Ethical investment

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The spectacular growth of ethical and environmental investments shows that increasing numbers of people want their money used wisely to make a better world

This page covers:

  • Some facts
  • What are ethical and environmental investments?
  • Assessing Ethical and Environmental Funds
  • What is the "best of sector" approach?
  • Why have ethical investments not done even better?
  • wpe2.gif (941 bytes) Are ethics of any interest to the financial sector?
  • wpe2.gif (941 bytes) Are stock exchanges interested in a sustainability index?
  • wpe2.gif (941 bytes) Should Pension Funds disclose where they invest?
  • How do I go about starting to build an ethical portfolio?
  • What is involved in changing an investment portfolio?
  • Who can help?
  • How does ethical investment help with applying sustainable development?
  • How does responsible environmental performance affect corporate business results?
  • Ethical funds expected in 1999
  • References
  • Some facts

    What are ethical and environmental investments?

    Ethical investments exclude companies with interests in armaments, oppressive regimes, nuclear power, tobacco, vivisection, gambling, alcohol and pornography. Environmental (and ethical) investments are also screened for positive factors. These include companies that are of  long term benefit to the community such as environmental improvement, conservation of resources, a good record of dealing with staff and customers, and an equal opportunities policy. EIRIS identify five different kinds of ethical investment:

    EIRIS analyse the performance of each of these and conclude that neither the performance nor the risks vary much from the Financial Times Stock Exchange (FTSE) All-Share Index [Source: EIRIS Supplement September-October 1998]

    Assessing Ethical and Environmental Funds

    Several criteria are important:

    What is the "best of sector" approach?

    Some business sectors have performed well above the average for the top 100 UK companies (FTSE 100). These include oils, banks, and pharmaceuticals, all of which may be excluded when applying rigorous ethical criteria. However, a recent ethical investment innovation now admits a few companies from these sectors if they meet the "best of sector" criteria. For example in the banking sector Abbey National or Halifax, which are converted building societies, are acceptable because they are not involved in Third World debts nor do they have business accounts in the excluded sectors.

    Why have ethical investments not done even better?

    Many Independent Financial Advisers (IFAs) discourage their clients from ethical investments because they say believe that they don't perform so well and they provide an unbalanced portfolio by excluding large high performing sectors. Neither belief is valid. Many conventional IFAs are so convinced they are right that they have not investigated ethical and environmental investments thoroughly. Discussions with clients tend to focus on the performance of the portfolio and some of the holdings which are doing well or badly and this leads to decisions about selling poor performers and buying other stocks which may or may not meet ethical criteria. Many investors have never been given the opportunity to consider ethical investments.

    A second important factor is that many investors are not aware of the full business interests of some large companies in which their money is invested.  The diversification of businesses has resulted in several multinationals getting involved in sectors that are not in their mainline. For example armament components are made by many different companies and some large companies buy raw materials from or have their products manufactured in countries with oppressive regimes where employment conditions are appalling. If an investor knew the facts they may well not wish their money to be used in that way - even if the company performs well and pays good dividends.

    wpe2.gif (941 bytes) Are ethics of any interest to the financial sector?

    There has been little or no interest in environmental, ethical or social issues from the financial sector, which tends to see all these as peripheral to the central purpose of making money. However, an interesting initiative was taken by Deutsche Bank in August 1999 (newspaper reports on 25 August) over the question of investments in companies involved with Genetically Modified Organisms (GMOs). Deutsche Bank, the world's largest bank, sent a report to several thousand large institutional investors, including many British pension funds. They drew attention to "growing negative sentiments", noted that Monsanto has failed to influence public opinion in the UK despite spending 1 million and that food companies, retailers and grain processors are sending signals that "we are not ready for GMOs". Deutsche Bank advised investors to sell their shares in leading companies involved in the development of GMOs. This initiative may well signal a newly found awareness that public opinion about ethical issues, threats to the natural environment and possible danger to human health do indeed impact on financial performance.

    Apart from this the insurance sector has taken a keen interest in damage caused by climate change and the escalating scale of claims arising from floods, hurricanes and storms. They have been described as the business sector playing a significant part in changing the attitudes of large companies through the rapid rise in insurance premiums.

