For the majority of funds in the UK we do not see much difference in stock selection, or performance, between UK 'ethically screened' funds and conventional funds
'Most green funds hold oil companies' Photo: AP
By Paul Farrow, Personal Finance Editor 4:08PM GMT 18 Feb 2011Comments
I'd like to think I have a green side. I don't own the must-have hybrid car, the Toyota Prius, but I do drive a diesel which is marginally better than petrol. I may not have got to the stage of recycling my bath water but I do recycle my rubbish. Like most of us I check the labels on cartons and food packets for a pair of those swirling black arrows. If there is, into the recycling box it goes and I can sleep easy knowing I am doing my bit for the environment. Or am I?
Every week the box comes back still half full of cartons and packets that are supposed to be recyclable but are seemingly not. It is as though my borough is paying lip service to the notion of being green.
They are not the only ones. It's officially cool to be green so banks, lenders and fund groups have been dreaming up ethical options for customers. Whether it's planting trees on behalf of customers or abandoning paper statements, they are desperate to show they really do care. But you do wonder – even Barclaycard admitted last year that its ethically minded Breathe card was jumping on the bandwagon.
It hasn't always be cool to be green. Take fund management groups – most used to scoff at green investing. There used to be just a smattering of funds available to the ethically conscious investor – now we have dozens to choose from. When a colossal brand such as Virgin launches a Climate Change fund, as it did late last month, you know that green is a sure-fire way to win consumers over.
When the first ethical funds appeared in the early 1980s a fund manager would not typically invest in stocks if they were associated with industries such as tobacco, brewing, armaments, oil or pornography. But now the vast majority of green funds focus on "socially responsible investment'', or SRI as it is known. Rather than screen out stocks, funds that follow the SRI route take a more positive approach, investing in companies that adopt good environmental and social practices, regardless of sector.
18 Feb 2011
18 Feb 2011Naturally this more proactive approach means that companies that would not otherwise be included on some of the strictest funds can be included in so-called ethical portfolios.
Oil companies, for instance, are typically excluded from green funds – many extract oil in countries such as Venezuela and Kazakhstan, where human rights exploitation occurs. But a stock such as Cairn Energy could count because its fields are in Bangladesh and India, which pass its labour and human rights criteria.
In short, the burgeoning ethical investment fund arena is becoming a minefield. It's amazing the types of stocks held in funds – many of them may not be what your ethics dictate.
Climate change funds are the latest wheeze and if you are warming to their credentials you might want to cast your eyes over Holden & Partner's Guide to Climate Change Investment.
It found that "for the majority of funds in the UK we do not see much difference in stock selection, or performance, between UK 'ethically screened' funds and conventional funds".
The report shows that 14 of the 23 global 'ethically screened' funds have been holding oil and gas companies, while of the 25 UK 'ethically screened' funds
only three did not. In the same year that Greenpeace protesters climbed a Cairn Energy Oil Rig in the Arctic to stop it deep-water drilling, four UK ethical funds were holding this stock in their top ten holdings. In addition four UK ethical funds have had 30pc or more of their top ten holdings in oil and gas companies.
Holden Partners reckons that an investor could draw two conclusions from this analysis. Firstly, that when you look at the stocks within 'ethically screened' funds in the UK, there is in practice little difference from their conventional peers and thus little difference in the risk and returns
of the funds. Secondly, that many 'ethically screened' fund managers, both globally and in the UK, either have a lack of research capability, or a lack of imagination in their stock selection, which means that they will not be able to take advantage of the financial opportunity offered by the environmental sector.
The Holden report doesn't surprise me. There is already doubt that many fund managers going down the SRI route do not have the resources actively to build a relationship and influence companies they invest in. It wasn't so long ago that another report, from FairPensions, claimed that the majority of Britain's biggest occupational pension schemes were keeping their members in the dark about the environmental and social impact of their investments.
It argued that the lack of transparency meant a supporter of Amnesty International may unwittingly be backing business ventures in states with oppressive regimes, or someone who regularly donates to Friends of the Earth could discover they have effectively been supporting an oil company's climate change denial policy.
In the spirit of doing the right thing, recycle your rubbish, stop flying or invest in an ethical fund by all means – just make sure you are fully aware of what companies it invests in. It would be green of you not to.
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