Ethical Investments - McCrea Financial Services, Glasgow, Independent Financial Advisers IFA, independent financial advisers

The rising importance of ethical and environmental issues on the global agenda has precipitated the growth of "green" or Socially Responsible Investments (SRI) over recent years. Once considered the preserve of wealthy philanthropists, ethical investing has now come to the fore, allowing ordinary investors the opportunity to align their personal values with their financial goals, without compromising either.

Introduced in the UK in the mid 1980s, SRI was initially treated with great caution by investors and justifiably so. Ethical constraints served to exclude the growth potential of many FTSE funds and limited exposure to potentially more volatile, smaller and medium-sized funds. This resulted in poorly diversified portfolios and poor returns, but this is no longer the situation.

Over time, increasing pressure from governments, businesses and individuals has forced companies to crack down on issues of ethics, from corporate governance to environmental sustainability. This has ultimately broadened the investment universe available to ethical fund managers, stimulating returns.

There are now more than 80 ethical funds available in the UK, each quite different from the next. While some funds avoid certain sectors or investments, others support those that make a positive contribution to the environment. A few do both.

Most of these funds avoid investment in:

Armaments
Non-medical animal testing
Intensive farming
Nuclear power and related technology
Investments with and in countries that violate human rights
Production and distribution of tobacco, gambling or pornographic material

This also avoids companies that do not address the social ramifications caused by the product, for example, the alcoholic beverage industry.

What do you want from your investment?

Ethical investors may seek to avoid companies involved in activities they believe to be harmful to society, such as tobacco production, pornography and child labour, to name but a few. Ethical investment strategies try to balance both the avoidance of some activities whilst pro-actively supporting others.

A number of ethical funds go further still by using shareholder pressure to bring about changes in company policy. By joining forces with other investors some ethical funds have successfully influenced several companies to improve their ethical record.

Ethical investment funds put in place a screening process to ensure that the companies they select for inclusion in the fund are the right ones to meet the ethical policy. There may be negative and/or positive criteria, some of which are examined in the following tables:

Negative Criteria (those that the funds may seek to avoid)

Investment Area	Reason for avoidance
Alcohol	Consumed to excess, alcohol may result in violence, serious illness and accidents.
Animal testing	Animal testing for cosmetic products although banned in the UK still exists abroad. Some consumers view all animal testing as unacceptable, whilst others may be less concerned with animal testing if it is for pharmaceutical purposes.
Arms	This includes the supply of goods and services, including weapons to the military and export of arms.
Gambling	Gambling can result in addiction and, with the advent of the National Lottery, people are increasingly concerned about the adverse impact this is having, especially on the young.
Greenhouse gases	Greenhouse gas emissions, such as carbon dioxide are contributing to global warming.
Health & safety breaches	Investors can avoid those companies that have been successfully prosecuted by the Health & Safety Executive.
Human rights abuses	Includes operations in countries with regimes that violate the political and civil rights of their people.
Intensive farming and meat sale	Vegetarians who gave up meat for ethical, rather than medical reasons, may prefer to avoid investing in groups involved in meat production. Meat eaters too may have concerns as to the treatment of animals used in food production.
Nuclear power	This is concerned with the damaging effects of radioactive waste, nuclear weapons, nuclear reprocessing and radioactive discharges.
Ozone depletion	Although the manufacture of many ozone destroying chemicals has been banned, their use is still permitted while stocks last.
Pesticides	Excessive pesticide use can cause damage to the food chain, animal and human immune systems and injuries and deaths among farm workers. Some chemicals are also ozone-depleting.
Pollution convictions	A small number of convictions are carried out each year against companies, due for example to a serious pollution incident.
Pornography and adult films	Pornography is often objected to on the grounds that it may corrupt, deprave and contribute to sexual violence and sexual discrimination.
Roads	The construction of new roads will contribute to the number of cars on the road, causing levels of pollution to rise and destroy countryside.
Third World concerns	This includes Third World debt, codes of conduct covering suppliers and aggressive marketing campaigns causing customers to buy unnecessary or harmful products, for example tobacco or breast milk substitutes.
Tobacco	Smoking is the largest cause of preventable death, causing over 100,000 deaths every year.
Tropical rainforest destruction	Deforestation for agriculture, development, commercial logging etc. has damaging effects on the environment and threatens the survival of certain wildlife.
Water pollution	Often caused by industrial discharges – water pollution has both environmental and economic impacts.

