has not been fulfilled, it is likely to be the advisers in the firing line yet again, and the dreaded spectre of mis-selling will raise its ugly head.
So, why bother? Why not turn away from this obscure ‘new’ concept and stick with the traditional, tried and tested asset classes and themes? Because, despite the risks inherent in advising on financial products, not only does change signify opportunity to advisers, but the current period of global change is unlikely to leave the markets and financial institutions untouched in its wake.
As Kathy Booth, IFA for the Gaea Partnership, explains, the traditional asset sectors and companies which are detrimental to the environment or have lax corporate governance will become less attractive investments, will lose value, and consequently will lose investors as they seek better and more sustainable returns elsewhere.
As any adviser knows, investors benefit the most when a performance track record has been formed but the asset class or investment concept is just on the cusp of mainstream exposure. If the chattering classes are talking about their SRI portfolio rather than property prices, then it is probably safe to say that the best ship has already sailed.
As you will see, several of the contributors to this supplement have expressed a concern that financial advisers are “flailing” or “lagging” behind the market in their knowledge of SRI, and that this is worrying given the greater empowerment of individual investors and the complexity of the issues involved.
Despite several tools and guidelines being targeted at financial advisers – not least the UK Social Investment Forum’s free IFA Toolkit – SRI experts such as James Vaccaro, head of investment banking for Triodos Bank, believe that advisers’ laid-back approach to SRI will not serve them or their clients well.
He writes that IFAs will need more than a basic knowledge of the products available if they are to meet the expectations and requirements of their clients, adding: “These developments present an opportunity to increase consumer interest in advisory services by being able to cut through the language of corporate social responsibility reports to get to the full story. Simplistic reports, or tokenistic environ- mental projects, will not be enough to satisfy a new generation of investors who are informed about a company’s overall impact.”
There is a concern that product providers keen to capitalise on the current appetite for ‘green’ financial products do not have the specialist expertise needed to properly screen companies for inclusion in SRI funds.
Mike Fox, fund manager of the Sustainable Leaders trust for Cooperative Insurance, said: “Not only do you need financial expertise, which investment houses have, but you need expertise in social, ethical and environmental areas, which are quite specialist. And it is not a cheap skillset either – the SRI analyst provides research to the financial analyst, who passes it through to the fund manager.
“This is hard on an organisation’s resources, as well as culturally – in a cut and thrust capitalist world this expertise is difficult to introduce. It is not easy to tell whether Tesco has done enough with its environmental policy to justify an investment from an SRI fund. It is a difficult and time-intensive judgement to make. Also, newcomers will not have any record which, like with any investment product, investors should be wary of.”
There is also the issue of diversification. In their infancy stages, ethical investment funds have been caught chasing after the same, small number of top-pick companies, which could mean an investor with a broad spread of investments in various SRI funds has unconsciously overlapped and held too many units in a limited amount of stock.
In the positive screening realm, there is also concern that the present taste for technologies that positively fight global warming could overshadow other technologies with the potential to make a global impact on the other issues within the SRI banner, such as healthcare, fair trade and social solutions.
But at the forefront of advisers’ concerns is whether SRI returns are seductive and sustainable enough to turn their heads. Ethical investing has been around for 20 years and, despite limited opportunities for retail investors until fairly recently, there are now up to 40 ethical unit trusts available, most of them through fund supermarkets, and most of which are eligible within a tax-efficient wrapper.
The average UK ethical unit trust beat the average of all UK unit trusts by 13 per cent – 71 per cent growth compared with 55 per cent growth in the FTSE index – between 1991 and 1996, according to Cooperative Insurance. And the World Markets Company concluded its recent report on ethical investment by stating that it “can provide competitive returns”.
Mr Fox claimed that there are a host of ethical trusts that have achieved top- quartile performance over five years, with the F&C Stewardship, NU Sustainable Future European, Aberdeen Ethical World funds and Mr Fox’s Sustainable Leaders trust all being highly rated in the sector and performing well.
Mr Fox’s fund, launched in 1990, is now valued at £146m.
He admitted that negative and positive investment screening – for example, the weeding out of ‘sin stocks’, or limiting the universe to ‘ethical’ stocks only – flies in the face of tried and tested investment practice. He said: “The logic is that less choice should equal less performance, but it very much depends on what you include and what you exclude – whether the companies that you include have better drivers and better prospects than the ones you exclude.
“Mining and oil companies have strong drivers in terms of development in China, for example, but if you replace that with companies that are involved in combating climate change and have some big political drivers behind them, their performance will more than make up for what you have excluded.”
In the current political climate, the green issues underlying SRI and ethical investment principles are likely to remain relevant to consumers. As investors gain in knowledge and strength of conscience, they will expect their financial advisers to be several steps ahead.
