| Old Codger 2008-02-19, 3:25 am |
| Storm brews over the content of ethical funds
There are plenty of climate change and eco options, but few are really
green, writes Huma Qureshi
Huma Qureshi The Observer, Sunday February 17 2008 Article history ·
This article appeared in the Observer on Sunday February 17 2008 on
p17 of the Cash section. It was last updated at 10:10 on February 18
2008. Ethical and climate change funds that claim to be socially
responsible are failing to invest in companies which support the
environment, a new study claims.
The report by independent financial adviser Holden & Partners reveals
most ethical funds are 'surprisingly mainstream' in their overall
portfolios, with very little investment in committed environmental
companies.
'Some funds that are branded as ethical do not look any different to
non-ethical funds when it comes to the companies they are investing
in,' says Mark Hoskin, partner at Holden & Partners, which specialises
in offering ethical and environmental financial advice.
'A socially responsible investor will choose a fund precisely because
it is branded "ethical". They won't necessarily look at the underlying
investments because they trust they will be ethical. But some
investors would be surprised to see what their holdings really are.'
Socially responsible investment (SRI) funds use a form of ethical
screening to select which stocks and sectors they will invest in,
using a mixture of negative and positive criteria. Each fund has its
own interpretation of these positive and negative factors- one may
categorically choose not to invest in a company that has any
involvement in animal testing, while another might invest in companies
that carry out legally required animal testing only for the production
of life-saving medicines rather than, say, cosmetics.
However, the study reveals that several ethically branded funds hold
stocks in oil giants such as Premier Oil, Shell, Neste Oil and BP.
'This throws up questions about the screening process used by some
companies,' says Hoskin. 'Can it be an ethical fund if some of its
biggest holdings are in oil?'
Credit Suisse Fellowship Fund's top 10 holdings include HSBC,
GlaxosmithKline, Vodafone, Schroders and Associated British Foods. It
holds just 2.5 per cent of its money in environmental companies.
Likewise, Legal & General's £126.7m ethical fund has just 0.747 per
cent of this invested in environmental stocks. Its top 10 holdings
include Barclays, Tesco and Lloyds TSB.
'None of these top 10 companies stands out as particularly ethical,'
says Hoskin. 'An investor might expect a more ethical weighting.'
A spokesperson from Legal & General says: 'Our ethical fund is an
index- based fund based on the whole economy and isn't pretending to
only operate in a particular fashion and only choose to invest in,
say, wind farms. We are not making any judgment on what is ethical and
what isn't - we filter companies based on what market research tells
us consumers consider to be ethical.
'On that basis, it is perfectly accurate to call it an "ethical" fund,
because we invest in companies that contribute to the entire economy
and operate under ethical practices based on what consumers tell us
they believe to be ethical.'
Environmental approaches
Those that do have bigger environmental holdings include Henderson
Industries of the Future fund, 51.1 per cent of which is invested in
environmental solution providers such as solar power company
Solarworld.
Jupiter's £291.25m ecology fund invests 50 per cent of its holdings in
companies such as Bioteq Environmental Technologies, which builds
water treatment plants, and Augean, a specialist waste and resource
management group.
Jupiter, F&C and Norwich Union all have dedicated ethical research
teams which actively analyse and decide upon the companies in which
they can and cannot invest. Standard Life regularly petitions its
investors to find out which environmental issues they are most
concerned about, adjusting the holdings in its ethical funds to
reflect this. Last week, the company announced its SRI funds would no
longer be investing in airlines, after a third of its investors called
for the company to drop holdings in this sector. More than half of its
investors said they saw climate change as one of their top three
concerns.
Climate change
Climate change funds, which invest in environmental companies, are a
big growth area according to many fund managers. James Vaccaro,
investment director at Triodos Renewables, a purely environmental
retail fund, says: 'Companies are under pressure to develop
alternative sustainable energy sources for the future, and investors
should benefit from this demand.'
In the past three months, at least six climate change funds have been
rolled out by investment companies, including Allianz, F&C, HSBC,
Jupiter and Schroders. Strictly speaking, these funds do not
necessarily fall into the same definition as an 'ethical' fund as they
generally do not follow the same strict screening process. Instead,
they will typically invest in any company working on climate-related
projects or solutions.
'We see climate change primarily as an area of importance as an
investment theme rather than purely in ethical terms,' says Farley
Thomas, who runs HSBC's climate change fund, which launched last
November.
'We have been very careful not to specifically brand our fund
"ethical" - it's just an amazing coincidence that something which is a
great investment also happens to be ethical. We see it more as a
mainstream global investment area.'
HSBC's biggest holdings are in energy provider Eon, Vestas Wind
Systems and international industrial services group Suez. The fund
will only invest in companies that generate at least 10 per cent of
their revenues from climate change activities, but Thomas says he
would not exclude investment in sectors such as nuclear power within
the climate change fund.
'The reality is that the world needs alternative energy and the best
way to support that is to invest in companies based on their overall
sustainability and ethical behaviour, regardless of their sector,' he
adds. 'Alternative energy, like windpower, is not yet mass-produced,
but nuclear energy is a proven large-scale energy source. Ultimately,
whether we invest in a nuclear power company or not depends on its
performance.'
Virgin Money launched its climate change fund in January. It says it
will 'invest in all industry sectors, but only in companies with
lighter-than-average environmental footprints for their sector.' Ten
per cent of the fund is instead in 'solution providers specialising in
offering solutions to environmental problems', with the rest invested
in the European market.
Holden & Partners, however, believes Virgin Money's climate change
fund does not display a big enough commitment to the sector to be
given the name that it has. 'It's just a European equities fund with
only 10 per cent invested in what it calls solution providers,' says
Hoskin. He says the name will attract ethical investors who may be
disappointed when they find out where their money is ending up.
'There are some genuinely focused climate change funds around, such as
HSBC and the Impax environmental markets investment fund, which state
that they will only invest in companies with revenue generated
specifically from good environmental practices,' says Hoskin. 'But
Virgin Money's fund doesn't have this sort of criteria. Climate change
funds are new and there is a lot of interest in them, but a lot of
companies are fudging things a bit. It's a great marketing push to
call something "climate change" at the moment, and we think Virgin
Money has done this.'
Virgin Money says: 'Our climate change fund invests in companies
across all sectors, but only those that do a better job than their
peer group in minimising their environmental footprint. The effect of
this type of investing will be to see the stocks of lighter-footprint
companies outperforming those of heavier-footprint companies.
'In our view, nothing can bring greater pressure to bear on company
management teams to lighten their footprints than seeing their
competitors' share prices outperform theirs. We think this benefits
both investors and the environment in a more tangible way than the
traditional approach, which in our view is just one small part of the
answer.'
Choosing an ethical fund
Alex Davies, head of SRI at broker Hargreaves Lansdown, says he
recommends three ethical funds to investors: the Aegon Ethical Equity
fund (UK all companies), the 'best UK ethical fund on the market' at
the moment; the F&C stewardship income fund; and the Jupiter global
growth ecology fund. 'These funds are all performing remarkably well -
there's a perception that you have to sacrifice performance when you
choose an ethical investment, but you do not have to,' he says. 'Each
of these funds scores very well against the wider sectors.'
Broker Hargreaves Lansdown has an online ethical investment fund
comparison tool which includes a 'filter' to enable investors to
choose the ethical criteria important to them. The comparison tool,
along with a guide to SRI, is available at
h-l.co.uk/ethical-investment.
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