Read more on ethical and sustainable investing in Morningstar's Ethical Investing Week 2013.
Traditionally, ethical funds used to take a hardline approach to what they invested in, but the sector has evolved in line with its catchphrase “socially responsible investment” (SRI).
Rather than screen out stocks, funds that follow the SRI route take a more positive approach, investing in companies that adopt good environmental and social practices regardless of sector. This gives managers a wider choice of stocks, which can help boost returns and reduce volatility. It is also why ethical funds have such diverse holdings – while traditional funds will concentrate on renewable energy firms, ethical funds such as Aberdeen Ethical World invests in Vodafone (VOD), Centrica (CNA) and PepsiCo (PEP).
As long as the companies strive to align their values with the investor – be it on environmental issues, corporate governance or shareholder relations, they can qualify to be held in an SRI fund.
Peter Michaelis, of Alliance Trust said that SRI is a sensible approach from both an investment perspective and an ethical one.
Alliance has more than £1.4 billion invested in its Sustainable Future fund range.
“Recent figures show that the UK has fallen considerably behind the US and rest of Europe in the proportion of assets being sustainably and responsibly invested,” he said. “This reaffirms the importance of educating potential investors of the value of sustainable investments.”
Triodos Bank found in a recent survey that investors plumped for SRI funds because of the transparency surrounding stock selection.
“Only 17% of investors believe in investment return at all costs and saying that achieving the highest possible return is more important than being ethical, there is clearly an appetite among people to see that their money is being put to good use as well as making profits for them,” said Huw Davies from the specialist bank.
What’s more, the SRI universe is growing. According to an Accenture report, 44% of senior executives think that sustainability was ‘critical’ to their business – and the figures show that
Roger Cowe, director at SRI research group EIRIS said that General Motors reportedly earns $1 billion a year turning waste into revenue, DuPont saves approximately $300m a year from energy efficiency initiatives and Marks &Spencer’s wide-ranging “Plan A” sustainability strategy contributed £135m to the company’s profits last year.
“Executives have realised that sustainability is a driver of business performance. At its simplest, saving energy and cutting waste improves profitability. Less directly, responsible practices reduce risks and build brand loyalty,” he said.
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