The only way is ethics

As investors’ understanding of the related issues, including environmental, social and governance factors, has improved, the number of SRI-focused funds has markedly increased.

Financial advisers are increasingly asking specific questions as to whether clients want any SRI/ethical consideration as part of their investment strategy.

SRI has evolved from what was previously regarded as a more traditional ethical investment approach, where investors were focused almost exclusively on the issues, sectors and companies they wished to avoid investing in – for example, animal testing and tobacco.

This is still an approach favoured by some investors, and there are a number of funds that are managed using a negative ethical screening strategy.

Some SRI funds that adopt this approach include the Kames Ethical Equity and Kames Ethical Corporate Bond funds, which combine their specific negative screening criteria with the investment processes used in their non-ethical funds.

This means the funds also benefit from the experience and stock-selection skills of Kames fund manager Audrey Ryan for the Ethical Equity fund, and the strength in depth and fund-management skills of the Kames Fixed Income team for the Ethical Corporate Bond fund.

These strategies are then combined within the Kames Ethical Corporate Bond fund to provide a balanced, mixed asset approach for investors.

Increasingly, however, there has been a move towards using positive screening criteria and a focus on identifying sectors and companies making positive contributions based on ESG factors such as climate change, environmental waste, human rights, and resource scarcity.

This has led to the launch of a number of funds with a thematic approach, concentrating on sectors and companies benefiting from or creating solutions to ESG issues.

Some thematic SRI funds adopt a targeted approach, looking at a small number of themes or an individual theme. The Schroder Global Climate Change fund falls within the latter category, looking for companies that are helping to mitigate climate change.

The Jupiter Ecology fund concentrates on companies providing some form of environmental solution and/or protection of the environment within a small number of themes (environmental infrastructure, resource efficiency and demographics).

Finally, the Allianz Global Eco-Trends fund focuses on companies in the eco-energy, pollution control and clean-water sectors, mainly providing exposure to technology and technology-related companies.

SRI funds launched more recently have tended to concentrate much more on the positive side of SRI investing, with the wider theme of sustainability a particular focus.

This typically involves firstly identifying the specific themes/issues that require attention and then identifying the beneficiaries and solution providers at sector and company level.

This is an approach adopted by the SRI team at Alliance Trust, who joined from Aviva Investors in August 2012, through its range of Sustainable Future funds.

The team has currently identified four broad ESG themes – climate change and efficiency, quality of life, sustainable consumption and risk management, within which there are smaller themes that will be applicable to specific sectors and companies – for example, emissions, education and water technology.