Ethical
stocks are now more popular than ever before with fund managers.
And shares which have traditionally been linked with an ethical
investment universe are now increasingly seen as good investment
by the broad fund management industry.
As Sophie Horsfall, director, global equities at F&C Asset
Management, points out: “Fund managers have become more
interested in ethicals because of a combination of factors.
One major reason is that many companies in the so-called ethical
sector have got to the point where they are more stable, with
regular earnings streams, whereas they had previously made
losses.” As an example, Horsfall points to the German
solar energy industry which started to become profitable a
couple of years ago.
“The solar energy industry has been boosted by the macro
and political environment in Germany, with government support
for the alternative energy industry including tax incentives,”
she says. “It has also been helped by the fact that
when oil prices are high, other energy sources start to look
more competitive.” But besides a background which has
become more favourable to some ethical sectors, she says that
another factor in the popularity of ethical stocks is growing
consumer awareness, and a demand for environmentally friendly
technologies and products.
One theme where this is evident is consumer staples. “The
UK population is becoming increasingly wealthy and is making
the decision to buy ethically-sourced wholefood products,”
she says. “For instance, we have the imminent arrival
of the US-based Wholefoods Market supermarket chain, in Kensington.
At present, the ethical consumer staples sector is growing
faster than the mainstream consumer staples sector.”
At F&C, Horsfall manages both screened and unscreened
funds, and there are some stocks which she holds in both types
of funds.
She says this new ethical trend is not simply a case of niche
companies moving across to the general universe. Many companies
which have always been considered mainstream have also introduced
ethical strategies.
For instance, F&C invest in Marks & Spencer, which
has long been famous for its progressive employment policies,
and is now pushing a healthy and ethically-produced message
in its food operations. They also invest in Starbucks, which
Horsfall says has done a lot to pioneer Fair Trade.
“There is a creep of ideas from the alternative sector
across to the mainstream,” says Horsfall. “If
a company presents a very good investment opportunity, it
may well justify investing.” And she says the very presence
of these companies on the mainstream fund managers’
radar creates its own impetus.
“Over the past year or so, we have had a lot of IPOs
from these companies, and the market cap of these stocks is
getting to a size where fund managers can take decent positions,”
says Horsfall. “In addition, some companies are starting
to enter the stock market indices.” As to which factor
– the macro environment or consumer demand – is
dominant in ushering in a new acceptability for ethical stocks,
Horsfall says it depends on the theme.
“With alternative energy, it is probably the macro environment
which has been more important,” she says. “For
consumer staples, it is more the result of customer demand.”
“We are seeing a lot more interest in these stocks,”
says Mark Mansley, head of institutional advisory services,
Rathbone Greenbank Investments. “Fund managers are very
rapidly picking up on some of the interesting stories, particularly
in areas such as alternative energy. However, there remain
many specialist areas.”
For example, for some clients he has recently invested in
a micro-credit bond, launched by Developing World Markets,
to fund small-scale finance to entrepreneurs in the developing
world.
“This is socially positive, but it is also exciting,
in that it has been done in such a way that risk is spread,”
he says. “We have ended up with a reasonable return
– one per cent over government bonds.” Mansley
says it is possible to exclude 10 per cent or more of the
market and not have an impact on performance.
“Even last year, when the best-performing sectors were
defence, tobacco and mining, we still produced portfolios
which performed better than their conventional peers, because
we tried to find companies with a positive story,” he
says.
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Beyond equities
While most charities may now be familiar with the concept
of ethical equity stocks, they may not know that there are
also ethical options across a much wider range of assets.
In order to inform charities how they can access these other
assets, the EIRIS Foundation and UK Social Investment Forum
(UKSIF) have published a new report, Responsible Investment
Approaches to Non-Equity Investments, available on both
organisations’ websites. “The aim is to increase
awareness about the different options for charities to invest
ethically,” says Sam Collin, charity adviser, EIRIS/UKSIF
Charity Project, which produced the report. “The report
highlights the issues to consider when investing, such as
whether a particular investment fits with their mission
or helps their work.”
Collin says that many charities with ethical policies tend
to focus on equities, and don’t apply their ethical
stance to other parts of their portfolios. “We say
they can look at the broad range of investments and still
invest in ways which support their mission.” The report
covers cash, bonds, property, hedge funds and private equity.
For all of these asset classes there is an explanation of
what the asset is, and how it works. This is followed by
a summary of responsible investment issues and a description
of how responsible investment operates, with many examples
of investment products and services which are available
to charities.
One of the most important areas for charities is fixed income
investment. This includes commercial, government and supranational
bonds (issued by organisations such as the World Bank).
The report explains that investors can screen some bonds
according to avoidance or support criteria. And bonds can
also be a way of accessing some entities which cannot be
reached through the equity markets, such as bonds issued
by the John Lewis Partnership, or special purpose bonds
to finance social housing.
Charities can also invest in ethical bonds via pooled funds,
since some common investment funds and retail bond funds
include responsible investment criteria. Examples include
the AEGON Ethical Income Fund and the Rathbone Ethical Bond
Fund.
However, if the charity is using segregated management,
it is possible to develop a bespoke policy by which the
fund manager will screen bond investments in line with the
charity’s policy. Fund managers are also able to engage
with companies which issue bonds.
For government and supranational bonds, the report says
that a responsible investment approach differs from commercial
bonds. Instead, this approach focuses more on sustainability
and environmental criteria. A country’s performance
against these criteria can then be assessed and rated against
other countries’ performance, international norms
and conventions or more specific indicators. These criteria
can be applied to emerging and developing economies as well
as to more established ones.
According to the report, responsible investment approaches
towards government bonds are less developed than those for
corporate bonds. So the approach may be about changing the
weighting of a bond portfolio, rather than avoiding particular
stocks or sectors.
However, there are bond funds which use socially responsible
criteria, such as the Dexia Sustainable Euro Bonds Fund
and the Sarasin Sustainable Bond Euro Fund.
The section on ethical property investment concentrates
on commercial property, which can be bought directly or
by investing in a pooled property fund. Usually the property
being bought is already built and is then rented out, but
charities can also invest in a property development for
sale.
Responsible investment issues here include environmental
considerations such as energy efficiency, climate control,
waste management, water consumption and pollution. The social
and community issues include accessibility, regeneration
and the location of developments, such as building on greenfield
or brownfield sites.
Charities can also consider the use a building will be put
to before investing in case, for example, the tenant is
involved in activities which contradict the work of the
charity or potentially risk the charity’s reputation.
Another consideration is the construction process, such
as the sourcing of materials and the use of local labour.
Organisations which can provide partnerships for this type
of investment include the Ethical Property Company and the
Igloo Regeneration Partnership. However, the report says
that there are still limits to this kind of ethical investment.
For instance, few funds at present offer the ability to
screen out certain kinds of tenants. On the other hand,
engagement can be harder hitting, with investors sometimes
able to influence the design and build of a new development.
Overall, although the investment industry is moving in the
right direction, there is still a long way to go before
there is a wealth of choice for ethical investors.
So how can charities influence product providers? “There
would be a lot more of these products if providers knew
there was a demand there,” says Collin. “We’d
like to see more charities going to fund managers and asking
for these kinds of products.”
Mansley says: “Charities should find what best practice
is, by talking to their peers for ideas. I tell charities
to ask their fund managers to explain what they’ve
been investing in, how they source ideas and what is driving
their research.”
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