ETHICAL INVESTMENT

Introduction

One of the most effective ways to encourage more people to shop ethically and support the development of more ethical businesses is through ethical investment. The idea of using your money wisely has been around for a long time, but only recently has it become a mainstream means of supporting a good cause. With a growth in awareness about ethical investment’s benefits on the part of companies as well as investors, it is becoming ever easier to put your money where your mouth is.

A long history

The roots of ethical investment can be traced to the religious movements of the nineteenth century, such as the Quakers and Methodists, whose concerns included issues such as temperance and fair employment conditions. At the beginning of the 1900s, the Methodist Church began investing in the stock market, consciously avoiding companies involved in alcohol and gambling.

During the twentieth century, more churches, charities and individuals began to take ethical criteria into account when making investment choices. An ethical investment ideology began to develop in the US as controversy over American involvement in the Vietnam war led to the founding of the Pax World Fund in 1971, which aimed to avoid investments associated with the war. In the 1980s, the apartheid regime in South Africa was the focal point for ethical investment and, indeed, its success as a tool of protest there accelerated its acceptance and growth around the world.

In 1983 the Ethical Investment Research Service (EIRIS) was established as the UK’s first independent research service in ethical investment, providing the underlying research into companies’ social, environmental and ethical performance needed by investors to make informed and socially responsible investment decisions. The UK’s first ethically screened unit trust – the Stewardship Fund – was launched by Friends Provident a year later. Now there are over 60 ethical retail funds in the UK market, with an estimated value of £3.8 billion. This growth in SRI (socially responsible investment) has been reflected globally. For example, the Asia-Pacific region has seen the launch of several SRI funds in places such as Japan, Australia and Singapore. In Europe there were 170 ethical funds in 1999; by the end of 2001 the number had grown to over 280.

‘Ethical’ or ‘socially responsible’ investment describes any area of the financial sector where the principles of the investor inform where they place their money. Companies big and small have an increasingly large impact upon the world around them. How they conduct their business can affect all manner of things beyond the actual product or service they provide. There is a growing awareness that, alongside simply choosing to buy or not to buy their products, those of us who invest our spare money can also influence companies towards better social and environmental behaviour.



With any standard unit trust, investment trust, ISA or pension you may find your money going to companies that you would not wish to support. An ardent anti-smoker, for example, would be dismayed to discover that their savings were invested in a tobacco company. Whether your investments are limited to a pension fund, or if you’re more involved in the stock market, knowing as much as you can about the ethics of the financial companies you’re investing in can be as important as choosing an environmentally sound washing-up liquid. In fact, as a recent War on Want campaign (encouraging the 10 million people who are occupational pension scheme members to find out where their money is invested) shows, you can use your influence no matter how small your investments might seem.

How do I begin?

The first step towards positive investing is to identify what social, environmental and other ethical issues are most important to you. Areas of concern can be wide ranging, from animal testing to gambling, from human rights to nuclear power, from environmental enhancement to community involvement. Surveys by EIRIS have shown that the most prominent areas of concern are operations in oppressive regimes, breaking environmental regulations and testing products on animals. The companies that respondents preferred their pension funds to be invested in were those with good records on environmental issues and employment conditions. Identifying these areas will reflect the type of companies you want to invest in or to avoid.

Nobody’s perfect

It is important, however, to remember that there is no such thing as a perfect company. All are involved in activities that someone somewhere will object to, and none go far enough in terms of positive social and environmental contribution to satisfy all of the people all of the time. Ethical investment is about compromising and prioritising.

There are three main strategies that funds can adopt to implement their ethical investment policies.

Engagement: No companies are excluded but areas are identified in which companies can improve their environmental, social and ethical performance. The fund managers then ‘engage’ with the companies to encourage them to make such improvements.

Preference: The funds adopt social, environmental or other ethical guidelines which they prefer companies to meet. These guidelines are applied where all other things are equal (e.g. financial performance).

Screening: An acceptable list of companies is created based on chosen positive and/or negative criteria (e.g. avoid companies involved in the arms trade, include companies with good environmental performance and so on). Funds are invested only in those companies on the list

Types of funds

Once you’ve worked out your individual criteria, there are a diverse range of ethical funds available, and different funds suit different investors. Some funds select a set of criteria which they believe will appeal to the widest range of investors. Others take a precisely focused approach, designed to appeal to a particular market. It is therefore very important to look behind the ‘green’ or ‘ethical’ label at what the fund is actually investing in before deciding to invest.

  • How does the fund research the activities of the companies in which it invests?
  • Is there an ethical committee or advisory board that is independent of the investment process, to make sure the fund adheres to its published ethical policy?
  • How good is the fund’s communication with investors, e.g. does it have mechanisms in place to allow investors to voice their concerns?
  • How active is the fund in engaging or communicating with companies? Does it encourage companies to improve their social and environmental performance?

