There is even evidence to suggest that the perception of ethical investments underperforming their non-ethical counterparts is a thing of the past.
Ethical investments are generally defined by a set of negative and positive factors. The negatives include the obvious, such as environmentally damaging practices, armaments, trading with oppressive regimes and countries with poor human rights records. The positive factors are known as “Socially Responsible Investments” and include products and services of long term benefit to the community, conservation of energy and natural resources, environmental improvements and openness about their activities.
Thus, there is a fairly blurred line between what might be considered “ethical” investments (no harm to people) and “green investments” (no harm to the environment), and increasingly they are being treated as one and the same.
Within this distinction, the area can be a difficult one to measure.
For example, the Cooperative Insurance Sustainable Leaders Fund is able to invest in Diageo, since it gives help to those South African employees who are infected with the HIV virus. Most other ethical investors, however, would immediately rate an alcohol related company as a no-go area.
Also, what of travel companies, such as the bus and coach operators in particular? Are they green since they carry more people, thus saving on traffic congestion, or do their emissions negatively balance this out?
Another potential conflict might be the recent rise of biofuels, seen as a long term and more environmentally friendly alternative to oil. In certain areas of the world, though, rainforests are being cut down to enable these biofuels to be planted. Heads or tails?
So what of the suspicion that ethical investing involves sacrificing returns for principle? The Standard & Poor’s “A” rated OEIC Ethical Fund has apparently returned top quartile performance over the past one, three, five and seven years. It remains to be seen whether general ethical funds match this performance, let alone direct (as opposed to collective) ethical investors.
Another point worthy of mention is that the reason for some of this strong showing is that generally speaking, ethical investments avoid the largest companies, since they are more likely to have a subsidiary which may be involved in something which is unacceptable to ethical investors. As such, the emphasis is very much on small and mid-cap shares, which of course have performed very strongly over the last couple of years and, as such, may go some way in explaining the more recent outperformance of these funds. However, this also leaves ethical investments at the mercy of the performance of small and mid-cap sectors, which in turn means that they could actually be argued to be cyclical!
For the ever-increasing socially responsible society, the rise in ethical investment can prove to be rewarding financially as well as helping to ease the conscience. From an investment perspective, the fact remains that investing in this way is restrictive – the strength of the tobacco companies and the arms companies over recent years has continued to defy gravity. As mentioned above, and within these pigeonholes, it can be moot as to whether a company is indeed socially responsible or not.
Nonetheless, from a social perspective, ethical investing is not an area which can be ignored since issues of corporate governance and climate change are being pushed further up the political agenda. From an investment perspective, the jury is still out.
If you’d like to read more free research, comment and analysis from me and the rest of my colleagues at Hargreaves Lansdown please visit our website at www.hargreaveslansdown.co.uk
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown
www.hargreaveslansdown.co.uk