EIRIS, the socially responsible investment research organisation, reports that there is now over £11 billion invested in green and ethical funds in the UK. Ten years ago the figure was about £1.5 billion. Access to SRI investments has also increased dramatically, with over 100 funds to choose from compared to a couple of dozen a decade ago. The fact is that socially responsible attitudes are commonplace these days - issues such as climate change, sustainable energy, Fairtrade initiatives, recycling, poverty and human rights are no longer the province of the hardcore ethical activist or green consumer.
A good number of our clients invest with more than just the bottom line in mind. But that doesn’t mean that fund performance needs to take second place to SRI criteria.
When it comes to SRI criteria for constructing a portfolio or fund, there are three main approaches, although in reality many funds use a combination of all three to achieve their aims.
Exclusion (‘dark green’)
The most rigorous SRI funds simply screen out companies involved in what are deemed to be unacceptable activities. This might, for example, include a blanket ban on tobacco companies. On the flip-side, companies can also be positively included for their benefits to society, such as those involved with renewable energy or clean water.
Rather than excluding, say, all oil companies, a ‘best-in-class’ approach might look to include only those companies in the oil sector that have the very best credentials when it companies to the environment, or human rights. This can hardly be applied to all sectors – the idea of best-in-class tobacco or armament companies, for example, is a contradiction in terms. However, as a lighter touch form of ethical investment, best-in-class approaches are quite common.
Engagement (‘light green’ or even ‘ethical-lite’)
Sometimes considered with some suspicion by dark green or mid-green investors, engagement refers to a process in which fund managers, who can have significant influence and voting power by virtue of the size of their shareholdings, attempt to nudge corporate governance towards socially responsible/ethical best practices.
Sources of information
If you are new to socially responsible investing, or want to learn more, the EIRIS website, and particularly their consumer site Yourethicalmoney contains a wealth of investor information. Their green money blog and EIRIS twitter feed might also be helpful, along with information from the Ethical Investment Association. Further information about the guidelines for ethical/SRI retail funds can be found at the Eurosif website.
How we invest for SRI clients
The first key distinction is to recognise that there is no one particular type of ethical investor. Concerns, preferences and ‘shades of green’ naturally vary between individuals, and a specific questionnaire that helps identify these is generally the first step towards constructing a tailored solution. For example, you may be passionate about championing human rights but have no problems with the drinks industry. There is no definitive right or wrong approach.
From this point we can either construct an investment fund based portfolio and run it in-house or, where you have an existing share portfolio, which falls outside of our permissions to manage (perhaps you have inherited it, or attempts to get your stockbroker to manage it ethically have been greeted with incomprehension), we might introduce you to a specific SRI investment management company. This second approach might also suit an investor with exceedingly specific criteria, where investing in funds may not allow for precise enough targeting.
And as for Fiduciary...
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