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.