Ethical investment is no longer the poor performer it once was, and with this has come the wider considerations of ethical investment for charities, says Philip Smith


It is incumbent on those charged with managing other people’s money to seek the best place in which to invest.If it is growth trustees are seeking, it surely makes sense to have the freedom to pick from the widest range of high performing companies.

Which can create a dilemma for charitable funds as the sectors in which donors’ money can generate the best returns may be at odds with the core values and mission statements of that association.

The solution has been to seek sanctuary in an ethical fund. Ethical funds, or sustainable and responsible investing (SRI), have been around for some years but, while they adhere to the mission of the charity, have too often failed to deliver the growth sought.

Well, times are changing. Some of the funds with the strictest criteria on where they will and won’t invest are now outperforming the FSTE All Share index on a vast scale – more than 100% in some cases. And that is a far better performance than many unrestricted funds, according to some experts.

It’s that kind of performance, backed by an increasing awareness of, and interest in, ethical investing among the wider community that has seen the amount of money under such management rocket in recent years.

On the back of that expansion is a growing industry of advisers, analysts and fund managers all looking to provide those with stringent conditions on where their money cannot be invested with a growing range of portfolios from which to select.

Specific guidelines
Sustainable and responsible investing is not new. Many claim the origins go back as far as 1758 when The Quakers prohibited members from investing in the slave trade and later when John Wesley’s Methodists added alcohol and tobacco to the banned list.

It’s developed somewhat since then, driven mainly by the charitable sector’s specific guidelines over which sectors or businesses – over and above the standard tobacco and arms industries – are deemed unacceptable.

The first ethical fund in the ‘modern’ age aimed at mainstream investors – F&C Stewardship Growth Fund – was launched in 1984. These early funds, however, were seen as poor performers.

No longer. Ethical investment is breaking into the mainstream and it’s partly down, say commentators, to the global banking crisis, which has raised doubts over the stability of more traditional funds. Which goes some way to explaining the sudden burst of interest.

According to recent figures from EIRIS, the sustainable investment research firm, there’s around £11 billion invested in Britain’s green and ethical funds, up from £4 billion 10 years ago, and from £6.8 billion in 2008, whenthe financial crisis began. And over the last decade, the number of ethical investors has tripled, from 250,000 to 750,000. Stephen Hine, head of responsible investment development at EIRIS, said the range and diversity of the funds available now means any ethical criteria can be met.

So what constitutes such an ethical fund? According to Simon Howard, CEO of UK Sustainable Investment, it’s a fund that has other criteria – environmental, social or governance - rather than purely financial as its motive.

Ethically neutral
It’s not a case of a fund manager selecting specific industries or companies to invest in, more a case of excluding others. As Lee Coates, director at Ethical Investors explains: “An ethical fund is one that sets out to avoid certain companies and then invests in anything else. It’s not a case of looking for ‘nice’ companies, it’s about avoiding the nasty ones. Most investment in ethical funds is in companies that are ethically neutral.”

That’s why the performance of many ethical funds can often beat unrestricted funds. Lee Coates cites Kames Capital’s ethical fund as exemplary: “Kames Ethical is a vegan fund,” he says, “which rules out investing in, for example, supermarkets and train companies because they both sell meat products.” (In the case of the train company
it’s in the sandwiches from the buffet!)

“Kames saw growth last year of 19.4 per cent against 8.57 per cent from the FTSE All Share index. Taking it over three years, Kames grew by 50 per cent against the FTSE 26 per cent.” Others cite First State Asia Pacific Sustainability, which concentrates on companies which actively manage sustainability, sustainability developers or those who have a positive sustainability impact, as an example of how SRI funds can outperform the market.

That fund tops the Barchester Green Investment lists of top 10 performers over the past three and five years. The others are no slackers. In the past year CIS Sustainable Leaders Trust TR (19.39 per cent), Jupiter Responsible Income (16.06 per cent) and CIS Sustainable World Trust TR (15.27 per cent) have all performed well.

Mark Morford, product manager for private clients and investments at the Charities Aid Foundation, agreed that ethical funds are holding their own. “Typically ethical funds perform differently to unrestricted funds and there are times when they outperform those in the unrestricted market. But likewise there are times when they have lagged behind. Over the longer term, though, they have proved to be very good investments.”

Simon Howard does strike a note of caution, however: “They have been performing well of late but five years ago they were not so good. These things have to be read in context.” Not all investing decisions are as straight-forward as the Kames example, which is clear-cut in that it won’t invest in any company which contravenes its vegan principles. While all SRI funds avoid the ‘sin stocks’ such as pornography and arms, many will work with “bad” companies to change practices or seek to find the ‘best’ in a sector.

So charities looking to address a specific social or ethical issue can chose to invest in businesses that are also looking to reduce or resolve their impacts in those areas. It’s called positive engagement. “If a clothing company has a manufacturing base in China there is a reasonable chance it is using child labour, forced labour (political and religious prisoners forced to work) and having oppressive working conditions,” says Lee Coates.

“So if an investment fund was looking to buy stock in an apparel company that it knew manufactures in China the first thing is to ask to see its child labour policy.” If the fund has a big stake, it will be better placed to influence and develop that policy. The question for the trustees is when to exclude a business and when to engage with it. If the mission – the raison d’etre of the charity – is to end child labour, then working with such a company to change its policy may have a greater impact than simply ignoring it.

“A lot more funds are looking at positive engagement,” adds Mark Morford. “They won’t necessarily screen out an oil stock if that company is making significant progress or is committed to improving the way in which it operates.”

It means trustees have to ensure the ethical fund manager is working to the same set of principles and criteria as the trustees. “They have to be careful to understand what it is they are investing in,” adds Morford.

What is key is transparency. The donors and members must be aware of where you are investing and why. “The moment a charity publishes its mission statement and asks the public for money it has to be open about where that money is being spent and invested,” concludes Coates.

Philip Smith is a freelance journalist

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