Your Industry 

Ethical Investing - February 2014

    CPD
    Approx.60min

    Introduction

    The very traditional ethical funds, first launched in the 1970s were very much about negative screening – where you avoid investments in companies that are involved in certain products and services incompatible with the ethical objective, such as gambling, alcohol, pornography, armaments, tobacco and so on.

    However, in the 21st century, investing ‘ethically’ has become a catch-all for everything from environmental or ecology funds, to sustainability funds, alternative energy as well as the traditional ‘dark green’ mandates.

    Bruce Jenkyn-Jones, head of listed equities at Impax Asset Management, notes: “When we talk about specifically ethical investing, it is about factoring in personal values into your investment decision. Ethical investing is not an objective thing, it really depends on the individual.”

    He adds that if ethical investment is just a broad term of trying to incorporate your values into your investment, SRI (socially responsible investing) is trying to have a positive impact with your capital, while ESG (environmental and social governance) incorporates non-financial aspects into your investments.

    Charlie Thomas, fund management director, environment and sustainability at Jupiter, says: “The interesting thing is ethical investment is quite a big catch-all for everything. In quite a simplistic way I segment the market into three areas. There is ethical, which is an ethical fund that avoids the nasties – you can invest in anything but avoid areas such as tobacco, alcohol, armaments and so on. That’s category one.

    “Category two, which is a more recent iteration, I define as the ESG or SRI or sustainability. That is basically you can invest in anything but you will engage on those issues. You might invest in the controversial sectors but only in the best ones. The third sector is what I define as thematic, where you invest in the growing growth trends around water, or environmental solutions.”

    He adds that the current situation is that the normal person on the street, might not appreciate the difference between the three segments.

    “It is perhaps the fault of the industry. The real challenge is for us to convey that a bit better.”

    In terms of performance, this is where it can become tricky. As Mr Thomas points out, “you can’t really compare an ethical fund with a thematic fund. You need to break them apart”.

    Chris Wright, manager of the Premier Ethical fund, says: “The one thing I’d say about ethical investing is that it has changed, in a sense it has become mainstream.

    “So many funds now insist there is proper governance, that there is proper risk reward for what management get. The principle of [investing] institutions is to look for that.”

    While ethical investing has clearly broadened its remit from its original incarnations, one of the key trends surfacing in recent years is around renewable energy, resource efficiency and climate change.

    Mr Thomas notes: “When we started talking about energy efficiency and renewables and food and water, people thought it was an esoteric concept. But what is really happening in a much more accelerated way is that these are all becoming more mainstream in our life.

    “That is reflected in the number of companies we can invest in, which has gone up four-fold in the past 10 years, so the universe has got much bigger.”

    The manager argues that consumers buy cars based on fuel efficiency, while water is increasingly part of the wider agenda in emerging markets and particularly China where approximately 40 per cent of the country’s GDP is situated in areas of water scarcity.

    He adds: “This is basically the next evolution that I see in and around the thematic investing. But what we’ve got to do is understand ethical, SRI and thematic as three different segments, then you can understand what these products are and what they mean.

    “If you’ve got all these products out there in the UK market how do you understand what they are if you don’t understand the principles behind ethical investing?”

    Nyree Stewart is features editor at Investment Adviser

    In this special report

    CPD
    Approx.60min
    1. What does ESG stand for?

    2. Who came up with the concept of ‘five forces’ to help determine profitability?

    3. What does SRI stand for?

    4. How many funds with SRI in the title are listed in the IMA universe?

    5. What is the approximate amount of assets held in ethical funds according to latest IMA figures?

    6. What type of ‘ethical fund’ was the best performer for the 12 months to January 28?

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