Yield in principle

Prefer to put your money where your mouth is? If you are talking sustainability, the financial sector is latching on to the need for products that suit. Giles Chitty of Holden Meehan tracks the trend.

Is ethical investment coming of age? Well, it’s certainly past infancy, out of nappies, growing fast, and getting into all kinds of places. And eventually it’s going to touch all investment activity.

For the individual investor, there are now about 40 retail ethical investment funds to choose between. This is a market that has quadrupled to £3 billion in five years. A small beginning - only one-tenth of 1% of UK stock market capitalisation. But significantly the last six launches have been from major players - ones who represent 20 million customers worldwide and manage £500 billion of investment funds.

With the first ethical funds, 15 years ago, the impetus was idealism, and investors took a financial risk for the sake of their values. Some of the early products and services were professionally flaky (indeed a few of the new ones are less than crisp) but the poor ones soon wither on the vine, given today’s range of choice and more public awareness. Past performance (see p20) shows financial risks for ethical investors are much the same as for conventional funds. And there is reason to believe future performance will be superior, as long-term profitability in business comes to depend on decision-making that includes social and environmental criteria. A case of ethical principles, practically applied, spawning corporate behaviour that is commercially necessary.

Interest in ethical investment was highlighted by the launch last September of Dow Jones’s new yardstick for European and worldwide financial performance. The Dow Jones Sustainability Indices are based upon 200 companies selected as world leaders from the sustainability standpoint. In the USA, where such indices have existed for about 10 years, the Domini Social Index and the Citizen’s Index show ethically screened investment out-performing the market as a whole. The NPI Social Index exemplifies another approach, using a ‘constructive engagement’ policy involving dialogue and company visits to add depth to the analysis of a company’s policies, practice, core values and culture. This can enable investment managers to identify excellent companies early in their evolution towards sustainability.

The purpose of ethical investment advice is to direct savings in accordance with investors’ values. This includes the practical objective of maintaining their financial health. It requires overall long-term strategic planning. It involves choosing investments that continue to meet their objectives in a rapidly changing world. It means meeting non-financial as well as financial criteria, recognising, indeed, that these are essential to excellent long-term financial performance. Top quality investment advisors and managers are now applying their skills and resources to this goal.

One possibility is the self-administered and self-invested pension scheme, a framework within which the client sets the investment strategy and chooses how it is executed, rather than settling for off-the-peg management. Trust fund, charity and private client portfolios can be tailored in similar fashion. Financial and ethical objectives can also be built into the strategy for using tax-free vehicles such as Individual Savings Accounts (ISAs) and Venture Capital Trusts (VCTs). There is already a wide range of ethical ISAs and the first ethical VCT was launched in October. The field is widening.

Holden Meehan Holden Meehan is one of the newer Green Futures Partners. We are independent financial advisers and see the partnership as a way to use our professional and commercial reputation, along with our influence in the financial sector, to help create a more sustainable society - the only sort of society in which businesses will survive and prosper. We have well-established expertise in advising our clients on sustainable and ethical investments, the fastest-growing part of a business that has tripled in the last five years.

Holden Meehan gives independent advice: we are not beholden to any product provider and we recommend only products that, in our professional judgement, will achieve a client’s financial and ethical objectives. Our clients are companies, charities and individual private clients, and we are particularly active in the group and company pensions field, being consulted by the government as new directions in pensions legislation, both financial and ethical, are developed.

Overall, we aim to keep our individual and corporate clients up to date with ethical and financial developments, keep ourselves up to date with their careers and business developments, and so keep offering responsive advice in the context of sustainable long-term client relationships.

Giles Chitty is a consultant with Holden Meehan

17 October 2001

Giles Chitty