And for the sake of keeping possible future mis-selling claims at bay, the smart adviser will be the one who confronts the issues posed by SRI, enforces serious due diligence, and embraces the opportunities that arise.
Anna Lawlor is features writer for Financial Adviser :key points
- Savvy consumers are driving the growth in socially responsible investing
- Advisers must ensure expertise to avoid any future claims of mis-selling- In the current political climate, the green issues underlying SRI and ethical investment principles are likely to remain relevant to consumers
Friends Provident funds look to maximise ethical interest
- Magazine: FinancialAdviser Published Thursday , November 23, 2006
Friends Provident has offered the first range of ethical funds wrapped within a single, simple bond. Aimed at those wishing to invest over a long term – it has a minimum period of five years, and offering lump sum investment ofa minimum of £5000 with additional lumps of £2000 permitted – it is aiming to be an investment bond with a conscience.Offering nine underlying funds, the unit-linked bond offers a range of low, medium and high-risk investment life funds, all of which meet the life and pensions company’s strict ethical criteria. Regular withdrawals of £40 and more are permitted monthly, quarterly, every four months, bi-annually or annually, although withdrawals will be stopped if the fund value falls to £2000.With no notice period, investors can cash-in the bond in full or in part, with a minimum of £250 each payment. The amount left, however, needs to be more than £2000, although a discontinuance deduction of 8.5 per cent in year one, and each year thereafter of 7 per cent, 5.5 per cent, 4 per cent and 2.5 per cent in year five will be made.The external funds available are the Aegon Ethical Corporate Bond fund which has an annual management charge of 1.65 per cent; the Aegon UK Ethical Equity fund, which has an AMC of 1.75 per cent; Credit Suisse’s Multi-Manager Ethical fund, with an 1.85 per cent AMC; and Morley’s Sustainable Future European Growth fund, 1.95 per cent AMC. Additional expenses for these funds will not exceed 0.2 per cent, except for the Credit Suisse Multi-Manager fund, which is capped at 1.1 per cent.An additional feature of the bond is the ability for investors to switch between ethical funds, or into non-screened Friends Provident funds up to 12 times in each bond year for free. Additional switches will draw a £15 charge.An annual management charge of 1.25 per cent applies to the Stewardship funds, except for the Stewardship Safeguard Optimiser, which charges 1.85 per cent. Additional expenses for the Stewardship funds will not exceed 0.1 per cent. The Ethical Investment Bond offers no capital protection, however Julia Dreblow, socially-responsible investments marketing manager for Friends Provident, expects the performance to mirror that of non-ethical funds.The bond is also basic rate income tax- and capital gains tax-exempt to the investor. The incentive of life cover is included in the bond, paying 101 per cent of the value at the time of death, payable upon death or joint life second death basis. Intermediaries are offered 5.2 per cent standard commission, with enhancements for larger investments. An annual valuation statement is sent, but bond performance can be checked daily online.
Kathy Booth, ethical IFA for Manchester-based The Gaeia Partnership, said: “This is a great opportunity for ethical investors to include other ethical funds in their portfolio alongside the popular Friends Provident Stewardship Safeguard Optimiser fund, which is not available through any other provider’s bond, and is ideal for cautious investors.This provides the opportunity for clients to diversify into other ethical, non-Friends Provident funds
It is now okay to have ethics, says Aberdeen
- Magazine: FinancialAdviser
- Published Thursday , November 10, 2005
THE stigma surrounding socially responsible investments as an underperforming investment class is dissolving, claims Aberdeen Asset Managers. Andrew Preston, head of SRI for Aberdeen, said public and governmental awareness of environmental and ethical issues had grown over the last few years. Mr Preston said: “There have been legislative changes, attitude changes, EU legislation on the environment and recycling. Consciousness has been raised enormously. I see growth in the SRI arena as people continue to become more concerned for themselves and their children.” Mr Preston said one of the issues in the past had been performance. He said institutions were particularly cautious about reducing the investor universe, through the screening processes applied by SRI investments. But Aberdeen’s Ethical World fund has achieved strong performance, outperforming the FTSE World index since launch in 1999. Mr Preston said: “The screening for the fund is much stricter than the FTSE World screening, yet we are outperforming the FTSE.” Aberdeen believes the best returns on SRI come from telecommunications, financial services and industrial companies in Asia. These include Korean Samsung Electronics and Japanese NTT Docomo, the world’s largest mobile phone company. Despite the greater potential among larger firms to breach the SRI screens, Aberdeen does not exclude large companies from its investment process. The fund is underweight in the US, which accounts for just 16 per cent of its holdings. Mr Preston predicted that A-Day would see a growth in SRI investing, as people had more freedom to invest in what they want in their pension funds.