Toward a more caring sharing capitalism

Ethical investing is still seen by many as a niche area, whatever guise it appears in – be that green, environmental, social and governance (ESG), or socially responsible investing (SRI). The morality of an investment is still seen, by and large, as a more subjective, peripheral criterion than its performance.

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This, however, is no longer the case. At the end of June, the IMA sectors housed 49 ethical funds, with approximately £6.94bn in assets under management (AUM). This is more than the £5.32bn in the Global Equity Income sector, the most popular of the equity sectors in June, which witnessed net retail inflows of £133.28m.

Overall, ethical funds have a higher total AUM than nine IMA equity sectors, including the UK, North American and European Smaller Companies and China/Greater China sectors.

This is in spite of ethical funds reporting a net outflow of £2m from retail customers in the second quarter of the year, following net retail inflows of £26m in the first three months of 2012. Overall, however, the average quarterly net retail sales figure for this type of investment over the past year is £35m.

Such a high level of assets in IMA-listed ethical funds indicates the demand for a wider variety of products, a trend highlighted in research by UKSIF, the membership network for sustainable and responsible financial services, as part of the fourth National Ethical Investment Week held in October 2011.

The survey of more than 2,000 adults revealed 42 per cent with investments wanted to ‘make money and make a difference’, with 34 per cent wanting at least a quarter of their investments to include green and ethical considerations.

In addition, a further 10 per cent of those surveyed wanted to ‘dip their toe in the water’ by including green and ethical considerations in a smaller proportion of their investment portfolios.

This theme is being continually driven by events such as the Deepwater Horizon oil spill in the Gulf of Mexico, which affected not just investment returns in the shape of BP’s dividends and share price, but also highlighted the environmental effect of actions by companies.

Anna Sofat, managing director of Addidi Wealth, says: “There is a groundswell of opinion in favour of ethical products. You only have to look at how many people buy organic food and refuse to invest in tobacco companies to see that people really do want to put their money to positive, rather than negative, use.

“But many financial advisers think that ethical investment is not viable and therefore don’t discuss it with their clients, even though, in my experience, a lot of people don’t want their money invested in unethical industries such as armaments, tobacco, blood diamonds and so on.”

Performance concerns

A key concern for many is whether ethical funds underperform their mainstream counterparts, but the best performing ethical/SRI fund over three years to July 31 is the First State Global Emerging Markets Sustainability fund, with a return of 59.59 per cent. This compares extremely favourably with its IMA peers in the Global Emerging Markets sector, which produced an average return of 26.55 per cent, and the return of 28.27 per cent for the MSCI Emerging Markets index, which funds in the sector are typically benchmarked against.