courtesy of Investasure Financial Services Ltd.
[Editor’s note – Expatriates often struggle to find the right investment vehicle for their money, a task made more complicated by the various taxation and legal requirements of different countries. In recent years another element has been thrown into the mix: ethics. The following article explores the history of this new “style” of investment.]Ethical investment has long been regarded as a ‘minority interest’ by investors but during the last few years this has changed due to the rapid growth experienced in this sector.
This growth and interest is due to the fact that this form of investing is now considered a most ‘attractive investment option’ for the discerning investor. But what is ethical investing and why has it become so popular?Our research and findings indicate that the roots of ethical investing date back to the nineteenth century and the concerns of religious groups over investing in companies involved in alcohol and gambling. However, since then, the ethical investment ideology has continued to gain strength.
The Pax World Fund was launched in America in 1971, with the aim of avoiding investments associated with the Vietnam War. The UK’s first ethically screened unit trust was launched by Friends Provident in 1984. Now, the modern investor can pick from an extensive range of ethical funds, each offering a different ethical policy.
In July 2000, new pension regulations meant that pension fund trustees were obliged to disclose their policies on ethical investments and individual investors have also taken an interest in all things ‘green’. In October 2000, the Cooperative Bank found that roughly one in six shoppers frequently either bought or boycotted products because of a manufacturer’s reputation. In effect, ethical concerns could be backed, at a conservative estimate, by billions of pounds of consumers’ money. And, as investors have become increasingly sophisticated, their demands for socially responsible investment funds have increased.
These managed funds offer varying definitions of what constitutes an ethical investment. Contrary to what some people may think, investing in an ethical fund does not mean that you are donating money to good causes – it simply means that your money is not invested in companies that are considered ‘unethical’.
The two most common investment strategies adopted by fund managers involve negative or positive screening. Negative screening means a fund strictly excludes companies involved in practices deemed to be unethical, such as the manufacture and sale of armaments and tobacco.
In contrast, a positive screening policy will accept companies that embrace ethical practices which investors wish to support, such as reducing pollution or embracing good employment practices and as such, a large company or a FTSE constituent would not be automatically excluded from consideration simply because it was, for example, a bank.
The third preference is to use engagement strategies where fund managers encourage companies to make improvements to their ethical, social and environmental policies.
The use of negative and positive screening has created a variety of ethical funds, some of which are ‘greener’ than others. AEGON’s ethical funds (Ethical and Ethical Cautious), for example, are respected for the stringency of their screening processes. The investment criteria is highly selective, preventing investment in any company whose activities could be considered harmful to society or the environment.
Investors need to be aware of the screening criteria used by a fund manager. It may not suit all investors’ preferences to choose an ethical fund that encourages positive ethical practices rather than using a straightforward negative screening process. People often think that the ethical policy applied by a fund manager will also have a large impact on the financial performance of the fund. However, research by EIRIS (Ethical Investment Research and Industry Service) indicates that investing according to ethical criteria makes little difference to overall financial performance.
It is also a widely-held belief that most ethical funds only invest in small- to medium-sized companies. However, funds that operate a positive (rather than a negative) screening policy are more likely to hold blue chip stocks. Greener funds are more likely to invest in smaller stocks, such as recycling companies. So, it is important that investors understand the fund manager’s ethical policy and how this can have an impact on the level of risk and potential returns.
The rise of ethical investing has been meteoric during the last few years, with investors becoming increasingly sophisticated, the outlook for the ethical sector is very positive.
The variety of funds on offer in the UK means there is a ‘shade of green’ to suit everyone.
PLEASE BE ADVISED:
The above document and wording herein represents the findings of the Investasure Directors.
This document has been collated by liasing with many various life offices and the findings stated represent our views on Ethical Investing.
Investasure Financial Services Ltd are licensed to conduct investment business by the Isle of Man Financial Supervision Commission.