‘Fifty shades of green’ – navigating the maze of ethical investments is no easy task, says Bestinvest

07 October 2013

It’s that time of year when the ethical investment industry seeks to raise public awareness of the ability to invest in a socially responsible manner through its National Ethical Investment Week (13-19 October) campaign. Yet despite the growth in recent years of areas such ethical consumerism and eco-tourism, the data suggests ethical investment has failed to make a decisive break through into the mainstream. According to figures from the Investment Management Association (IMA), funds under management for ethical funds were £8.6 billion at the end of August 2013 and their share of total funds under management was just 1.2%, the same as this time last year.

The Marmite of investing
Jason Hollands, Managing Director at Bestinvest says: “Ethical investing is like Marmite, people seem to either love the idea or loathe it, and all too often discussion of the subject seems to revolve solely around the question as to whether investing ethically will result in lower returns. However, that misses the point: some investors have a sincerely held desire not to have their money invested in tobacco or those companies which test their products on animals irrespective of the returns those areas may offer. Ethical investing exists to provide these savers with a choice.”

“The trouble is that nothing is straightforward with ethical investment. It is an umbrella term for a smorgasbord of strategies and involves an inherent degree of subjectivity. In fact, the industry can’t even settle on a name for it. Over the last two decades the ethical investment industry has variously badged itself as SRI (Socially Responsible Investment), ESG (Environmental, Social & Governance) investing, SEE (Social, Environmental & Ethical) investing, Sustainable Investing and latterly Responsible Investing,” said Hollands.

Bestinvest explains that the range of the funds on offer include traditional ethically screened funds, which encompass a multitude of concerns and filter out “sin” sectors (tobacco, alcohol, arms and gambling) as well as individual stocks that are evaluated as unacceptable; funds focused on identifying companies that are ‘best of breed’ for corporate responsibility across a range of industries (which in the case of the Premier Ethical fund extends to a 3% holding in pub operator Mitchell & Butlers); funds which emphasise ‘engagement’ with companies on social, environmental and corporate governance issues, and; environmentally-friendly thematic funds and niche products focused on alternative energy stocks.

What are your red-line issues?
“While it is common to categorise funds under broad banners such as “light green”, “mid green” and “dark green” these are inadequate in conveying the important differences and nuances between funds. Potential investors need to decide what the key issues of concern to them are - in particular whether they want a broad based ethical approach or a more narrow focus on the environment - and then select a fund with a set of policies that most closely matches their concerns. And it is here that there can be important differences in the detail,” explained Hollands.

He highlights the emotive area of animal welfare where some funds exclude all companies that test products on animals, such as Kames and Standard Life, but most are allowed to invest in companies that do so for purposes of research into the treatment and cure of disease. As the table in the appendix shows, GlaxoSmithKline is a common top five holding in UK equity ethical funds.

Bestinvest singles out the Kames range of ethical funds as the most suitable for vegans as it also excludes producers and retailers of meat, poultry, fish and dairy. In contrast, Jupiter Ecology has a long-standing holding in Cranswick, a leading supplier of free range pork with a strong record of managing its environmental impact.

While animal testing for medical discovery purposes is an example of how there can be very different views between ethically minded investors, Bestinvest also argues that beyond a few sectors such as tobacco and gambling most companies do not neatly fit into a black and white definition of ethical or unethical but sit somewhere in between. Perhaps contrary to the expectations of some these funds invariably hold large mainstream companies such as Vodafone, Royal Dutch Shell, HSBC, Lloyds Bank and GlaxoSmithKline. The universe of stocks open to ethical funds are chosen on the basis of an often finely balanced evaluation, a role performed in some cases by a separate committee tasked with reviewing and developing policy. For example, in the case of the oldest UK ethical funds, the Stewardship range, their committee was chaired by Revered Justin Welby, up until his recent appointed as Archbishop of Canterbury. Ethical funds are therefore unlikely to please all of their investors, all of the time. In many cases policies are not set in stone but will evolve over time so it may be necessary to periodically check whether the fund still meets your red-line criteria.

