Despite tumbling markets in 2008, ‘ethical’ funds saw inflows of £152.4m for the year, says the Ethical Investment Research Service. That’s the second-highest inflow since 2001. These funds claim to offer socially-responsible investing (SRI), often with a “green” or “climate change” theme. But do most do what they claim on the tin?
The first trap to watch out for is that “ethical” means different things to different funds. Some renewable energy funds, for example, avoid nuclear power and favour wind, solar and wave power instead. Others will happily invest in nuclear power on the basis that it is low carbon, and some will even buy uranium miners. Next, be aware that some funds are ‘dark green’ – using negative screening to exclude “socially irresponsible” sectors such as armaments, alcohol and tobacco. Meanwhile, other ‘light green’ funds will happily invest in what many would class as less ethical companies in, say, the oil and gas sector, provided they have made at least some promise to change their behaviour.
Unsurprisingly, this can lead to confusion. “People think ethical funds are all in nice, small cuddly companies, but they’re not,” warns Peter Holden of specialist SRI advisers Holden & Partners in the Financial Times. “They may exclude oil, tobacco and armaments, but they’ve obviously got to replace them with things, such as banks.”
And that decision can hit performance. Some ethical funds have done relatively well – for example, the Henderson Global Care Growth Fund, which has over 50% of its portfolio in the US, fell just 18.5% over the last year against a 34% drop for the MSCI World Index. But many did much worse – the typical green fund fell by 30% over the 12 months to February, according to figures from financial analyst Moneyfacts.co.uk. By contrast, the average drop for non-ethical funds was 25%. And ethical funds with heavy exposure to financials did much worse – not to mention the fact that they also owned shares in firms that helped bring about the credit crunch. That’s stretching the badge “socially responsible”.
So while ethical investing sounds good in principle, as The Independent’s Simon Evans puts it, it can often be “a one-way ticket to miserable financial returns with little social benefit”. Better to devote your investing energies to making profits, which you can then use to support the causes of your choice.