It has been a hectic week in world stock markets. I’ve found it hard to tear my eyes from the car crash that is the American housing market, and the increasing likelihood that we’re going to see a big private-equity deal collapse any minute now.
Even so, one of the most telling quotes this week wasn’t in the financial press at all. It appeared in a nice fluffy interview with supermodel Laura Bailey, one of the many faces of Marks & Spencer. Talking about her favourite fashions, she said: “Today it is easier to be cool and green than cool and not green.”
It might seem a tad shallow, but she has hit the nail on the head. At every turn, someone else is jumping on the green bandwagon. Celebrities crisscross the world in their private jets, carping about our carbon footprints. Hysterical headlines blame the flooding of Tewkesbury on climate change (just as they blamed last year’s drought on global warming), and commentators with second homes in Italy wring their hands over the masses flying to escape the miserable British weather.
Even the investment industry, never exactly the epitome of cool, is jumping on the bandwagon. Ethical or “socially responsible” investing is hardly new – ethical funds have been around since the early 1980s – but we’ve never heard so much about them. At the start of this year there were nearly 90 ethical funds available to UK investors, according to Ethical Investment Research Services. More than 10% of those had been launched in the past 12 months. Meanwhile, comparison website Moneyfacts.co.uk has launched a dedicated “ethical” section, where consumers can compare credit cards, mortgages and investment funds.
Now, before anyone accuses me of being a dreadful cynic, I don’t have any problem with ethical investing. If your religious convictions, lifestyle or informed beliefs about climate change or the arms industry mean you want to invest in a specific way, that’s great. My concern is that for many people, ethical investing is just an easy way to kill two very annoying birds with one stone.
We’re all worried about saving for our future. We’ve all read about the pensions crisis. And most of us (who work in the private sector, at least) will be familiar with that sinking feeling as we are reminded we’re not doing enough to provide for our old age.
Equally, most of us are worried to some extent about big geopolitical “issues” such as the environment or world hunger or the global arms trade. We all wonder if we should be doing more. It would be nice to make the world a better place.
It’s all somewhat daunting. So the idea of just giving a load of money to the first vaguely ethical fund manager you can find is very attractive. On the one hand, you’re making some sort of effort to save for your future; and on the other, if the investment underperforms, you can always heroically say you’re perfectly happy to lose out a bit, because at least the money’s being invested “responsibly”. Trouble is, that won’t be much consolation when you turn 65 and people are still talking about global warming, while you face penury because your investment fund hasn’t kept up with inflation.
The truth is that ethical investment is no quick fix, not for your conscience and certainly not for your bank balance. In fact, it’s twice as much work – not only do you have to come up with an investment strategy (after all, if you don’t care about making money, you may as well just give it to charity), you then have to tailor it to fit your belief system.
And deciding what you mean by “ethical” can be surprisingly hard. Most people would agree that cigarette makers are “bad”. But how do you feel about firms that make alcoholic drinks? And newsagents sell cigarettes – so should you avoid WH Smith?
But there’s another problem with ethical funds. Restrictions mean they have to avoid many larger stocks, so they tend to be tilted towards smaller, high-growth businesses – one reason why they have performed well in recent years. But the economic environment that has been so good to growth companies for so long is coming to an end.
The grim reality is that the British are up to their eyeballs in debt, owing a record £1,300 billion, at a time when the economic climate – which you really should be worried about – is changing. All those stories about the US housing market collapsing point to one thing – the days of the loose credit conditions that have enabled us to borrow so much and that have sent our house prices soaring are ending.
We can expect far more turmoil in the stock markets. Now more than ever you should be investing in blue-chip “mega-cap” stocks – ones that haven’t been pushed to unrealistic valuations by private-equity bid speculation. Some – oil majors such as BP and Shell, or miners like BHP Billiton and Rio Tinto, probably wouldn’t feature too heavily in an environmentalist’s portfolio.
Ignore the lectures from the likes of Madonna and Al Gore. If you want to do some good, follow the example of Bill Gates – and, assuming he keeps to his word, Sir Tom Hunter.
These “new philanthropists” spent their early years making their money – and now they are free to spend it on the projects they care about, without having to worry about whether or not the returns add up. I’d suggest you do the same.
Once you’ve built up a comfortable retirement fund, you can concentrate on the good causes closest to your heart, whether that’s climate change – or just helping out at your local cat shelter.
First published in The Sunday Times 29/7/07