SOCIALLY responsible investing (SRI) is enjoying unprecedented popularity. This is no passing fad either. Public interest has boomed, fund performance has improved and the number of funds specialising in the area has grown dramatically.
The majority of SRI investments are now available within the tax shelters of an Individual Savings Account (ISA) or in a pension (SIPP) and this means that clients can easily integrate ethical or environmental investments within their total financial portfolio.
The increased popularity with product providers has led to over 50 funds being offered to investors; however, with greater choice comes uncertainty as to which may be the right investment for you.
In this article I will explain the different types of investment, look at performance and at the relationship between risk and reward.
SRI funds invest in a wide range of sectors but there are two main themes for investment, ethical and environmental, as summarised below.
Environmental
Environmental investment funds are managed so that they avoid those companies whose business would have a detrimental effect on the environment. Climate change is generally accepted as one of the greatest issues facing the world today and last year the Stern report indicated that, over the long run, it will cost more to do nothing than to attempt to avoid catastrophe now.
By 2030 the global demand for energy is expected to have risen by 50% and, as governments and businesses implement plans to help combat climate change, some excellent investment opportunities are made available for the astute investor.
In all adversity there is opportunity and any problem that has a major impact on the global economy will need global solutions to solve it. The companies that find these solutions will add real value and finding these businesses now could give the opportunity to invest in some companies with excellent long-term prospects.
Ethical
Many people are no longer happy investing in a company purely for gain; they are also concerned with how that company operates. People have a wide range of options as to where there money in invested and many do not want to invest in tobacco, alcohol or the arms trade. Ethical businesses are less likely to be burdened by public pillory, regulation and political interference.
A number of promising investment themes fall into the ethical sector: for example, companies dealing in issues such as healthy food, clothing, clean water and those that install good employment practices. Ethical investment funds often incorporate environmental ideas, as ethical beliefs tend to support environmental concerns.
As investors we often consider the impact of global events before putting our money into the market place; therefore, ethical investing could be considered in the same light as any other economic or investment theme.
Socially responsible investment strategies
There are three main management strategies applied to SRI fund management: exclusion, preference and engagement. A SRI may adopt one or more of these themes and more details on each are illustrated below:
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Exclusion
Companies which do not meet predetermined selection criteria, by being involved in certain activities, are excluded from investment by the fund manager. For example, a fund manager may decide to exclude any companies or firms that are involved in animal testing. However, it should be recognised that a company that is classified as responsible by one fund manager may be ruled imprudent by another.
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Preference
A preference strategy is a “best in class” approach and involves a lesser degree of exclusion. The manager can analyse the companies in each sector according to various social, ethical and environmental criteria and consider investing in those that score the highest.
For example, a stock may be held if a company is not adding to an ethical or environmental problem, even though it may be doing nothing to solve that problem.
Engagement
Some SRI funds will use their position as a shareholder to influence the way a company operates. As well as exercising their voting rights as shareholders, some SRI funds will actively communicate with companies whose shares they hold. The objective of doing this is to get companies to behave more responsibly and address ethical issues which they believe will affect investors.
SRI fund performance
It has been widely regarded, for many years, that you cannot achieve competitive fund performance figures whilst upholding socially responsible principles. This is changing. We believe that investors can now have both.
Some ethical and environmental funds are sitting close to the top of the performance tables. This is generally as a result of funds investing into small and medium sized companies whose shares have generally performed well in recent times. Another reason is that many investors and product providers are now paying more attention to this area. As more people invest, the manager will pay greater attention to the fund, and this should lead to improved performance.
As there is now such a diverse range of SRI funds available you could also consider building a portfolio of funds in order to spread the risk. An investor could mix income with growth or invest across different geographical regions.
It must be remembered that although there are some fantastic opportunities available for investors, one must take into consideration the fact that the basic rules of risk and reward apply to SRI just as they would to any investment sector. For that reason, we must state that past performance alone is not a good reason to invest and that the values of your investments may go down as well as up.
For further information or other financial advice, contact Allchurch Bailey Investment Consultants Ltd, Almswood House, 93 High Street, Evesham, Worcs. WR11 4DU; telephone 01386 442597, e-mail invest@allchurchbailey.co.uk.
