The momentum was there and the ‘ethical’ industry has never looked back since those early days. In terms of numbers, 1996 saw investment in ethical funds top £1bn and by 2004 had reached £5bn.
According to the Investment Association (IA), 2007 saw 1.2 per cent of all funds under management invested in ethical funds. Ten years on, and that figure is still the same at 1.2 per cent invested. In fact it has remained at 1.1 per cent or 1.2 per cent each year in between.
The difference is that 1.2 per cent in 2007 was £5.9bn, but in 2016 that same 1.2 per cent was £12.4bn. More than holding its own with funds not run to an ethical mandate.
There are more than 60 ethical unit trusts and Oeics available, a handful of investment trusts and in the world of discretionary management, looking at model portfolio services, we are aware of at least 75 portfolio options run on an ethical basis.
And of course the majority of discretionary managers that run bespoke portfolios (65 out of 75 that are listed on Defaqto Engage) will agree to run a portfolio of investments to an ethical mandate.
So, for those that hold strong beliefs or simply feel they should be doing their bit, there is plenty of choice out there. So, how do you chose the right fund or portfolio for the client?
As with all investment, start with the client and find out from them what a good fit is, what they believe in and how much of a compromise they are willing to take. That established, you need to look at what is available in the market and how each of the options available differ.
Having started this article contemplating how things have changed over the last 30 years or so, the one area that has not perceptively changed over the years is how the funds and portfolios are put together and managed.
There are three key areas that come in to consideration when putting together a portfolio:
- Applying negative criteria.
- Applying positive criteria.
- Engagement.
1. Negative criteria
Negative screening takes out those companies that do not meet the ethical criteria laid down in fund objectives. This is usually the starting point for putting together an ethical fund. Companies that are involved in any number of the following could be excluded:
Alcohol | Testing on animals (medical/non-medical) |
Gambling | Production of greenhouse gasses |
Pornography | Use of pesticides |
Tobacco | Non-sustainable forestry |
Oppressive regimes | Other pollution |
Exploitation | Nuclear power |
Health & Safety breaches | Abortion/contraception issues |
Human rights violations | Arms |
Discrimination | Genetics/biotech |
An element of compromise is required for negative screening as it is very difficult to be absolutely sure that a company or, in some instances, its subsidiaries or even suppliers are not investing in, or profiting from, any of the above.
2. Positive criteria
This identifies companies that are actively making a positive impact in terms of ethical criteria. This may include:
Developing alternative energy | Equal opportunities employers |
Promoting organic farming | Good employment practises /welfare/rights/health and safety |
Transparent environmental reporting | Community involvement /education/ support/sponsorship/traffic management |
Pollution control | Life enhancing products |
Advancing recycling procedures | Alternative medicines |
Environmental management | Good customer relations |
Sustainable forestry/agriculture/fishing | |