    The third example that may change things is the first UK partnership between an environmental charity and a city institution to launch the NPI/WWF investment fund - reported in   BBC Wildlife September 1999, page 65-68.

    wpe2.gif (941 bytes) A fourth example comes from Prudential Portfolio Managers, the investment management company of Prudential plc, who will in future "explicitly screen all of its potential UK equity investment on a range of environmental and ethical issues. [They] have been prompted to do this by sound business motives, because environmentally sound companies are good performers" - reported in The Ethical Investor, November/December 1999.

    wpe2.gif (941 bytes) Are stock exchanges interested in a sustainability index?

    Yes! It was reported on 6 August 1999 that Dow Jones were set to launch a Sustainability Index to "meet the growing demand from 'ethical' fund managers and retail investors for clearly defined instruments to assess companies social and environmental credentials." Dow Jones believes that "over the past 5 years sustainability-driven companies had better financial performance than their peers." [Source: Independent 6 August 1999].

    The ENDS Daily reports that Europe is the "clear front runner" in a new global Dow Jones index ranking companies according to sustainability principles, according to one of the scheme's organisers this is believed to be the first such exercise on a world scale. The index aims to boost investor interest in companies prioritising environmental and social concerns alongside economic results by showing that they often outperform the market average. European companies top nine of the 18 economic sectors within the index, according to Reto Ringger from Zurich-based SAM Sustainability Group, which developed the assessment techniques. These companies are paper products (Finland's StoraEnso), automobiles (Germany's Bayerische Motorenwerke), food (Netherlands-based Unilever), banks (Credit Suisse of Switzerland), insurance (Sweden's Skandia Forsakrings), conglomerates (Norsk Hydro of Norway), pollution control and waste management (Tomra Systems, also Norway) and semiconductors and telephone systems (Germany's Deutsche Telekom).

    Overall, Europe has a "two or three-year lead" in corporate sustainability and, if the index performs well, this should "quickly spill over" to the USA and elsewhere. The concept is better understood by European firms, and consumers here are more focused. Several countries already have successful ethical funds at a national level, and new research indicates that a number of very large investment companies would like to take a bigger step in placing funds. Five financial institutions from Germany, the Netherlands and Switzerland have already started setting up special investment funds based on the index and there is also strong interest from Scandinavia and the UK.

    The Dow Jones Sustainability Group Index (DJGSI) comprises three regional indexes covering Europe, America and Asia-Pacific, as well as a separate USA index. Within each, investors can choose to exclude companies involved in alcohol, gambling, tobacco or all three activities together. Drawn from the Dow Jones global index of over 3,000 companies, the DJGSI features more than 200 of the most sustainable top performers in 68 industries with total market capitalisation of about US$4.3bn (euros 4.09bn). In a "backcasting" exercise covering the past five years, it outperformed conventional indices by 5.5% with an added risk of just 1%, according to Mr Ringger of SAM Sustainability Group. wpe2.gif (941 bytes) The Dow Jones Sustainability Group Index can be seen on their web site at http://indexes.dowjones.com/djsgi/

    The yardsticks of sustainability includes strategic commitment and organisation at board level, concrete management initiatives and instruments, use of new technology and a host of industry-specific measures. The rating uses specially developed questionnaires, analysis of company reports and policies and assessment of stakeholder relations. Where possible, it incorporates methods already in the market such as the Global Reporting Initiative, Sustainability standards for environmental reports, and SA8000 standards on the social side. The latter has represented the biggest challenge, particularly in an international context where many of these questions are value-driven, according to Mr Ringger. Contacts: DJGSI (http://www.sustainability-index.com), Tel: +41 1 395 2828.

    wpe2.gif (941 bytes) Should Pension Funds disclose where they invest?

    Yes! The Goode Committee said in 1995 that ethical investment was legal for pension funds and in 1999 it became a requirement for pension funds to give details of any ethical policies in their "statement of investment principles". This is seen as the biggest ever shake up of the pensions industry. To support the moves towards ethical pensions, research shows that 77% of people believe that their pension scheme should operate an ethical policy and 83% want to know where their pension scheme invests. EIRIS have published a Guide for Pension Scheme Members as a supplement to The Ethical Investor, September/October 1999.This supplement reassures readers that evidence shows that carefully chosen ethical investments perform as well as any other investment but acknowledges that people have different ethical principles but there is often a high degree of common ground that can be discovered through research.

