It’s not easy being green: socially responsible investing
The 8th – 14th November 2009 is National Ethical Investment Week (NEIW). This is a campaign to raise awareness of green and ethical investment options, coordinated by UK Sustainable Investment and Finance (UKSIF) – the sustainable investment and finance association.
‘Green’ investing is increasingly popular. More than £7 billion is currently invested in green and ethical funds in the UK, up from £1.5 billion just ten years ago. Some new research by Co-Operative Investments found that 18% of investors plan to invest ethically this year.
There are lots of ways to ensure that your money is invested ethically. In the UK, you have the choice of over 90 green and ethical funds. Each takes a slightly different approach and it can be confusing when you are trying to match a specific fund to your own ethical preferences.
Here is our short guide to the different green, ethical and socially responsible investment options available.
Why go green?
Investors have different reasons for choosing ‘green’ investment options.
Some do it because of particularly strong feelings, wanting to ensure their money is not being used to fund such things as arms trading, tobacco, pornography or alcohol. Others want to make a positive contribution to the world, investing in themes including renewable energy.
Some investors opt for ‘green’ funds simply because they see the potential for higher returns. There might be something in this, for reasons we will explain later.
Approaches to investing
There are four main ways in which a fund manager can approach the management of an ethical or socially responsible investment fund. These are negative screening, integration, engagement or positive selection. Each should result in a very different outcome in terms of the types of investment considered and how the fund might fit with your own views of the world.
Negative screening is where ethical investing started. It involves the exclusion of companies from the pool of those under consideration because of the things they do. This might include the exclusion of companies in the armaments or tobacco industries. Funds that use negative screening are sometimes referred to as ‘dark green’ as their screening methods should ensure no companies involved in undesirable activities slip through the net.
Integration involves the use of specific criteria in the selection of desirable companies. This could involve the use of analytical tools to identify environmental, social and governance (ESG) factors.
Engagement is an approach used to improve a company’s performance in respect of these ESG factors. The commercial motivation behind this approach is to improve the profitability of the company, whilst ensuring alignment with the objectives of the fund.
Finally, positive selection is an approach used to identify those companies that already display strong and attractive traits in terms of corporate social responsibility practices or other ‘green’ matters.
Four different approaches to the selection of suitable investments within funds means the various green funds on offer can look very different.
What about performance?
Investing in line with your views on green, ethical or matters of social responsibility is clearly important. Ensuring that you invest in line with your attitude towards investment risk and meet your investment objectives is also important.
A common criticism of green funds is that they carry a higher level of risk than traditional investment funds. There could be some truth in that statement.
Green funds, and particularly those that use negative screening, typically have access to a smaller pool of potential investments. This used to drive green funds in the direction of smaller companies which are usually more risky from an investment perspective than their larger cap peers.
The counter argument is that a fund manager with a smaller range of companies from which to choose should be able to analyse and understand those investment options to a very high degree.
Over the medium term, certain investment sectors will outperform others. For example, when tobacco stocks do well most green funds will miss out. Of course the reverse can also occur.
Longer term, you might expect green funds to perform well because of the increased global concern about the themes of renewable energy and reducing carbon emissions.
How do I invest?
YourEthicalMoney.org is a consumer website created by Ethical Investment Research Services (ERiS). You can use this website to find out more about where your money is invested, search for green and ethical financial products, and find out how you can help make finance more sustainable
Another good place to start your research into specific green investment options is the UK Social Investment Forum (UKSIF).
By far the most comprehensive book we have read on this subject is An Investor’s Guide to Ethical & Socially Responsible Investment Funds. It is expensive (with a retail price of £55, available for £52.25 from Amazon) but is good value for any serious ethical or socially responsible investors.
If you need advice, you can find a suitable independent financial adviser using Unbiased.co.uk, the professional advice website. This online tool allows you to search for advisers who can assist with ethical investments.
Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. He thinks he is quite ‘green’ (recycles everything, walks rather than drives, etc) but these lifestyle choices have yet to filter down into his personal investment selections.
