More and more ethical funds have entered the market, giving investors the option to invest their money not just for a monetary return but also with the aim of contributing to a larger social well-being. But what are these ethical or socially responsible funds (SRI)? Here are five things to know about SRI funds...
What are SRI funds?
SRI refers to investments driven by sustainability, social conscience or ethics. In this form of investment, investors look at putting their money into areas they are passionate about, with profit maximisation second.
How can investors get involved?
This kind of investment can be done in three ways. First, by investing in companies that the investor believes adhere to values such as environmental, social and governance. Second, as shareholders, socially responsible investors proactively influence decisions in the corporate space so that they do not have a detrimental impact on environment or society. And finally, by community investing – more and more investors tend to divert their capital into areas or communities that are under-served.
How do ethical funds decide what companies to invest in?
Ethical funds each have a set mandate that directs what kind of stocks or ventures they can put their money into. All funds that describe themselves as ethical carry out a positive and negative screening process. In a negative screening process, the company’s activities are compared with a list of prohibited practices such as alcohol, animal testing, armaments, environmental, unsustainable activities, gambling, nuclear power, pornography and tobacco. Positive screening includes companies that contribute to the community and follow good practices in the environmental, social and governance space.
How well do these funds perform?
A number of analysts have pointed out that the performance of most ethical funds has been strong over the past few years. This gives a positive signal that the ethical bond market is an interesting place to invest and one where, over the longer term, you can get a social and an investment return. For example, Rathbones’ Ethical Bond fund included the Midlands Together project in its portfolio. This project issued a bond that paid a 4 per cent return, while also employing 17 ex-offenders, thus generating employment.
What are the risks?
The funds come with their own sets of risks and challenges. Due to the restrictive nature of SRI funds, there are only a limited number of sectors that they can get exposure to and thus performance can be subject to those sectors doing well. They are also subject to market risks and with heavy exposure to equities, the companies can be impacted by events like an interest rate hike. In order to deal with this, a number of fund managers try to diversify exposure to other asset classes.
For more, see Money Management’s feature on socially responsible investing in the October edition.
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