Positive Criteria (those that a fund may actively choose to invest in)

Investment Area	Reason for support
Community involvement	Companies donating money to worthy causes and encouraging a contribution to the community in which they operate.
Disclosure	Creating better information on corporate policy and practice as well as a willingness to be open about company policies.
Environmental initiatives	Some investors may prefer to invest in companies demonstrating commitment and achievement in cleaning up their activities or taking a more proactive approach to reducing their impact on the environment.
Equal opportunities	Companies that have improved their equal opportunity records, such as developing a system to monitor effectiveness of equal opportunity policies.
Positive products and services	Different activities which can be seen as providing basic necessities and other products and services which help in solving problems and making the world a safer place. These may include: Environmental technology, including products for recycling, wind power generators and pollution abatement technology. Waste disposal companies. Public transport and bicycles, including provision of bus services and maintenance of railway tracks. Safety and protection, for example alarm systems for elderly people living alone, fire alarms, life jackets and protective clothing. Healthcare, including medicines, hearing aids and spectacles. Housing, food and clothing. Retail of utilities (water, electricity and gas) for residential users. Training and education, including supply of educational materials and occupational and language training courses. Publishing and the press.

Meeting the Investment Criteria

Many ethical funds will have a panel or committee responsible for setting the criteria and establishing an approved list of companies from which the portfolio manager can select investments. The Ethical Investment Research Service (EIRIS), the UK leading independent provider of research into the ethical status of companies, also helps most ethical funds with the ongoing monitoring of investments.

The type of screening used by the fund manager will be very important to you if you are particularly concerned about certain issues. You may wish to support certain companies that you feel are making a positive effort to be "green", while avoiding those involved in activities that you do not agree with. Positive and negative screening will help you make your investment choice.

Choosing An Ethical Investment

The first step is to decide what issues are important to you. Ethical investment is about personal choice. Do you want to avoid investing in companies involved in activities you dislike? Or do you want to support firms that provide a positive service to society? Remember some funds will combine both approaches.

Each fund must state clearly its exclusions and inclusions, so we can shop around to find one that does what you want it to. Remember some funds will be "greener" than others.

As a fund aims to please a lot of people, you may not find one that precisely mirrors your objectives but there should be several that are close.

Performance

Do you have to pay a price for your principles? Is poor investment performance the penalty for following your conscience?

Ethical funds hold a higher percentage of shares in small to medium-sized companies and a smaller percentage in large companies than their non-ethical equivalents. Shares in small companies can sometimes be more volatile than those of larger companies. For this reason, ethical funds are often perceived as being a riskier investment than their non-ethical counterparts, but as with all equity funds, there is always risk in the short term, so you should be looking to invest for the medium to long-term. Typically ethical investments are recommended for a minimum of five years or more, rather than expecting gains in the short term. It is not true to say that investing ethically leads to poor financial performance.

As with most share-based investments, the price of units can go down as well as up. The performance of ethical funds is just as reliant on good management techniques as conventional funds. Ethical funds with similar investment policies can perform quite differently.

You should be aware that past performance is no guide to the future and you may not get back the full amount invested. The value of investments can go down as well as up as a result of both market movements and exchange rate fluctuations.

Funds with a strict criteria (dark green) may be limiting their performance. For example, strict ethical screening can exclude whole industry sectors from investment. This can mean that you may miss out on the gains from this sector during periods of high growth.

New funds exist that are adopting a "best of sector" or "light green" approach.

The "best of sector" approach is one where the fund managers look at the whole sector and assess which funds are the most ethical within the sector and make their selections from within the most ethical few.

The "light green" approach means that the ethical criteria is not the most important factor in making the investment decisions, however the investments involved will be more ethical than the sectors average.

These funds have been met with mixed response from the market.

They may invest in companies often shunned by traditional ethical funds, mostly larger companies, which removes some of the risk associated with investing mainly in smaller companies.

They are not as ethical as traditional ethical funds, however many traditionally non ethical investors have chosen these funds since their introduction, thus increasing the total funds invested in more ethical investments than would have been under traditional ethical investments.

The value of assets can fall, as well as rise, particularly in the short term. You may get back less than the original amount invested.

Contact McCrea Financial Services for further information


McCrea Financial Services Turnberry House 175 West George St Glasgow UK G22LB
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tel: 0141 572 1340 fax: 0141 572 1341 enquiries@mccreafs.co.uk
Directors Douglas McCrea Cert PFS - Managing Director / IFA
Registered Advisors Paul Burns - IFA John Elliot - MAQ - Mortgage Advisor Alan Moore - IFA Alistair Paton Cert PFS - Pensions Specialist


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