February 15th, 2008
Green pickings
Ethical investment is no longer just about doing the right thing. It’s now a good place to watch your money grow
Ethical investment used to be seen as a dull and worthy backwater of the investment market. Not anymore. With the huge focus on green and corporate social responsibility issues, it is emerging as one of the most exciting areas for investors. It is also no longer only for those with a social conscience but for hardened investors who want to obtain the best returns for their money.
According to the latest figures by the IMA (Investment Management Association), investments in ethical funds rose by 32 per cent over the last year to £5.6 billion. And while this is still a relatively small proportion of the £463 billion of UK retail funds, the whole investment market now takes on board a lot of the thinking that drives ethical funds. According to Jason Hollands, a director of F & C Asset Management, the UK’s largest ethical funds provider, ethical investment is an area of growing public interest. “Ethical funds used to be known as the Brazil funds because it was said you had to be nuts to invest in them,” he says. “There, however, has been a complete change in the way people regard them. They are now seen as keeping ahead of some very important trends in the market.”
The F& C Stewardship Growth Fund was the first ethical fund to be launched in the UK in 1984 with an initial £2 million. Collectively, F & C ethical funds under management are now valued at £2.5 billion.
The Stewardship Fund itself in the five years to July produced a return of 104.57 per cent, compared to the FTSE All Share Index’s 89 per cent. “Ethical funds tend to be much less volatile than those who follow the largest stocks,” Hollands says. “Around 40 per cent of the largest stocks on the UK Stock Market are in oil, banking and mining - all areas closed to ethical funds. These, however, are very sensitive to changes in oil prices or fluctuations in the dollar which a lot of ethical investments are not.”
Lee Coates is director of Ethical Investors Group, one of the UK’s leading ethical investment independent financial advisers, based in Cheltenham, Gloucestershire. He says investors now want to have ethical investments within their portfolio, whether they have ethical concerns or not. “There is general market interest in such funds and investors are increasingly attracted by their performance,” he says.
Companies which set out their stall to counteract global warming have the potential to become the major growth stocks of the future
According to Coates, 60 or so dedicated ethical retail funds currently on the market are typically some of the best researched. “Mainstream funds often tend to invest in 80 to 100 funds, yet there are some 1000 shares on the FTSE All Share, many of which go largely un-researched,” he says. “More than half the UK’s fund managers fail to beat the index which is something of an indictment. Ethical investment fund managers often have to do a lot of research since they typically invest in a lot of smaller companies for which information is not readily available.”
He says that while the ethics of some of the funds might not be to the red-blooded taste of many investors, they still can perform. He cites the Aegon Ethical Fund which has delivered a 73 per cent return over the last six years. “It is a vegan fund that does not even invest in Thornton’s because it has milk in its chocolate,” he says.
There is not only growing interest in ethical investment but in funds which invest specifically in areas of environmental concern. The Quadris Environmental Fund invests in a teak plantation covering 50,000 hectares in Brazil and hopes by 2014 to have five per cent share of the global certified teak market.
It is a major forestry project, ensuring the reforestation of the environment and also providing much-needed, well-paid work to the local population. It aims to deliver over the longer-term high investment yields and less volatility than conventional Stock Market investment. Ian Hook, managing director of Quadris Environmental Investments, based in Woking, which markets the fund, says the investment is a good fit for many portfolios. “Forestry investment is not dependent or inter-related in any way to stock or bond prices so it is an ideal component of a balanced portfolio,” he says.
“It is one of only three commodity investments which have grown in real terms over a 50-year time horizon and without the volatility of the other two - oil and gold.”
While climate change is one of the major political concerns, many are now also seeing it as a major investment opportunity. Companies which set out their stall to counteract global warming have the potential to become the major growth stocks of the future.
Schroders’ decision to launch a Global Climate Change Fund this September - the first to specialise in companies involved with mitigation of, or adaptation to, global climate change - reflects the potential of investment returns in this area. It is not strictly an ethical fund in its own right.
Simon Webber, the fund’s co-manager, says the high performance of ethical funds, many of which have weighted portfolios towards future technologies, has been a factor behind launching the fund. “Investors simply can’t afford to ignore the realities of climate change. Across all sectors, climate change will have a broad and lasting impact along the value chain,” he says. “For the mainstream equity investor, now is the time to adopt a global approach to what will be a major investment theme for the foreseeable future.”
Mark Dampier, head of research at stockbroker Hargreaves Lansdown, adds a word of caution to those who think ethical investment is the new goldrush. “Ethical funds have performed well over the past two or three years but we have been in a bull market. They also typically invest in small and mid-capitalised companies which have been a strongly performing sector of the market,” he says.
“There is also a danger in investing in companies with the latest solar power or wind power technologies, which goes for any technology company, in that they might have good ideas but can’t make money out of them. They can sometimes be significantly over valued too.”
Coates says ethical fund managers often have more investment freedom than many think. “All funds are specialist to some extent. They might invest in a particular size of company or a certain sector. Ethical is not as constraining as some other specialisations and therefore can take advantage of a wide array of opportunities.”
Investors will no doubt get their fingers burnt in green investment, as in any other, but it is still likely to be one of the major investment themes of the next 20 years.
Membership to the Executive Golf club is free. Simply click here and become a member of Executive Golf