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Ethical investing used to be a very niche area of investment that was reserved for the brave few who would rather their money ‘did good’ than ‘did well’.
But things are starting to change as the sector becomes more mainstream, and the performance of ethical funds is now competing with more traditional, non-ethical sectors. Alison Steed looks at exactly what ethical investing is.
What is an ethical fund?
An ethical fund is one that has very specific criteria that it applies to companies that it chooses to invest in, which relate to the way the fund itself has been set up, and its principles. For example, some funds will avoid any companies that make weapons, or those that deal with alcohol production, or pornography, or who have a gambling slant to their business.
If you have a particular area that you would like to avoid yourself, you would need to decide on what your principal concern is, and identify a fund with your adviser that will meet your ethics.
Do all ethical funds exclude companies based on what they do?
Well, not exactly. The funds themselves work in two ways – they will either exclude companies specifically because of the nature of their business, or they will seek to actively include them because of what they do.
It may be, for example, that a fund would include a company dealing with nuclear energy in preference to a company that deals with energy production using fossil fuels because it has a lower impact on global warming because there is less CO2 produced.
The screening process for funds is very stringent, and a set of principles will be established when the fund is set up. Often there will be a board of researchers in addition to the fund manager who will monitor companies to see how they are doing business, to ensure that those they are already invested in continue to meet the fund’s criteria. In addition, they will identify companies that the fund manager can invest in, which are ‘screened’ according to the fund’s ethical stance.
Is this the same as socially-responsible investing?
Yes, the terms ‘ethical investing’ and ‘socially-responsible investing’ are both interchangeable.
What about ‘green’ investing?
Green investing relates specifically to companies dealing with environmental factors, such as renewable energy, or reforestation. These funds actively seek to invest in companies that are going to be working towards helping the environment through their business.
Again, specific criteria will be laid down for each ‘green’ fund which dictates how the investments can be made. Some will include firms, and some will exclude them – you need to check how companies are chosen to be sure your own ethical stance matches that of the fund.
I have heard about ‘dark green’ and ‘light green’ funds – what is the difference?
Dark green funds are much stricter in the way that they apply their criteria. These funds will generally look to exclude companies that operate in a field that is working to the detriment of the environment. Light green funds are prepared to take what is called a ‘best of sector’ approach.
For example, you would expect oil stocks – the likes of BP, Shell and ExxonMobil – to be excluded from a fund that is concerned with the environment because of their involvement in the use of fossil fuels.
However, light green funds using a best of sector approach will include companies that are considered to be the best of a bad bunch – so if BP was considered more environmentally friendly than Shell, or vice versa, it could be held in a light green fund.
Isn’t that just blurring the lines?
No, not really. The criteria for all of these funds are set out clearly, and if you do not think this is the right way to operate, you should choose a different fund that meets your personal ethics.
The one good thing about including companies in these funds when they may otherwise not get a look in is that the fund manager and investors can start to engage with these companies to improve their environmental measures more quickly, and more effectively. It is a way of getting firms to perform better and more ethically, and it can be extremely useful.
OK, so what is ‘sustainability’?
This is just as it sounds – sustainable investing done through ethical funds is designed to help companies to continue to help the environment, by putting money towards goals which might include renewable energy, such as hydropower or wind farms.
Can I expect to get decent returns in this sector?
Not all the time, but then what sector is there that you can expect great returns all the time? When the first ethical funds were created they were given the derisory name of ‘Brazil funds’ because ‘you would have to be nuts to invest in them’.
Now, there have been periods – especially in turbulent times, as it happens – when ethical funds can come into their own.
Recent figures from Trustnet Offshore show that the top three funds in the offshore ethical equity sector – Premier New Earth Solutions Recycling Facilities, AMB Ethical Trust and Banco Kultur – have made 14.2%, 12.3% and 12.3% returns respectively in the past year. The MSCI World Index, by comparison, has fallen by 1.51% over the past year at the time of writing.
Should I have a big part of my portfolio invested in ethical funds?
From a performance point of view, you would be banking a lot on one area of investment to work in your favour, and the best advice is generally to diversify your holdings to try to insulate yourself from falls in different sectors at various times.
However, if you have a strict stance on certain areas, for example if you would not be happy to invest in a company producing alcohol, then you would need to consider avoiding this as a priority within your investment portfolio.
What is being done about ethical investing in Asia?
Plenty. The Association for Sustainable and Responsible Investing in Asia (ASrIA) had its 10th annual conference in Hong Kong at the end of September, which brought together a wide range of ethical investing experts to look at how the Asian markets are approaching sustainability and ethical financing across Asia.
The Singapore Stock Exchange has also implemented a Sustainability Reporting Guide for all of the companies listed on the exchange. They must report on their environmental and social risks as well as their financial performance.
Given the natural disasters that have hit Asia and the Far East in recent years, there is a real sense of concern about climate change and environmental risks.
How can I find out more?
You can look at the ASrIA website at www.asria.org, and/or you can speak to your financial adviser for assistance in working out whether an ethical investment strategy would work for you.
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