Ethical dilemma

Around 18 per cent more people are intending to invest ethically this year, research published in May by The Co-operative Financial Services. It believes these figures confirm that the financial crisis will indeed promote growth within the green investment arena.

To further strengthen its case, the Co-operative cites the Investment Management Association’s quarterly statistics which show that retail inflows into ethical funds have been greater than outflows for every month since February 2008, despite the recession. The Co-operative Investment’s own Sustainable Leaders Trust saw growth of 16 per cent in 2008, with this growth continuing into 2009, it adds.

At the same time, research from Friends Provident reveals that 54 per cent of people think ethical investing is more important now than it was 25 years ago when the UK was also emerging from recession. Indeed, it was in 1984 that Friends Provident became the first UK company to offer retail ethical investments, launching its Stewardship fund range in a bid to give people the option to “put their money into socially responsible hands”.

Its research also found that 70 per cent of people expect financial advisers to offer ethical investment options, while 45 per cent thought it was important that pension fund managers took social, ethical and environmental issues into consideration – as long as they were a ‘good’ investment.

The Co-operative Asset Management fund manager Joe Walters believes it is clear that the way investors make money is now as important as how much is made.

“There has been a significant erosion of consumer trust, particularly seen in the banking sector and we believe that this could lead to increased demand and awareness in ethical investments which would tend to invest in more responsible businesses,” Walters says.

He suggests the financial crisis has illustrated the dangers of poor governance within companies and says it seeks to integrate governance analysis alongside financial analysis to invest in companies with high standards of management practice.

Walters adds that topics such as the environment, human welfare and sustainability, which have become major issues on a global scale, are not cyclical and therefore should perform regardless of the economic climate.

Friends Provident investment proposition manager Mel Rees says the increase in investment into its ethical funds over recent years has been steady, adding that it now accounts for nearly 30 per cent of investment into its life funds”Recent research conducted by Friends Provident shows that 74 per cent of investors consider social, ethical and environmental issues important when making investment decisions,” Rees says.

“These results indicate that when the investment market picks up momentum, ethical investments will be well placed to increase their market share.”

Meanwhile, F&C Investments head of governance and sustainable investment Karina Litvack says it is seeing an increase in investors interested in taking a more ethical view. She believes there is now a much higher public awareness about the potential impacts of poor governance on the economy.

“Interestingly, in terms of performance, the funds have been hit just as badly as non-sustainable investment funds. But what we’re finding is that the inflows are continuing just the same,” she says.

Litvack believes this is a continuation of what has been experienced in previous downturns – people wanting performance, but against a different set of drivers.

“They’re looking for a fund that achieves congruence with a set of values as well as a fund that achieves a competitive performance,” she says.

But despite the suggestion from fund managers that the recession is serving to heighten the importance of an ethical stance, advisers remain unconvinced of its actual impact.

“The only reason that in an economic downturn people would move that way is because they get a little bit more settled mentally,” says Worldwide Financial Planning managing director Peter McGahan.

“They stop being greedy, they stop being capitalistic,” he says.

McGahan says this is something that happens in every economic downturn, but while people may become more “centred”, he believes the realities in terms of putting this into play in their investment portfolio in a significant way are very different.

“Today people are a lot better read, so they know an economic downturn like today is really an opportunity to make a lot more money. Of course when they do their homework on ethical investment they’ll see that sector underperforms. So the realities are rather different than the theory,” he says.

How socially responsible funds have fared with respect to their unrestricted peers depends on the timescale you choose to look at, but figures from Morningstar show that over the year to June 1, 2009, the average ethical or ecology fund dropped in value by 23.76 per cent. This compared to a drop of 17.77 per cent for all unit trusts and open-ended investment companies. Over 10 years, ethical and ecology funds have risen 0.89 per cent against the typical fund’s 34.17 per cent.

Currently ethical funds represent 1 per cent of all UK funds under management.

Bestinvest senior investment adviser Adrian Lowcock suggests there are two camps that ethical investors fall into: those who invest ethically not because of their beliefs, but because of the opportunities it presents; and those with a truly ethical standpoint, who will invest ethically regardless of the economy.

“As far as clients go, they don’t suddenly change their mind on an ethical investment depending on the state of the economy. They’ve held that view long beforehand,” he says.

Lowcock too says ethical funds tend to be more volatile and under perform more than the average fund in downturns, something he puts down to the more restricted investment choice available. Such funds have minimal exposure to more defensive stocks such as tobacco, armaments or pharmaceuticals, Lowcock says.

Pharon IFA business development manager Nicholas O’Shea says he is also not seeing more clients knocking on his door demanding a greater ethical stance in their portfolios.

“My view is that at this moment what people are focussing on is what is a suitable investment. People are looking for value; they’re looking for returns and you don’t get value and returns in ethical investments,” he says.

Norwest Consultants principal Harry Katz is similarly unconvinced, believing that capitalism is the ultimate force in this marketplace.

“It comes down to a commercial reality. The sensible thing is that you do things that either make you a profit or save you money – because at the end of the day it’s the same thing. Normally if you’re being careful and not being wasteful that in itself helps the planet.”

So while ethical funds may continue to enjoy greater inflows in the new world order, it could have more to do with the opportunities appearing in this area than on purely ethical instincts – in the short term at least.

Adviser View: Ethical investing in the recession

Jeremy Newbegin, Director, The Ethical Partnership

The global financial crisis, along with the ongoing scandal surrounding politicians’ expenses in the UK, are likely to have turned the spotlight onto ethical issues for many people, the Ethical Partnership director Jeremy Newbegin believes.

“One would have expected that would in turn mean that people would start looking at ethical investment,” he says. However, like other advisers, he is doubtful as to whether this will translate through to action. “My experience is that it’s one thing people being more concerned about ethics if they are, the other is whether they’re prepared to align their money with those principles,” Newbegin says.

“At the end of the day the other issue that people are concerned about at the moment, is whether they’re going to make money.”

But Newbegin does believe that in the longer term there will be greater numbers of people seeking out investments that “have integrity behind them”. He says the future is looking promising for the environmental sector in particular, thanks to the future growth potential of areas like renewable energy and waste management.

Newbegin’s favoured green funds include the Impax Environmental Markets investment trust, the Jupiter Ecology fund and the Allianz RCM Global EcoTrends fund. He also likes the First State Asia Pacific Sustainability fund for its ability to give ethically minded investors some exposure to the Asia Pacific region.

Newbegin says he prefers fund managers that spend money on research in the ethical space itself, rather than relying heavily upon the Ethical Investment Research Service (Eiris), as this indicates their commitment to the ethical marketplace.