A two-pronged approach

Ethical investing works in two ways:

  • by using the individual’s power as a shareholder to influence corporate behaviour
  • by their decision to invest only in companies who behave in a socially responsible manner

Shareholder power

One method of shareholder influence, which is particularly useful for the publicity it often receives, is the practice of posting shareholder resolutions which companies then have to consider in public at their annual general meetings. Campaigners say that the rules governing who can put forward a shareholder resolution are more restrictive in the UK than in the US. Nonetheless, a prominent UK example is the resolution placed before BP’s spring 2002 AGM, filed by the global environment network WWF, together with an international coalition of ethical investors, on its drilling activities in environmentally and culturally sensitive areas. This is one part of the campaign to prevent BP and others from drilling for oil in places such as the Alaskan Arctic National Wildlife Refuge, which is one of the last pristine areas left in the US and is currently off-limits to oil and gas exploration and development.

The idea of shareholder power is relatively new, but it is becoming more prominent amongst NGOs. It can have some real results, as the case study below shows.

Voting for change

Shareholder resolutions, one of the more flamboyant ways of investing ethically, have been shown to work. Friends of the Earth used a shareholder resolution as part of its campaign against Balfour Beatty’s plans to build a controversial dam in Turkey – the Ilisu dam on the Tiber River, 40 kilometres from the border of Syria and Iraq. Protest groups warned that the dam would make 78,000 local people homeless and drown dozens of towns and villages, including the world historic site of Hasankeyf. FoE bought £30,000 worth of shares in order to submit a resolution on the dam contract at Balfour Beatty’s AGM.

Some months later, the company pulled out of the project, announcing that ‘after a thorough evaluation of the commercial, environmental and social issues, it is not in the best interests of our stakeholders to pursue the project further’.

Alternative investment

Ethical investment is not confined to shares traded in stock exchanges. Many investors prefer to back individual projects or causes. Such directed investment is known by a variety of terms including ‘alternative’ investment, ‘mission-based’ investment and ‘socially directed’ investment. Examples of cause-based investment include regeneration projects in Birmingham (through the Aston Reinvestment Trust), and the support of projects in developing countries (through the co-operative lending society, Shared Interest). The cause-based investment sector is currently dominated by financial institutions such as Triodos Bank and the Ecology Building Society, although it also includes ethical companies who raise money directly from stakeholders by selling ‘ethical shares’. Such companies include Traidcraft and the Centre for Alternative Technology.

Good for everybody

You don’t need to worry that concentrating on ethical investments will make your financial performance suffer. Research by EIRIS and others indicates that investing according to ethical criteria may make little difference to overall financial performance, depending on the ethical policy applied. Five ethical indexes created by EIRIS produced financial returns roughly equivalent to the returns from the FTSE All-Share Index. For example, the total return of the Charities’ Avoidance Index, which excludes the vast majority of companies involved in tobacco, gambling, alcohol, military sales and pornography, was 0.38 per cent greater than the All-Share.

Companies, too, can benefit. Over £3 billion is already invested in companies screened for good social, environmental and ethical practice by retail investors. Many churches and charities, pension schemes and local authorities are also investing according to socially responsible investment policies. That means money is being consciously diverted from companies that cannot demonstrate this good practice. Many investors are also engaging with companies in which they invest, or are considering investing in, to persuade them to improve their policies and practices.


You can get further information by contacting the organisations listed below:

EIRIS’s Guide to Ethical Funds covers the ethical retail funds (such as unit trusts, OEICs and investment trusts) available to the UK investor, giving a summary of each fund’s ethical policy, top ten holdings and outlining what products (such as pensions or ISAs) are available with that fund. EIRIS was established in 1983 by a group of churches and charities, and today it is one of the leading providers of independent corporate research for socially responsible investors. EIRIS has a wealth of information for people who want to apply their principles to their investments and finances. EIRIS can provide a directory of financial advisors who have expertise in advising on ethical investments (available from www.eiris.org).
EIRIS, 80-84 Bondway, London SW8 1SD
Tel: 0207 840 5700
Email: ethics@eiris.org

The UK Social Investment Forum is a membership network that promotes and encourages socially responsible investment in the UK, including shareholder activism, social banking and community finance (www.uksif.org).
Tel: 0207 749 9950

The European Sustainable and Responsible Investment Forum (Eurosif) is a nonprofit organisation promoting the concept, practice and development of responsible and sustainable investment (www.eurosif.info).

Ethical funds

Below is a list of the ethical funds that The Good Shopping Guide was happy to promote and EIRIS was aware of at the time of collating this information and had been given details on by the fund provider. There may be other ethical funds that are on the market that EIRIS was not aware of or had no information on at that time. Note that by providing this list we are not making recommendations. For further information you may want to seek independent financial advice.

