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Ethical Investment Guide

Progress

Along with the growth in the number of funds available in the ethical investment market, there is also an increase in the demand for ethical products. Investment providers now offer products for all types of ethical investor.

Shades of Green

Ethical funds have many different investment objectives. To make your investment choice easier many groups use a system to categorise their investment style. The main categories are dark green and light green, some groups also refer to a fund as medium green. Many believe that this system has widened the appeal of ethical funds.

Dark green funds use the strictest investment criteria. Suited to investors with strong ethical beliefs, investment usually excludes the largest companies in the UK. This type of fund shuns companies involved in such activities as animal testing, tobacco and arms manufacture. Investment in oil, pharmaceuticals and banking is also very limited. Fund managers of dark green funds would employ a negative screening process. The AEGON Ethical Fund is an example of a dark green fund; and has moved from being 'vegetarian' to 'vegan.' This means producers or retailers of meat, fish and dairy products will be automatically excluded from the fund – which even extends to chocolate manufacturers such as Nestlé, which makes KitKats, and Cadbury.

Light green funds use a positive approach to portfolio selection. Although these funds are still opposed to those companies involved in areas such as animal testing and tobacco, they do consider investment in mainstream companies that have shown an improvement in their environmental or social policies. For example, an oil company, rejected by a dark green fund could be considered for a light green portfolio if the company had taken positive action to help the environment, such as the use of solar power. This approach is commonly termed 'best of sector' or 'best of class'. These funds are considered a less risky investment due to the increased number of companies available to light green fund managers to choose from when investing.

Developments

There has been a renewed investor interest in ethical investment in recent years. Public awareness of environmental and social issues has been heightened, which has prompted some change in government attitudes.

In July 2000 the government’s introduction of pension fund regulation required pension fund trustees to disclose the extent to which ethical, social and environmental factors are considered when making investment decisions; the first time that a government had imposed such a rule.

There have also been developments in the investment process of ethical funds. While the traditional negative and positive screening approach is still used by many ethical products, other concepts have started to emerge from this new investment environment. Engagement is an attempt by fund managers to engage the companies in which they invest in a discussion about their social and environmental policies. For example, if a fund invests in a company that is involved in arms manufacture, engagement does not ask for the fund to withdraw its investment, but to use its power as a shareholder to question the decisions being made.

Friends Provident, having launched the first UK ethical fund in 1984, now houses its Committee of Reference – which makes judgments on where to invest – at F&C Asset Management, which continues as its fund managers following de-merger. Ethical funds are defined by their active avoidance of those companies that harm the world, but without investment in those companies they have no power to change them. The light green approach of engagement may help ethical investment gain the support it needs to effect real change.

In January 2010, Hermes, the asset manager of the BT pension scheme, launches a service to advise private equity investors on improving their environmental, social and governance standards.

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