Aiming for high returns as an ethical investor is irrelevant and distracting, writes Edinburgh-based financial adviser, Julian Parrott.
There’s rarely a day goes by when I don’t get a call or an email proffering me the latest super-green, uber-eco investment offering a double digit annual investment return. These are usually a ‘great opportunity’ to buy some trees on a plot of land in some far off region where I can be assured that said trees will yield me untold, almost exponential growth with complete security of tenure!
These, and other opportunities to buy into other forestry, solar, agriculture and carbon credit offers, are generally unregulated investments of the type that the Financial Services Authority (FSA) have recently decided should not be promoted to ordinarily retail investors.
So when the respected people at B> asked if I’d like to write an article about investors getting high returns from ethical investment, it was like a red rag to the proverbial bull.
Now don’t get me wrong – I’m all for clients getting a healthy return from their investments. As an ethical specialist I’m keen to disabuse clients of the notion that investing ethically means an automatic reduction in expected return. However, I do get concerned about the concentration of media and by extension, clients, about level of return, as I feel it distracts form more important issues such as the wider benefits form adopting a sustainable and socially responsible approach to investment.
As an adviser who regularly speaks to the media, I have found myself over the years having the same conversation from different perspectives with the same journalist over a three or four year time span; the question is, “Why are ethical investments doing so well/so badly (delete as appropriate) compared to mainstream funds?” The answer: it’s called investment cycles, reflecting short term variance in sector performance.
My view is that ‘high returns’ come with high risk and that there is not really any strong correlation of level of returns to ethics at all.
The level of return available to the investor reflects the asset class, liquidity, security and performance of the asset. In some instances, certain asset classes may be adversely affected by ethical considerations – e.g., equity income generates most income for mega cap stocks in alcohol, mining , pharmaceuticals and tobacco – all areas subject to ethical screens, so impacting ability to generate a good equity income from ethically led stocks (which tend to be smaller and mid cap).
Conversely, early adopters in renewables, waste, recycling and smaller companies in general may well benefit from the boost to values once the main market identifies the value and boosts market prices (as seen when the Stern Report was released in 2006).
There will always be the latest fad for any opportunist in any field to hook themselves onto – just note the number of electricians and plumbers who have become eco-energy installers. Ethical investment is not a fad – it represents a process of applying a range of values to investment selection and seeking to manage money for social and environmental benefit as well as financial dividend.
In that context we might expect some short-term variances due to relative performance for ethical and mainstream universes but long-term outcomes are quite likely to be similar.
Ethical investment advice should be given in the context of a considered approach to a client’s goals and objectives as part of an overall financial plan. It’s about assessing client risk and values and then setting an appropriate asset allocation. Talk of high returns or otherwise for ethical investors is in my mind irrelevant, and detracts from the planning that clients need to apply to their finances.
Julian Parrott is chair of the Ethical Investment Association (EIA) and a partner at Ethical Futures, financial advisers based in Edinburgh.