Hollands concluded: “It is also important to be aware that ethical funds will perform differently from mainstream funds, as they will generally have a lower weighting to commodities than the broader market as well as defensive sectors such as tobacco and drinks. This means they have a higher tracking error. Over the last five years we found the average ranking of UK equity ethical funds was 56th percentile but with a generally broad dispersion between the best performers, such as Standard Life UK Ethical, which returned 96% and the worst, Scottish Widows Ethical, which delivered a 25% return. This suggests that while it is undoubtedly a challenge to deliver out performance with a more restricted universe, underperformance isn’t inevitable either. ”

Bestinvest’s Guide to Ethical and Green Investing is available to download free-of-charge at www.bestinvest.co.uk/ethical

- ENDS -

Important information:
Current or historical yields quoted should not be considered reliable indications of future returns. The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Due to their nature, specialist funds can be subject to specific sector risks. Investors should ensure they read all relevant information in order to understand the nature of such investments and the specific risks involved. Please note that ethical funds may, by definition, have a limited investment universe; this may affect performance.

*Examples of financials and oil & gas exposure on leading UK equity ethical funds and top five holdings:

Fund Financials Financials
Oil & Gas
Top Holdings 5 Yr Percentile
Aberdeen Responsible UK Equity 15.94% 12.52% Royal Dutch Shell, Unilever, BHP Billiton, Centrica, GlaxoSmithKline 51
Alliance Trust UK Ethical 10.05% 5.72% ARM, Kingspan, Prudential, BT,
National Express
Alliance Trust SF UK Growth 8.45% 4.59% GlaxoSmithKline, Kingspan, BT,
ARM, Prudential
CIS Sustainable Leaders 21.32% 1.02% Vodafone, Lloyds Bank, BT,
GlaxoSmithKline, St. Modwen
Ecclesiastical Amity UK 16.96% 3.15% Dunelm, Vodafone, Dechra
Pharma, Halma, GlaxoSmithkline
F&C Stewardship Growth 23.36% 6.51% HSBC, Vodafone, BG,
GlaxoSmithKline, Legal & General
F&C Stewardship Income 25.70% 4.87% Vodafone, HSBC, GlaxoSmithKline,
BG, Legal & General
Henderson Global Care UK Income 29.74% 2.52% HSBC, GlaxoSmithKline, Vodafone,
BT, National Grid
Jupiter Responsible Income 21.35% 6.95% HSBC, GlaxoSmithKline, Vodafone,
Lloyds Bank, Rio Tinto
Kames Ethical Equity 27.73% 5.09% Vodafone, Prudential, Reed
Elsevier, Rightmove, Schroders
Legal & General Ethical (tracker) 25.61% 6.55% Vodafone, BG, Lloyds Bank, Tesco,
Premier Ethical 24.82% 3.76% Vodafone, GlaxoSmithKline, Rio
Tinto, BG, WPP
Scottish Wids Environmental Inv 23.67% 0.53% Vodafone, GlaxoSmithKline, HSBC,
Prudential, Ashtead Group
Scottish Widows Ethical 26.78% 8.35% Vodafone, HSBC, Prudential, BG,
Sovereign Ethical* 18.67% 8.87% HSBC, Vodafone, Royal Dutch Shell,
GlaxoSmithKline, Rio Tinto
Standard Life UK Ethical 20.04% 6.33% Vodafone, Barclays, Standard
Chartered, BG, Ashtead

About Bestinvest:
Founded in 1986, Bestinvest has grown to become a leading private client investment adviser, looking after £5 billion of assets for more than 50,000 clients. We offer a range of investment services from Select for self-directed investors to Investment Advisory and Investment Management services for clients who do not have the time or inclination to manage their own investments.

All of our services are underpinned by rigorous research aimed at identifying those fund managers we believe will deliver long-term superior performance. We also have a team of expert financial planners with nationwide coverage to help clients with their pensions, retirement or Inheritance Tax
planning. At Bestinvest, we pride ourselves on offering the highest levels of professionalism and expertise with transparent, competitive prices. We are pleased that our greatest source of new business is from personal referrals from existing clients.

Bestinvest has won numerous awards including UK Wealth Manager of the Year 2013, Best Wealth Manager for Investments 2013, Best Stockbroker for Customer Service 2012 and 2011 Self Select ISA Provider of the Year as voted by readers of the Investors Chronicle and the Financial Times. Bestinvest’s Select service was recently ranked as the highest-scoring investment platform when judged on cost, service, range of features and breadth of investment choice by specialist consultancy The Platforum.

Headquartered in Mayfair, London, Bestinvest employs more than 200 staff and has an extensive network of regional offices. The company is one of the fastest-growing private client advisory firms.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.