The growing interest in green or ethical investing, an area where as many as 700,000 people in the UK are investing, has led to an ever longer list of options for investors, and an investment universe that offers competitive returns.

On 6 April the FTSE4Good ESG Rating service was launched, ten years after the creation of the FTSE4Good Index Series of global companies – an index of companies designed to measure corporate responsibility standards.

Designed to help investment managers and researchers, the ESG (environmental, social and governance) Rating service allows investors to better understand how a company measures up against criteria such as environmental management and labour rights.

The development of the ESG ratings is a sign of how the industry is developing, with a wide range of investment funds also now available, including corporate bond funds, equity funds focussed on the UK stock market and funds investing in companies globally.

Light and dark green

The approaches of investment funds are often referred to as light green and dark green.

Light green ethical or socially responsible investment (SRI), is sometimes called ‘best of sector’ or preference investing, which rather than excluding whole sectors will invest in companies with relatively good corporate practices, such as those scoring highly on FTSE4Good ESG ratings.

This normally means light green funds reflect the wider market more closely but may exclude firms with a particularly poor environmental record, or human rights record, or will engage with companies on these issues.

Dark green funds will apply stricter criteria, excluding firms based on factors such as companies that are involved in nuclear power or that derive more than 10% of their business from the tobacco industry.

Dark green funds may also invest thematically seeking out companies providing solutions for environmental and social problems.

Within this, the process of excluding firms and selecting firms is known as positive and negative screening.

Shareholder engagement

Another area of increasing activity is shareholder engagement with some funds engaging with the companies they invest in to try and improve standards of social and ethical practice. This may be done in combination with the screening approaches mentioned above or as an ‘overlay’ to a more conventional fund.

Performance and risk

Some funds investing along SRI criteria sit in the top quartile (a ranking of funds into four groups by performance) of funds in their investment area such as global growth or UK all companies. The Aegon Ethical Equity Fund, the Jupiter Ecology Fund and Ecclesiastical Amity International Fund are top quartile funds in their respective sectors.

The Investment Management Association (IMA) states that overall, the funds it lists as UK all companies ethical funds over five years (to the end of 2010) delivered around 50% of the level of return of the UK all companies sector average. UK all companies is the largest IMA sector by money under management.

Funds listed as global growth ethical funds, have outperformed the IMA global growth sector average over five years. However, it should be remembered that past performance is not a guide to future performance.

For many funds using strict SRI screening more investments are often made in medium-sized and smaller companies which can see higher volatility compared to an equity fund investing in large firms. However, these smaller or medium sized firms offer the potential for growth over the long term.

Knowing your funds

As funds employ different approaches, holdings vary between funds and it may be that the criteria applied and investments made fall short of your idea of what constitutes ethical investment. It is best to look closely at how a fund invests and the criteria it uses before deciding whether to invest. Fund factsheets and associated literature will provide more information.

Investing through Fair Investment

Fair Investment Company was ranked joint first in the National Ethical Investment Week survey of the best fund supermarkets for ethical stocks and shares ISAs, for providing filter tools and up to date guides for investors.

Compare ethical investment options available through Fair Investment, including the Fair Investment Ethical Portfolio »

No news, feature article or comment should be seen as a personal recommendation to invest.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Past performance is not a guide to future performance.

Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

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