Ethical investments: What shade of green will you choose?

With National Ethical Investment Week about to start, Sarah Pennells guides newcomers through the three main types of fund and suggests where to go to find out more
Sarah Pennnells
The Guardian, Saturday 7 November 2009
You recycle, switch off lights and have a water butt. But is your wallet green? Tomorrow sees the start of National Ethical Investment Week (NEIW), a campaign designed to spread the message of ethical and green investing. Only 8% of people invest ethically, although 33% of those questioned by YouGov for NEIW said they would consider it in the next five years.
Ethical investing can be tricky to get to grips with if you are a first-timer. With dozens of different funds and some off-putting jargon, it is not surprising that some just plonk their cash in the first fund they come across.
But this is not the route to investing happiness. You might end up with a fund that bears no relation to your own ethical views or one with a great track record in ... abysmal performance. You do not need to be an ethical expert to invest £50 a month in an Isa, but it helps if you understand the basics.
There is no foolproof way to categorise funds because they tend to overlap, but they can be – broadly – broken down into ethical, green and engagement funds (which put pressure on companies to improve their behaviour). Don't expect funds in the same category to invest in the same companies: it will be down to their focus and investment approach.
Ethical funds either refuse to invest in certain companies or sectors, positively invest in others, or both. Those on the banned list will vary but could include cigarette and alcohol producers, armaments manufacturers and businesses supporting regimes with a bad record on human rights.
Of all the categories, it is the easiest to explain, according to Amanda Davidson, of independent financial adviser Baigrie Davies: "If you ask a client what they want to do with their money, they'll always start with a list of what they don't want to invest in."
The first green fund launched 21 years ago. Now there are dozens; some exclude companies with a bad environmental record, others invest in specific sectors, such as renewable energy.
But if you think green funds buy only solar panel and wind turbine makers, you will be disappointed. For example, Jupiter Ecology fund, the oldest green fund, invests in a producer of free range and organic sausages.
Funds that take engagement seriously can have a far bigger influence than traditional ethical funds. By "engaging", fund managers lobby chief executives of companies they invest in and use their vote at shareholder meetings to bring about change.
The providers
Ethical funds use either in-house or external research (or both) to assess companies before they invest and while some funds are very strict, with a long list of companies they cannot invest in, others are not. In theory, the stricter the fund the worse the performance should be, but Aegon's Equity fund, with one of the strictest screening criteria, has (until recently) performed well. "It has very simple negative screens covering activities such as human rights, armaments and labour relations," says John Ditchfield, director of ethical independent financial adviser Barchester Green Investment. "It also has consistent fund management."
However, its performance has taken something of a battering in recent months; falling from the top 25% in its sector – over both five and 10 years – to the bottom 25% (which Aegon says is because it cannot invest in large banks or oil and mining companies).
The biggest and best-known ethical funds are the Stewardship group, launched by Friends Provident 25 years ago and now managed by F&C. They are unusual in that fund managers can only invest in companies approved by an external committee.
Green funds Jupiter's Ecology fund was the first green fund and remains popular. Its negative screens are important, but it actively invests in companies that benefit the environment. Julian Parrott, from Ethical Futures, based in Edinburgh, says: "It's a broad-based fund with a strong environmental focus which includes shares in UK companies."
However, Lee Coates, at independent financial adviser Ethical Investors, likes the Guinness Alternative Energy fund's pure environmental approach. "Some [other] green funds invest in companies that use renewable energy, not because they're generating it."
Engagement funds A number of fund managers use a mixture of positive and negative screening and engagement and some, including Aviva Investors, are particularly active at engaging (on anything from disclosing carbon emissions to improving employee relations). Steve Waygood, Aviva Investors' head of sustainability, research and engagement, believes there are real benefits to this approach: "First, to support business behaviour that generates long-term value for investors and second, to ensure that the board is behaving with integrity in its dealings."
Other fund managers that engage include Henderson, Co-operative Investments and F&C. Before you invest, find out when the fund introduced its engagement policy, how active it is and what information it publishes.
Poor performers
You are likely to have more short-term volatility if you invest ethically, but some funds – such as Sovereign's Ethical fund – stand out for the wrong reasons. Figures from Trustnet show it made a loss of 16.9% over five years, while another ethical fund, run by Old Mutual, produced just 9.6% over five years (well below the sector average).
The advisers
If you want an adviser with relevant expertise, look at the website Yourethicalmoney.org, which has a directory of ethical IFAs. A good one should ask about your approach and not simply recommend funds on the basis that you're interested in "ethical" investment.
Useful contacts
Yourethicalmoney.org is a one-stop shop for information on green and ethical investments; neiw.org has consumer-friendly information on ethical investing; Trustnet.com tracks funds' performance and has an 'ethical' filter.