October 14, 2013
By Emma Simon
Almost two thirds of investors consider themselves “ethical consumers”, who think carefully about what goods they buy and which companies they buy them from.
But a recent survey by Ecclesiastical Investment Management found a disparity between the way we shop and the way we save, with only a third of those polled describing themselves as ethical investors.
“The research shows a clear disconnect between ethical consumption and investment habits, and ultimately between the tangible and intangible products we consume,” says Sue Round, head of investment at Ecclesiastical.
“We found consumers are becoming more environmentally and socially aware. Many are reluctant to purchase products from companies associated with animal testing, and they are concerned about climate change and energy resources.” [EXPAND Read more]
She says there is also evidence that consumers are engaging with issues of corporate governance, citing concerns about company’s tax issues and where they source material and labour. “But these concerns aren’t always reflected in their investment decisions.”
According to figures from the Investment Management Association, just 1.2% of the money invested in collective funds goes into those with a specific ethical mandate. This figure has been almost constant for the past decade. But despite the fact that so few described themselves as ethical investors, almost all of those surveyed expressed concern about where their money was invested. For this reason, many remain optimistic that the gap between consumer and investor behaviour can be narrowed.
“There certainly is a disconnect at present, but part of this reason is people’s reluctance of engagement with financial issues,” says John Ditchfield, director at Barchester Green, an adviser specialising in ethical pensions and investments.
Engaging people with their finances
Many people find finance baffling, particularly when it comes to pensions and investments. Deciding to invest in an SRI-mandated pension is a more complex decision than picking up a bunch of Fairtrade bananas. There are a lot of difficult financial terms and jargon to deal with before investors start dealing with issues such as sustainable investment strategies, wasted assets and corporate governance.
However, Ditchfield says the financial landscape is shifting, albeit slowly. There is now a greater emphasis on financial education, both in school and the workplace. And with fewer people able to rely on the state or their employer to sort out their pension, we all have to become more financially literate. “Once people realise they have to be more engaged with their finances, they will become more interested in where their money is being invested,” he says.
Part of the problem has been the misconception that taking a principled stance with your investments means sacrificing performance. Not knowing how much their pension might underperform can put people off.
But this “performance myth” is something the industry is trying to tackle. Figures from Moneyfacts, the financial data provider, show that ethical funds have outperformed non-ethical funds over the past three years: the average ethical fund has increased by 36% with the average non-ethical fund showing a 31% rise.
Investors don’t have to sacrifice performance for principles
Many also point out that the ethical investment market has become far more sophisticated and diverse in recent years, with the scope and nature of these funds changing.
The first ethical funds were based on strongly-held religious or ethical convictions that investors did not want their money funding companies involved in gambling, armaments, tobacco sales or pornography. But rather than simply apply a negative screen, the latest generation of ethical funds have a more positive remit, actively seeking to invest in companies that do good, rather than just avoiding those who don’t.
Many also have an environmental slant, supporting companies involved in green technology, pollution control, water desalination, and the use of natural resources more efficiently. Ditchfield says these appeal to a far broader spectrum of investors, “who are well aware of the challenges we face”.
Getting financial advisers on board
It isn’t just investors who need to be convinced though. Mike Appleby, an SRI analyst at Alliance Trust, said getting more support from financial advisers is key. Many, he said, are still relatively uninformed about sustainable and ethical investments. As a result, investors are frequently not being asked about their values, nor given information about appropriate investments.
Alliance Trust is currently visiting 27 towns and cities to raise awareness of this issue and challenge outdated prejudices regarding performance. In a similar vein, Blue & Green Tomorrow has recently organised “sustainability bootcamps” for financial advisers to help develop their knowledge about SRI investing ahead of National Ethical Investment Week.
Simon Howard, chief executive of UK Sustainable and Investment Forum (UKSIF), says: “Financial advisers who develop knowledge of sustainable and ethical investment can help take advantage of a £75bn market opportunity.
“Many investors are keen to invest in funds which reflect their values. There are also many excellent sustainable and ethical funds which would strengthen any conventional portfolio.”
But Appleby says it isn’t just financial advisers who need to up their game but the fund management industry needs to be more transparent, so that those investing in all funds – not just ethical ones – can have a full breakdown of holdings. This means investors can see exactly where their money is going. Fund managers don’t have to provide up-to-date holdings at present; most just publish a full list twice a year and give out their top 10 holdings the rest of the time.
The furore over the Church of England’s investment in Wonga shows that, if people are trying to take a principled investment stance, it’s important that they know what they are investing in. Not providing this can potentially erode trust in this market. [/EXPAND]