Putting your money where your morals are
| by Andrea Page 03 May 2003 Topic: Personal Finance |
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There are signs that ethical or socially responsible behaviour is gaining credence where personal investment is concerned, as Andrea Page discovers Research by the UK's Institute of Business Ethics, based on FTSE 250 companies between 1997 and 2001, suggests those with a well-established code of ethics or conduct were generally better at risk management, generated significant additional economic and market value, and had a more stable price-earnings ratio. Whether ethical behaviour leads to a higher share price is more difficult, says Stephen Hine, head of international relations at the Ethical Investment Research Service (EIRIS), which produces criteria to help investors address social and ethical concerns. Analysts, Standard & Poor's, says over one year to 1 April just two ethical/ecology unit trusts made a positive return - Aegon's Ethical Income Fund (4.85%) and Morley's Sustainable Future Corporate Bond (3.14%). This group of funds lost an average 29%, against 23% from all UK unit trusts excluding ethical/ecology vehicles. EIRIS says that the value of retail socially responsible investment (SRI) funds fell from £3.8bn to £3.5bn over the year to December 2002, while the main UK stock market lost over a third of its value. 'Broadly speaking, the average ethical and SRI fund has outperformed the FTSE All-Share index over the longer term,' says Jeremy Newbegin, director at specialist independent financial advisers (IFAs), The Ethical Partnership. However, Derek Vivian, principal of IFAs, Ethical Plus, says he tells clients from outset that they must be prepared to forego some growth to invest ethically. With the increasing choice of income and growth-oriented funds - including some tracking the FTSE4Good index - the emphasis can vary. 'NPI's Global Care fund is more human rights-related whereas the Norwich Union Ethical Fund is more sustainability-related,' says Vivian. Most retail funds screen potential holdings using both negative and positive criteria, on the assumption that private investors mainly want to avoid particular areas like arms, tobacco and animal testing. 'But some may have a wider set of negative screening criteria; some may be stricter and others less so,' says Stephen Hine. Positive criteria range from developing environmental initiatives and technology to being transparent about directors' pay, which may create a 'lighter green' investment. Standard Life's growth-oriented UK Ethical Fund creates an acceptable universe via negative screening, then applies positive criteria including good employee welfare standards and local community involvement. 'Roughly 80% of our acceptable universe is positively screened,' says fund manager, Amanda Forsyth. As a result, funds may have exposure to companies that don't offend but aren't social or environmental pioneers - Vodafone, Prudential, National Express and Centrica are among the most popular holdings according to EIRIS. Examples of lighter green funds include the Morley Fund Management and Norwich Union 'sustainable' funds, says Newbegin, as they're looking more for positive signals of companies changing their practices in the future. Although EIRIS and UKSIF don't differentiate 'ethical' and 'socially responsible' investing, funds calling themselves ethical tend to keep money out of areas like arms and pornography, while socially responsible investing (also called engagement) is more about investing in order to influence a company's behaviour, which otherwise may fall foul of negative screening. Along with governments and other organisations, SRI fund managers were involved in submissions that led to Glaxo recently agreeing to cut HIV/AIDS drug prices in South Africa. Fund managers need to attract money, especially from institutions, so SRI funds do lean towards greater compromise. 'But it would be wrong to assume all ethical funds aren't involved in engagement, because some are,' says Newbegin. EIRIS says groups including Henderson, ISIS, Jupiter and Morley use engagement in addition to screening criteria. It advises checking the exact engagement, objectives and process (this can vary from an occasional letter to regular meetings with senior management). 'What's important is that fund managers are transparent with clients,' says Hine. Specialist financial advice is available. The Ethical Partnership's questionnaire details individual client concerns from community involvement to pollution, in addition to the standard financial planning process. Ethically invested funds have a restricted universe to choose from, increasing the potential risk and volatility. 'We've had to avoid high profile defensive sectors like tobacco but, on the other hand, I have no problem investing in utilities and food retailers are interesting too,' says Amanda Forsyth. FTSE 100 companies tend to lead the way in an upturn, and she can access only around 60% of those companies. However, small company holdings like Simply Plastics, which makes biodegradable plastic bags, and Virotech, which has developed a product to neutralise contaminants left behind by mineworks, 'have very strong potential in the longer term'. Ethical exchange Elsewhere, a new ethical exchange to be launched by Triodos Bank in May could prompt wider interest in ethical shares. The Bank eventually aims to act as a market maker, although, initially, 'Ethex' is a matched bargain market. 'These aren't stocks you'd expect to trade every day,' says Matthew Robinson, head of investment banking at Triodos Bank. 'We expect to see less volume than a full listed exchange but with enough liquidity that, if someone wants to sell, they can realise funds in a month or so.' He points out that two previous share issues by The Ethical Property Company were fully subscribed, most recently at £4.25m. Triodos is currently discussing potential issues with social housing, fair trade, and renewable energy enterprises, and is working with Mencap on a housing initiative for people with learning difficulties. The Bank is sponsoring a new 10-year bond issue by Mencap, to be traded on Ethex. This aims to raise over £4m for Mencap's Golden Lane Housing arm, to provide much-needed housing for people with learning disabilities, and will pay 1% above inflation to a maximum 6.5% annually. With Co-operative Bank and the Ecology Building Society, Triodos is a leading provider of ethical savings. Co-op Bank's ethical policy governs what it generally will and won't invest in; the latter includes issues such as arms manufacture to oppressive regimes, animal testing on household goods and development of genetically modified organisms. Rather than apply negative criteria, Triodos lends to organisations it views as adding social and environmental value - accounts like Organic Saver and Just Housing are linked to specific causes and projects. Ecology Building Society only lends to people who are buying or building energy-efficient homes, or those with ecological value. There is a trade-off for such savings - for £10,000 with instant access the best return in the market is just over 4%. Ecology's Instant Share Account pays 2.1% and Co-op Bank's Save Direct just 1.5%, although their mini cash ISAs are more competitive, at 3.75% (including a 1% bonus) and 3.62% respectively.
Contacts Andrea Page is a freelance journalist writing on investment, property and lifestyle issues for a range of UK and international titles including Bloomberg Money and FT Expat magazines. | |