Ethical investment is becoming the chosen vehicle for many investors who demand more than just financial growth from their money, writes James Howard of Emerald Knight.
Since the near collapse of the banking system and rapid decline in the global stock markets, there’s been increasing concern over the stability of traditional investments which people have often relied upon heavily as their ‘nest egg’. And there’s much better awareness of how financial institutions use their customers’ money, driven by concerns about issues such as climate change, human rights, and deforestation. As a result, the nation is becoming increasingly aware of the impact of its choices.
Just how much is reflected in figures from EIRIS, the non-profit sustainable investment research specialists. These show that the amount of money invested in Britain’s green and ethical funds recently reached a record height of around £11 billion, up from £4 billion 10 years ago. And over the last decade, the number of ethical investors has tripled, from 250,000 to three-quarters of a million.
There’s also evidence to suggest that recent issues in the banking sector, such as the Libor rate-rigging scandal and executive pay, have led to more people than ever reviewing ethical options. The Move Your Money campaign, for example, estimates that 500,000 people chose to move their bank account to a more ethical provider in 2012.
The investment options
As regards investment options, you can choose to invest directly into companies or projects which meet ethical criteria, or look at ethical funds which can be growth or income generated.
There are several different types of projects to consider, and one of the most popular at the moment is carbon offsetting, where you help to fund a project which will reduce or remove a metric tonne of carbon emissions from the atmosphere. The company involved will package carbon dioxide emission reduction units into credit bundles that can be purchased as carbon credits.
There are many other investments, too, from social housing projects in Brazil which are helping to solve the country’s major housing deficit, to projects that invest in bamboo plantations in Central America.
When it comes to funds, there are a large number available and they’re often categorised in various shades of green, depending on the criteria they apply to their investment decisions. A dark green fund is a term used to describe a fund which applies strict negative screening before investing in a company, and excludes companies involved in unethical practices such as defence or pharmaceuticals. A light green fund is a term used to describe a fund which uses positive screening and invest in companies which are making a positive contribution to the environment, or which have a good ethical track record.
Some funds combine both screening methods with a best-in-class approach. So, while a company may invest in the oil and gas sector, it will only invest in those which are doing the most to limit their environmental impact, or to improve their ethical performance.
Other funds engage with companies by using the manager’s power as a shareholder to positively influence corporate behaviour regarding areas such as the environment and human rights.
You can have profits and principles
There’s still a widely held perception that investing ethically means having to sacrifice financial performance, but the two can actually go hand-in-hand. In terms of recent performance, for example, the Jupiter Responsible Income Fund has achieved a total return of 33.08% over the last three years, and become a top quartile performer in the UK equity income sector.
Despite the perception that the ethical investment is considered to be a fairly recent phenomenon, the concept actually goes back hundreds of years when the Quakers banned members from investing in the slave trade. Even until fairly recently, investors who chose to invest in ethically-minded products were often perceived as a periphery group. But the concept has blossomed into a viable and lucrative investment strategy.
And it appears to be breaking into the mainstream. This is borne out in our own research which shows that 60% of us would be interested in investing ethically if we simply knew more about it, and 74% of us would be likely to opt for investments which benefit society and the environment, if we had the money.
James Howard is a director at Emerald Knight, which specialises in socially responsible investment.
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