Mythbuster

The cynic’s guide to… ethical investment

I’m very sceptical about all this. Investing money is a serious business, not some fluffy lifestyle choice.
You’d probably find that seriousness shared by the people who manage the £6.1 billion of ethical investment funds in the UK and the $4 trillion worldwide in funds that take account of environmental, social and governance issues.

But why would I limit my options to a narrow ‘ethical’ niche?
Narrowing your investment on ethical grounds doesn’t reduce its performance any more than criteria like geography or sector. That’s not some green myth, but the official line from the Association of British Insurers.

Anyway, ethical investment is a broad field. At the one end, savvy venture capitalists can do well backing early-stage enterprises like ‘cleantech’. With climate change in the headlines, many are backing carbon saving and sequestration projects - $100 billion invested in the US in 2005 and 2006…

I certainly don’t want to lose it all on some untested technology.
If you’d backed fuel cells 15 years ago, you’d be laughing now. But you don’t have to go for the cutting edge. At the other end of the scale, you can invest in companies that are simply more socially responsible.

Isn’t that almost impossible to tell, with so much greenwash around?
Fund managers have already done the work for you - screening businesses for unethical practices, and sniffing out trends that’ll matter in tomorrow’s markets. A financial advisor could help you choose a fund, account or pension with specific exclusions - such as cosmetics companies that test on animals - or one that avoids sectors with negative social and environmental impacts, such as oil and mining.

Some financial institutions engage with the businesses they back, to raise their game and help create the sort of world you actually want to see. Because they’re the ones that control share value, companies are sensitive to this.

So it’s no riskier than ordinary investment?
Could well be a lot less risky. Want to trust your pension savings with a firm that’s going to be sued in the future for not doing the right thing? NGOs are turning the heat on and the World Trade Organisation is cracking down on companies exploiting animals, people or the environment. Look at how online gambling shares crashed last October at one stroke of US legislators’ pen. Coming back to mining - if the law shifts to make companies responsible for dioxin pollution, some will actually have a negative value in the market!

It’s one thing to play safe - but who is making real money in this area?
Believe it or not, 88% of ethical funds beat the FTSE All Share Index in 2006. If you want specifics, Giles Chitty at financial advisors Holden & Partners tells me that a grand invested a decade ago in the FTSE All Share Index would be worth £1,572 today. If you'd put it in the ethical Stewardship Fund from F&C, you'd be looking at £1,947 today. Left in only for a year, the FTSE investment would have grown to £1,123 - whereas the same money with F&C would have increased to £1,174.

Better than leaving it in the bank, then?
If you want to do that, the Co-operative Bank’s ethical online Smile account beats most current accounts hands down on interest. And there are lots of ready-made ethical ISAs up for grabs.

So why isn’t everyone doing it?
Hundreds of thousands of people already are. There are half a million socially responsible investment fund accounts today in the UK alone. Want to know more about them? www.eiris.co.uk can help. - Hannah Bullock

12 March 2007

Hannah Bullock