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Feature: Ethical investment

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03/12/2012
Investing in ethical funds is a growth area, and there are good returns to be had in the right places.
Feature: Ethical investment

Ethical investment is a growing trend and its days as a niche market appear to be disappearing fast. While some dismissed ‘going green’ and Fairtrade as passing fads, they’ve quickly gained momentum, and the same can be said for socially responsible investment (SRI), which is of significant importance to the forward-thinking investor. Since the near collapse of the banking system and rapid decline in the global stock markets, there have been increasing levels of concern over the stability of traditional investments which people have often relied upon heavily as their nest egg.

And these events have led to much better awareness of how financial institutions use their customers’ money. There’s also evidence to suggest that recent misdemeanours in the banking sector, such as the Libor rate-rigging scandal, have led to more people than ever reviewing ethical options.

Triodos Bank, for example, which provides a range of ethical accounts, says it witnessed a 51% surge in applications, and opened three times more accounts than average, the day before Barclays boss Bob Diamond resigned as a result of the scandal.

Alongside this, as the global economy has struggled, awareness of global warming has increased, the world’s population has continued to grow at a rapid pace, people are becoming more concerned about human rights, and the nation is become increasingly aware of the impact of its choices. Just how much is reflected in figures from EIRIS, the non-profit sustainable investment research firm.

These show that the amount of money invested in Britain’s green and ethical retail funds reached a record height last year of £11.3bn, and that over the last decade, the number of ethical investors has tripled, from 250,000 to three-quarters of a million.

 

What is ethical investment?

 

Ethical investment basically allows you to invest in a socially responsible way, without having to compromise your principles and moral stance. You can choose to invest directly into companies or projects which meet ethical criteria, or look at ethical funds which can be growth or income generated. In terms of projects, there are several different types to consider.

Many investors are opting for carbon offsetting, where you help to fund a project which will reduce or remove a metric tonne of carbon emissions from the atmosphere. The company involved will package carbon dioxide emission reduction units into credit bundles that can be purchased as carbon credits.

There are many other investment projects too, from forestry investments in Brazil that aim to eradicate illegal logging in environmentally-sensitive areas, to bonds that invest in bamboo plantations in Central America, and farmland investments in Australia which will produce food to help ease global shortages.

With regard to ethical funds, there are now a large number of these available in the UK and they’re often categorised in various shades of green, depending on the criteria they apply to their investment decisions.

A ‘dark green’ fund is a term used to describe a fund which applies strict negative screening before investing in a company, and exclude companies involved in unethical practices such as defence or pharmaceuticals. A ‘light green’ fund is a term used to describe a fund which uses positive screening and invest in companies which are making a positive contribution to the environment, or which have a good ethical track record.

Some funds combine both screening methods with a ‘best in class’ approach. So, while a company may invest in the oil and gas sector, it will only invest in those which are doing the most to limit their environmental impact, or to improve their ethical performance.

Other funds ‘engage’ with companies by using the manager’s power as a shareholder to positively influence corporate behaviour regarding areas such as the environment and human rights.

 

You can have profits and principles

 

Over the last two years, there’s been significant growth in so-called ‘ordinary’ investors who are finding that SRI fits their financial requirements. People who may previously have invested in property or dabbled in the stock market are looking for something different, but while they’re more conscious of the environmental and social impact their choices could make, they’re by no means prepared to sacrifice good investment sense to buy into such products.

No investor wants to settle for a serious compromise on returns, and they should never think that it’s a choice between ethics or growth. Choosing to invest ethically actually means that the two can go hand in hand. SRI typically involves investment in the few industries which have managed to remain in positive growth through the global recession.

Emerald Knight, for example, has had some very positive results over recent months, including double digit returns on a teak forestry project after the first year of investment. Since people have lost trust and confidence in the more traditional investment models, the returns demonstrated by SRI products combined with their social, environmental and ethical benefits make for a very compelling investment case.

 James Howard is a director at Emerald Knight, which specialises in socially responsible investment

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