Next week sees the first National Ethical Investment Week, but there are worries about the sector's performance. Think long-term, says Simon Birch
Simon Birch, The Guardian 17 May 08;
Britain's growing battalions of ethically minded consumers will have a new annual date for their diaries with the launch tomorrow of the first National Ethical Investment Week. With a range of public events from Edinburgh to Plymouth, organisers are aiming to emulate the way in which Fairtrade Fortnight has helped to propel fairtrade into the mainstream.
"If you buy fairtrade coffee and organic oranges, then it makes sense to invest ethically. Choosing a green and ethical investment is another way of acting responsibly, but many people are still unaware of this option," says Penny Shepherd from the UK Social Investment Forum, which is co-ordinating the event. "We hope that a wide range of organisations and individuals will use the week to spread the word about the benefits of green and ethical investing."
With the UK's first ethical investment fund launched by Friends Provident in 1984, there are now almost 100 green and ethical funds with a combined value of just under £9bn and 750,000 account holders.
Despite initial scepticism that principles couldn't generate a profit, the sector has, up until recently, proved the doubters wrong by consistently posting healthy returns. Now, though, the ethical sector is facing one of its stiffest tests, with commentators questioning its ability to withstand the fallout from the credit crunch and the ensuing turmoil in the markets.
Initial evidence, based on the performance of ethical funds over the past 12 months does, indeed, point to a downturn in the fortunes of the sector. "The past six months have been difficult," admits Lee Coates from the Ethical Investors Group.
So what sort of a hit has it taken?
In the 12 months to May this year, ethical funds lost an average of 9.1%. However, it is important to point out that it's not just ethical funds which have taken a loss - over the same period, mainstream UK investment funds were down 6.8%, while the FTSE All-Share Index fell by 3.8%.
Plus, not all ethical funds have performed the same: over the same period Jupiter's Ecology Fund, for example, is down 5.36% compared to its sector average, which is down 1.75%, while Henderson's Industries of the Future Fund is down just 0.1%, compared to a drop in its sector of 3.2%, again over the same period.
According to Coates, the main reason for this downturn in performance, is the flight of capital to larger companies in the face of the volatile market conditions resulting from the credit crunch. "Ethical funds tend to be weighted towards smaller and medium-sized companies, which are seen as being riskier when trading becomes bumpier," he says.
The second key factor is, that in the last year, the strongest performing sectors in the market were mining, oil and gas and tobacco, the very areas which few, if any, ethical funds have any presence in. Despite the impact over the past year of what some have called the perfect storm for ethical funds, Coates is unfazed. "None of my clients is looking at pulling out as they are in there for the long-term and aren't going to be concerned with what I believe are adverse short term trading conditions."
Brigid Benson from ethical IFA the Gaeia Partnership, who has almost 20 years' experience, agrees that the current downturn is purely short term. "People need to follow the fundamentals of investing, which are to invest for at least the medium term or, ideally, the long term, then they'll be fine."
Ethical fund managers such as Charlie Thomas, who manages the Jupiter Ecology Fund, believe that with key environmental issues including climate change firmly on the political and public agenda, ethical funds are perfectly placed to benefit from the transition to a low-carbon economy.
"The outlook for companies in the green sector is very strong over the long term, and investors shouldn't be swayed by the current short-term volatility," says Thomas, whose fund has two wind-power companies among its top 10 holdings. "There are many areas, for example, benefiting from legislative shifts - renewable energy currently accounts for less than 3% of power generation in the UK, yet the government has a target of increasing this to 20% by 2020. Even if we don't reach this target, there is clearly potential for very significant growth."
Mark Hoskin, from ethical IFA Holden & Partners, agrees: "Environmental markets are growing by up to 30% per annum ... investors need to see it as solid investment based on sound principles."
What to look for
There are nearly 100 ethical and green funds with each one investing its funds according to a wide range of criteria. But if you're a novice, how do you go about investing?
Get informed
Ethical Investment Research Services offers a comprehensive guide to ethical investments at eiris.org. Investmentuk.org is the unit trust industry's website, run by the Investment Management Association. Click on "investors" for a handy pocket guide for first-timers, plus a factsheet on ethical investing.
Don't overpay
The minimum investment in most ethical funds is £1,000 as a lump sum or £50 a month into a regular savings plan. But avoid paying an initial charge of 5-6% by buying through a discount broker. Try h-l.co.uk or chelseafs.co.uk - both allow you to buy online or by phone, rebating all the initial charge on a wide range of funds, plus a portion of the annual charge (usually 0.25%). Or go to a fund supermarket such as Fundsnetwork.co.uk (run by Fidelity) which will discount most funds to just 0%-1.25% initial charge.
Study performance
You can monitor the performance of an ethical fund on a very easy to use website, trustnet.co.uk, which has details on practically every fund in the UK. You can also try www.morningstar.co.uk.
Find an adviser
There a number of independent financial advisers that specialise in ethical. Try barchestergreen.co.uk; ethicalmoney.org; ethicalinvestors.co.uk; gaeia.co.uk; or holden-partners.co.uk.
