Will ethical investment become mainstream?

Attitudes to traditional investments are definitely changing

James Howard, director at Emerald Knight, considers whether or not socially responsible investment will ever be mainstream

will ethical investment become mainstream

Will ethical investment become mainstream?

Figures from the Investment Management Association show that between April and June this year, investors withdrew nearly £2 million from green funds. This means a total of £17 million has come out since November 2011 and raises questions about whether investors are becoming more nervous about going green and moving their money into more mainstream investments whose sole purpose is to make a profit.

However EIRIS, the responsible investment research firm, has said that the case for ethical investment has never been clearer as scandal and turmoil continues to hit financial markets worldwide, and that the recent outflow figures appear to be a blip. There are many who would agree with this.

Stability

Since the global banking crisis, there’s been increasing levels of concern over the stability of traditional investments, and there’s also much better awareness of how financial institutions use their customers’ money. Alongside this, awareness of global warming has increased, the world’s population has continued to grow at a rapid pace and people are becoming more concerned about human rights.

As a result, the nation is becoming increasingly aware of the impact of its choices. Just how much is reflected in figures from EIRIS. These show that the amount of money invested in Britain’s green and ethical retail funds recently reached a record height of £11.3bn and that over the past decade, the number of ethical investors has tripled, from 250,000 to three-quarters of a million.

There’s also evidence to suggest that recent misdemeanours in the banking sector, such as the Libor rate-rigging scandal, have led to more people than ever reviewing ethical options. Triodos Bank, for example, which provides a range of ethical accounts, says it witnessed a 51% surge in applications – and opened three times more accounts than average – the day before Barclays boss Bob Diamond resigned as a result of the scandal.

What is ethical investment?

Ethical investment basically allows you to invest in a socially responsible way without having to compromise your principles and moral stance. You can choose to invest directly into companies or projects which meet ethical criteria, or look at ethical funds which can be growth or income generated.

In terms of projects, there are several different types to consider. Many investors are opting for carbon offsetting, where you help to fund a project which will reduce or remove a metric tonne of carbon emissions from the atmosphere. The company involved will package carbon dioxide emission reduction units into credit bundles that can be purchased as carbon credits. There are many other investment projects too, from forestry investments in Brazil that aim to eradicate illegal logging in environmentally-sensitive areas, to bonds that invest in bamboo plantations in Central America, and farmland investments in Australia which will produce food to help ease global shortages.

With regard to ethical funds, there are now a large number of these available in the UK and they’re often categorised in various shades of green, depending on the criteria they apply to their investment decisions. A ‘dark green’ fund is a term used to describe a fund which applies strict negative screening before investing in a company, and exclude companies involved in unethical practices such as defence or pharmaceuticals. A ‘light green’ fund is a term used to describe a fund which uses positive screening and invest in companies which are making a positive contribution to the environment, or which have a good ethical track record.

Some funds combine both screening methods with a ‘best in class’ approach. So, while a company may invest in the oil and gas sector, it will only invest in those which are doing the most to limit their environmental impact, or to improve their ethical performance. Other funds ‘engage’ with companies by using the manager’s power as a shareholder to positively influence corporate behaviour regarding areas such as the environment and  human rights.  

You can have profits and principles

There’s still a widely held perception that investing ethically means having to sacrifice financial performance. Our own research shows that while 16% of British people would only ever invest for personal profits, only 30% think that you can have both profits and principles when it comes to a socially responsible approach to investment.   

Choosing to invest ethically actually means that the two can go hand in hand. SRI typically involves investment in the few industries which have managed to remain in positive growth through the global recession. Emerald Knight, for example, has had some very positive results over recent months, including double digit returns on a teak forestry project after the first year of investment.

Attitudes to traditional investments are definitely changing, with people who may previously have invested in property or dabbled in the stock market looking for something different in the wake of the financial crisis. And as awareness of environmental issues has increased, it’s becoming clear that many people are making an effort to have a socially responsible outlook to their future investments.

Ethical investment, through positive results and changing attitudes, appears to be breaking into the mainstream.

Traditional Investments on Equity Release

In finance, the notion of traditional investments refers to putting money into well-known assets (such as bonds, cash, real estate, and equity shares) with the expectation of capital appreciation, dividends, and interest earnings. Traditional investments are to be contrasted with alternative investments.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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