    How do I go about starting to build an ethical portfolio?

    Most IFAs will tell you that a balanced portfolio with the risks spread requires a minimum investment of about 75,000. However, smaller sums can be invested ethically with a good spread of the risks by investing in a unit trust. The Holden Meehan  Guide gives a listing of many funds and assesses their performance against several criteria. wpe2.gif (941 bytes) The EIRIS Guide to Financial Planning is a supplement in the November/December 1999 issue if The Ethical Investor. Both these publications are good starting points. It is a good idea to clarify the particular ethical and environmental criteria that are important for you. This can be done by completing the questionnaire in the Holden Meehan Guide.

    What is involved in changing an investment portfolio?

    Change means selling shares in companies that do not meet the defined ethical criteria and buying shares in companies that do. This needs to be handled with care and may mean selling some high performing stocks. If a lot of shares are sold in one year the capital gains tax liability could be unacceptably high. A gradual transition over 3 to 5 years could be a wiser strategy. A second consideration is to re-assess the competence of your IFA in terms of  sound research into the ethical and environmental investment market. In some circumstances this may mean parting company with a trusted adviser.

    Who can help?

    The checklist can help you find a responsible IFA and move towards a sound ethical portfolio:

    How does ethical investment help with applying sustainable development?

    The growth of ethical and environmental investments helps to enhance sustainable development in several ways:

    1. Enable people to invest to avoid social and environmental damage and contribute to the work of progressive companies
    2. Draw the attention of companies to the growing interest of investors in responsible corporate behaviour
    3. Encourage IFAs to realise that financial performance is only one criteria for building an investment portfolio
    4. The rapid rate of growth of ethical investments is attracting increasing interest from the financial sector
    5. These investments are showing that responsible companies can match or outperform others who are less scrupulous
    6. Ethical investments are showing that the "triple bottom line" makes business sense
    7. Ethical investment performance gives encouragement to "tomorrow's companies".

    How does responsible environmental performance affect corporate business results?

    Some companies say "we can't afford to take account of the environmental impact of our business", others say " we have done what we can to use resources more efficiently and cut pollution, but doing more requires a 'level playing field' which is up to the government". As a result of statements and beliefs like these a wide-ranging study was carried out by David Edwards and published in his book The Link between Company Environmental and Financial Performance. The conclusions were:

    The combined effect of EIRIS findings, the Holden Meehan report and the book by David Edwards is that ethical trade carries no financial penalties for either investors or business.

    To add strength to these conclusions Electrolux in their Environmental Report 1998 say: "products with high environmental performance show higher profitability than the average range". The add "the best thing we can do for the environment is get new, resource-efficient appliances into as many households as possible."

    Ethical funds expected in 1999

    According to News from the New Economy Scottish Amicable launched its new ethical fund on 6 April 1999 and Legal and General, Norwich Union and Murray Johnstone are expected to launch theirs before the end of 1999. This will bring the total number of ethical funds in the UK to 44, making it one of the fastest growing sectors of financial services. Ethical investors now hold over 5% of the share capital of 15 major UK companies. The companies that top this list are Abbey National, Railtrack, Vodafone, Severn Trent and Halma, according to EIRIS.

    Additional references (Note: email hotlinks may not work with Netscape browsers)

    1. Ethical Investment Research and Information Service (EIRIS), London, who publish a newsletter six times a year and have several other helpful publications. Contact by email ethics@eiris.win-uk.net or see their web site
    2. Holden Meehan Independent Financial Advisers, who publish periodic guides to ethical and environmental investments. They can be contacted by email green@holden-meehan.co.uk and have a web site.
    3. Barchester Green Investment who can be contacted by email GeoffGriffiths@compuserve.com and have a web site
    4. See also information about ethical investments in Australia and Canada.

    Last modified 15 November 1999

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