Ethical funds' exposure not so green

Tom Stevenson, The Telegraph 6 Feb 08;

Funds that are marketed as 'ethical' are failing to invest in companies offering environmental or climate change solutions, despite research showing that these are the key issues for their investors.

A surprising lack of exposure to pure-play environmental companies is the major finding of a comprehensive study of socially responsible (SRI) funds, which also concluded that there was often little difference between the composition and performance of ethical and mainstream funds.

The results of the survey by independent financial adviser Holden & Partners came as Standard Life, a leading ethical fund manager, said its SRI funds had stopped investing in airlines after 30pc of its investors called for it to cut all exposure to the industry. Air traffic is considered to be one of the fastest-growing causes of CO2 emissions.

Holden's Guide to Climate Change Investment analysed the top ten holdings of every SRI fund available to retail investors in the UK. Most had relatively insignificant holdings in clean-tech or environmental companies and were instead heavily invested in banks and telecoms companies. The bias reflects the relatively narrow focus of the FTSE 100 index and the tendency of ethical funds to screen out oil and mining stocks from their portfolios, Holden said. Prudential's Ethical Trust had a 56pc weighting in financial services and telecoms companies.

Only one out of 58 funds analysed in the study claimed to have more than 50pc of its portfolio in environmental stocks. Henderson's Industries of the Future fund has 51pc of its fund invested in environmental companies such as Praxair and SolarWorld. L&G's Ethical fund, by contrast, held less than 1pc in environmental companies and its top ten holdings included BG, BHP Billiton and Xstrata. Many ethical funds had exposures of less than 20pc to environmental stocks.

Peter Holden, a partner at Holden & Partners, said "SRI and ethical funds have not kept pace with the public's appetite for environmental solutions. Many are investing in mainstream 'old economy' companies whose contribution to solving environmental problems is questionable."

Last year Standard Life surveyed its own investors, finding that more than 50pc saw climate change as one of their top three concerns. Eight of the top ten concerns highlighted by investors related to the environment.

Julie McDowell, head of SRI at Standard Life, said: "The views of investors in our ethical funds are of paramount importance to us. We seek, wherever possible, to reflect those concerns in the criteria applicable to our funds."