Investors are advised to check the holdings of “ethical” funds. Some funds, such as the BlackRock New Energy fund, invest in renewable energy but are not classed as ethical. Other funds invest in companies that are not directly associated with ethical causes.
“People don’t understand what ethical funds are made up of,” warns Peter Holden of specialist SRI advisers Holden & Partners.
“People think ethical funds are all in nice small cuddly companies, but they’re not. They tend to exclude oil, tobacco and armaments and they’ve obviously got to replace them with things, such as banks.
“When people say they want to invest ethically, we ask them what they mean,” he explains.
The Friends Provident Stewardship fund, for example, counts Vodafone, Tesco and Legal & General among its top 10 holdings – perhaps not quite what ethical investors may have in mind.
This is because ethical funds tend to operate in different ways. In general, they are usually classed as either dark green or light green.
Dark green funds apply negative screening procedures and do not invest in companies in certain sectors that are deemed harmful, such as tobacco or armaments.
Light green funds focus on the measures that companies are taking to be more sustainable, such as waste efficiency plans or even community outreach programmes.
However, light green funds are not necessarily “less ethical” than dark green ones. Fund managers of light green funds often use their clout as shareholders to encourage companies to take more sustainable measures – which are arguably just as beneficial for sustainability in general as investing directly in a wind turbine company.
But some funds may also buy “best in breed” – which could even include the “least bad” oil or tobacco company.
Other funds send out questionnaires to investors to ask what they would like to invest in.
Standard Life, for example, was recently told by investors in its ethical fund not to invest in animal testing, even for medical purposes.
Across these dark and light green sub-sectors, ethical funds tend to invest quite differently, so investors are advised to check the prospectus of their fund carefully.
“Any time you invest in an ethical fund, it’s worth finding out what the policies are,” says Andrew Wilson, head of investment at Towry Law.
“No two are the same and, depending on what the restrictions are, that will affect performance.”
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