EIRIS defines an ethical fund as any fund which decides that shares are acceptable or unacceptable according to positive or negative ethical criteria e.g. environmental criteria, human rights criteria etc. The exception to this rule is that we do not include funds that only exclude companies involved in tobacco products.

Aberdeen Ethical Engagement UK Fund and World Fund
Types of investments: Unit Trust/OEIC
0845 300 2890,
www.aberdeen-asset.com

Aegon Ethical Cautious Managed Fund, Corporate Bond Fund and Equity Fund
Type of investments: Unit Trust/OEIC
AEGON Asset Management Ltd,
Mellon European Fund Services, Mellon House,
Ingrave Road Brentwood, Essex, CM15 8TG
0800 454422 (Investor Helpline)
www.abetterway.co.uk

Allchurches Amity Fund
Type of investment: Unit Trust/OEIC
020 7528 7364
www.ecclesiastical.co.uk/investments

AXA UK Ethical Fund
Type of investment: Unit Trust/OEIC
020 7003 1234,
broker.service@axa-im.com

Banner Real Life Fund
Type of investment: Unit Trust/OEIC
01342 717917,
www.bannergroup.com/prolife_ethical.htm

Barchester Best of Green Life Fund, Offshore Fund and Pension Fund
Type of investments: Unit Trust/OEIC
01722 331241,
www. barchestergreen.co.uk

CIS FTSE4Good Tracker Fund and Sustainable Leaders Trust
Type of investments: Unit Trust/OEIC
08457 46 46 46,
www.cis.co.uk

Credit Suisse Fellowship Fund and Multi Manager Ethical Fund
Type of investments: Unit Trust/OEIC
020 7426 2929 / 020 7426 2571
www.credit-suisse.com/uk

Direct Line FTSE4Good Tracker Fund
Type of investment: Unit Trust/OEIC
www.directline.com/Savings/tracker_ISA.htm
0845 246 8282

FandC Ethical Bond Fund, Global Climate Opportunities Fund, Stewardship Growth Fund, Stewardship Income Fund and Stewardship International Fund
Type of investments: Unit Trust/OEIC
Private investors should call customer Support desk
telephone: 0845 600 6166 or email:
investor.enquiries@fandc.com . Financial advisers:
Adviser Helpdesk telephone: 0845 799 2299 or
email:adviser.enquiries@fandc.com

Family Charities Ethical Trust
Type of investment: Unit Trust/OEIC
0800 521721,
www.family.co.uk

Friends Provident Stewardship Income Life Fund, International Life Fund, Life Fund, Managed Life Fund, Managed Pension Fund, Pension Fund and Safeguard Optimiser Fund
Type of investments: Unit Trust/OEIC
0800 00 00 80
www.friendsprovident.co.uk/sri/

Halifax Ethical Fund
Type of investment: Unit Trust/OEIC
www.halifax.co.uk/investments/funds_ethical.shtml

Henderson Global Care Growth Fund, Income Fund, Managed Fund and Industries of the Future Fund
Type of investments: Unit Trust/OEIC
020 7818 4267
www.henderson.com

Homeowners Friendly Society FTSE4Good Fund
Type of investment: Unit Trust/OEIC
0800 169 4321
www.engagemutual.com

HSBC Amanah Global Equity Index Fund and GIF Sustainability Leaders Fund
Type of investments: Unit Trust/OEIC
0800 5877 786
www.hsbcamanah.com / www.hsbcinvestments.fr/
sustainabilityleaders/index.asp

Impax Environmental Markets OEIC
Type of investment: Investment Trust
020 7432 2609
www.impax.co.uk

Insight Investment Ethical Fund and Evergreen Fund
Type of investments: Unit Trust/OEIC
08457 77 22 33
www.insightinvestment.com/responsibility

Scottish Widows Environmental Investor Fund and Ethical Fund
Type of investments: Unit Trust/OEIC
0845 300 2244
www.scottishwidows.co.uk

Skandia Ethical Fund
Type of investment: Unit Trust/OEIC
023 80 916747
www.skandiainvestmentmanagement.com

Sovereign Ethical Fund
Type of investment: Unit Trust/OEIC
www.teachers-group.co.uk

Standard Life Ethical Corporate Bond Fund, Ethical Fund, European Equity Ethical Fund, Pension Ethical Fund and UK Ethical Fund
Type of investments: Unit Trust/OEIC
0800 33 33 53
www.standardlifeinvestments.co.uk/mutualfunds

SVM AllEurope SRI Fund
Type of investment: Unit Trust/OEIC
0800 0199 440
www.svmonline.co.uk

SWIP Global SRI Fund
Type of investment: Unit Trust/OEIC
0131 655 7092
www.swip.com

SWIP Islamic Global Equity Fund
Type of investment: Unit Trust/OEIC
www.swip.com/private_inv/islamic_global_equity_home.htm

SWIP Pan-European SRI Equity Fund
Type of investment: Unit Trust/OEIC
020 7203 3051
www.swip.com

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