Ethical investment pays but take-up stays in the slow lane

The FTSE4Good index, which screens out stocks in tobacco, mining and other ‘non-ethical’ sectors, has beaten the all-share index over the past five years, returning 48per cent versus 43per cent .

The global version of the goodie index has made 62per cent, just ahead of the 60per cent delivered by the MSCI world index.

Adrian Lowcock, head of investing, at Axa Wealth says the regular index has been dragged down by the slump in oil and mining stocks, and investors who have picked ‘ethical’ funds have dodged the bullet.

“Many ethical funds have no exposure to these areas and therefore have protected investors from the falls,” Lowcock points out. They had also benefitted from the strong performance of smaller and midsized companies, which tend to be UK-focused.

The annual Good Money Week aims to raise awareness of the ethical fund sector, but brokers and advisers Tilney Bestinvest have suggested that it is ethical investment itself which is underperforming, by failing to tap into changing attitudes.

They point out that ethical funds have under £10billion of our cash, 1.2per cent of total industry assets, more than 30 years after the first fund was launched, and despite over 200 funds to choose from the percentage level has failed to grow in the past 10 years.

Jason Hollands, managing director at Tilney Bestinvest, says: “The lack of cut-through for ethical investment over many years is really quite surprising when you look at other industries, where it is clear that sections of the public are willing to adjust their economic activity to reflect their values.

“This is all the more disappointing given the relatively favourable investment climate for many ethical funds in recent years.”

Hollands suggests the ethical investment industry needs to address a number of misconceptions to reach its full potential. “There’s a perception that ethical investing is aimed at a narrow section of the public who are ardent in their beliefs, is focused on niche areas and is lightweight when it comes to delivering returns, none of which are necessarily true.”

He points out that many leading ethical funds are littered reassuringly with blue-chip names such as BT,Vodafone, Prudential, Lloyds and Next.

“These are brands that are instantly recognisable to many members of the investing public, who might currently assume that ethical funds are heavily focused on areas such as renewable energy.”

But Hollands notes that the extraordinary growth since launch last year of the Woodford Equity Income Fund, which has three tobacco giants in its top ten holdings , is a “reminder that many investors are relaxed about ‘unethical’ stocks if the investment case stacks up”.

Tilney says well-managed ethical funds have held their own in the performance leagues.

It highlights Kames Ethical Equity and Standard Life UK Ethical, both managed in Edinburgh, both of which have significantly outperformed the all-share index over three, five and ten years.

Just 13 funds from the ‘ethical and socially responsible investment universe’ have made the cut in the inaugural list of recommendations from ratings, research and investment data specialists FE Trustnet.

Trustnet has whittled 218 funds down to 25 using its normal performance criteria for approved funds. After this, it assessed whether the manager met the fund’s specific objectives.

Henderson Global Investors has three funds in the list, and Dundee-based Alliance Trust two.

Charles Younes, lead analyst, says: “There is still a distinctive lack of guidance for consumers who want to park their money in a more socially responsible manner.”

Meanwhile the annual ‘winners and spinners’ report from specialist advisers Castlefield picks WHEB Sustainability, the Alliance Trust sustainable funds, Premier ConBrio B.E.S.T. Income, Quilter Cheviot Climate Assets, and Impax Environmental Markets investment trust, as being focused on ‘sectors which will benefit from a low carbon future’.

It frowns on funds which are only ‘negatively screened’ to exclude the traditional ‘vice’ sectors and have exposure to oil and gas, citing the likes of Virgin Climate Change invested 4per cent in Shell, Prudential SR Fund with Shell and Rio Tinto in its top 10 stocks, Sovereign Ethical with 7per cent in oil and gas, and Aberdeen Ethical World with around £7m in shale oil extractor EOG. The latter three funds have also performed poorly, says the report, which claims a body of funds in the sector is “doing little to support confidence in or growth of the ethical investment market”.

Castlefield has also published a survey which found 51per cent of investors thought that companies trying to make a positive contribution to society and the environment were more likely to succeed, and 54per cent would move their money if they knew it was supporting companies causing social and environmental problems.

However 45per cent were not aware that that there are ethical and sustainable investment options, and 60per cent claimed they would like to be offered such an option when choosing an investment.

ENERGY COOPERATIVES

Edinburgh residents are being offered a new ethical investment by Edinburgh Community Solar Co-operative. It aims to raise over £1m to fund the installation of solar panels on all council sites – including Gylemuir Primary School, where the project was launched with TV weather presenter Heather Reid.

The minimum share purchase is £250, the projected return is five per cent a year plus RPI inflation and it should also be eligible for the Enterprise Investment Scheme, offering 30 per cent tax relief on shares held for three years.

It aims to become the UK’s largest community-owned renewables scheme and after two weeks has reached £73,000.

It becomes the eighth Scottish cooperative project supported by Energy4All, following five in the Highlands and two in Lanarkshire.

In 2013/14 the Spirit of Lanarkshire Co-op raised £2.7m from 608 investors to buy a stake in two local wind farms.