LM: Demand for ‘green’ funds catches up, and they can be rewarding too: May 09, 2008

Environmental concerns are no longer the reserve of tree-hugging hippies and climate change campaigners. Fund management companies are increasingly moving into the “green” arena as public concern over the ecosystem increases.

In recent years, demand for fair trade and eco-goods has rocketed, as consumers become all the keener to be greener: sales of fair trade goods have doubled in the past two years. Increasingly, consumers are also able to ensure the colour of their money is green when investing on the stock market.

But what is available and are such investment vehicles kind to your bank balance as well as the environment?

In the UK, where the nonprofit UK Social Investment Forum (UKSIF) will run a National Ethical Investment Week to highlight “socially responsible investment” (SRI) later this month, consumer SRI funds represent less than 1% of the total retail market, according to the forum. But, results from a recent poll show that more than two-thirds of investors are interested in putting their money into sustainable and responsible investment.

Demand, it seems, is on the up: the amount of money going into ethical funds has risen six fold in the past year.

“The evidence can no longer be ignored: consumer interest in sustainable and responsible investing is continuing to grow rapidly and what was once considered a niche market is proving itself to be a long-term growth trend,” says George Latham, head of SRI at Henderson Global Investors, which is co-sponsoring the week.

Some funds are greener than others. While some screen out all companies involved in certain “unethical” sectors—some more stringently than others, giving “light” and “dark” green funds—others take a different approach.

For example, Virgin Money’s Climate Change Fund, which launched in January, invests in companies engaged in oil exploration, mining and car manufacture. “Some commentators have questioned how a fund calling itself a ‘climate change´ fund could possibly (do so),” says a spokesman.

“Well, we’ve taken the view that in the real world, unless you are so fundamentally against these industries that you would never drive a car or get on a plane or buy anything made from plastic again, the chances are that you don’t necessarily want to close down all of these industries overnight but you would like them to be ‘cleaner’.” The fund invests in companies across all sectors, but only those that do a better job than their peer group in minimising their carbon footprint.

In a similar vein, rather than focusing on negative criteria to screen out investments in “undesirable” firms, Norwich Union’s “sustainable future” funds look to invest in companies that make a direct link between sustainable development and long-term returns.

So, there are different fund types. But, more importantly, how has the sector performed?

At one stage, those who took an interest in ethical investment did so out of the goodness of their hearts. Investment performance aside, they were satisfied in the knowledge that their money was not being used to finance weapons manufacturers, pornographers, tobacco and alcohol producers or companies that tested products on animals.

But, as asset managers who run SRI funds emphasize, it is a myth that those who want to invest with a clear conscience have to sacrifice performance.

“There are many myths surrounding green and ethical investing,” says James Dalby, fund propositions manager at Norwich Union, which manages six “sustainable future” funds and one ethical fund.

“One example is ‘ethical funds usually under perform’: this is generally untrue.” The figures speak for themselves. F&C’s ethically screened “Stewardship” funds—the oldest retail ethical funds in Britain, dating back to 1984 and commanding a 40% share of the ethical investment market in the UK—have turned in a stellar performance. F&C Stewardship Growth and its sister Income fund have both yielded 86.5% over the past five years, according to Trustnet data.

Others have outstripped that, more than doubling investments: Jupiter Ecology is up 137.3% in the past five years; Aegon Ethical Equity by 126.9%, Ecclesiastical Amity International by 120.5%; Norwich Sustainable Future European Growth by 118.2% and St James Place Ethical by 111.4%.

In recent months, however, SRI funds have suffered more than others amid the current market volatility.

F&C Stewardship Growth is down 18.6% in the past 12 months; F&C Stewardship Income is off 16.5% and Aegon Ethical is down 7.8%. Ecclesiastical Amity has managed a 6.2% rise, and St James Place Ethical is up just 2.9%.

There is a very good reason for the downturn in performance, Rebecca O’Keeffe, head of fund management at fund supermarket Interactive Investor, says. “The reason is quite straightforward: the five best performing sectors over the last year—mining, oil equipment services, chemicals, tobacco, and oil and gas producers—are ones that most ethical funds won’t touch.” Ethical fund mangers are, however, optimistic about the future. Charlie Thomas, manager of Jupiter Ecology, which is celebrating its 20th anniversary this year, says the longterm growth drivers for the sector have “strengthened considerably”.

These, he says, are threefold: the consumer, a shift in governmental and corporate policies and businesses’ capital expenditure commitments.

“Factors such as high energy prices mean there is a direct economic imperative for moving forward on environmental issues and companies have not failed to recognise this,” he says. “The green investment case remains very positive.” The trend for green investments is also spreading to emerging markets.

Fund managers in emerging markets will be rated based on their capacity to incorporate environmental, social and governance factors into their investment decisions, as part of a research project unveiled last week.

The International Finance Corporation, the private sector branch of the World Bank, has appointed Mercer to conduct the survey, which will involve 50 managers in China, India, South Korea and Brazil, as well as more than 200 throughout the world who invest in emerging markets.

Tim Gardener, global business leader of Mercer’s investment consulting business, says: “As demand for investment in emerging markets has grown, so too has the need for a better understanding of the environmental, social and governance forces at play in these markets and their impact on performance.” “Green” investment, it seems, is going global.