Is Ethical Investment Interesting?Posted on: 21 May 2008 by Gareth Hargreaves
From savings to shares, experts reveal whether you can get a good interest rate and invest ethically too.
"I've heard about 'ethical' banks whose investments don't fund arms and so on - can I get a decent return on my money with these?"
Donna Bradshaw, Financial Planning Strategist, IFG Group PLC:
There are a few ethical banks and building societies in the UK - namely The Co-operative Bank, Smile, Triodos Bank and Ecology Building Society - which offer ethical savings accounts.
When comparing their returns with accounts from other banks and building societies, they are lower than the best buys available elsewhere - by as much as 50% in the case of regular savings and around 25% for other accounts. However, it may be argued that their rates reflect a truer market rate as they are more closely linked to the Bank of England base rate. Normally rates for savings are slightly lower than base and the ethical banks' rates do indeed reflect that, whereas rates elsewhere are currently up to 40% above the base rate; which is a reflection of the exceptional conditions prevailing in the wider banking sector where cash strapped banks are desperate for inflows of deposits following years of reckless lending.
Jason Witcombe APFS, CFP CM, Chartered Financial Planner, Evolve Financial Planning:
The Co-operative is probably the most well known of the 'ethical' banks.
Banks are in business to make profits for their shareholders and one way that they are able to do this is by lending your money to someone else at a higher rate of interest than they are paying you. The trouble is that you won't know where this money is being lent unless the bank has a clear policy on this.
It is quite conceivable that your money could be loaned to companies involved in the fur trade or the arms trade or example. Therefore, some consumers do prefer to invest via a bank with a clear ethical policy so that they know where their money is going, or more accurately where it isn't going.
To give you an idea of interest rates, the Co-op's cash ISA is currently paying 4.75% p.a. compared to Bank of England Base Rates of 5% p.a. It is fair to say that higher rates of interest can be found elsewhere but the rate is not terrible.
You need to ask yourself whether you are prepared to take this cut in interest rates. Another interesting way of looking at it is that if you could earn an extra 1% p.a. on your savings by using a bank without a documented 'ethical' policy and then used this extra interest to make an annual gift to a charity or good cause of your choice, which is the most ethical approach?
Adrian Kidd, Independent Financial Adviser, Unleash Financial Planning:
An ethical bank is one which is concerned about the social use of its investments and loans. There are lots of differences among the main players but they do share commonalties in basic principles of how they run their entities, usually the most prominent being the transparency and the social or envoironmental aims of the projects they finance. They are also regulated by same institiutions as tradiotional banks. They will usually work to lower profit margins also. A great example in the UK would be the Co-Operative Bank. As always you should check the rates on offer to see if they are competitive (they should be) but more often than not the reason to bank with these institutions is one based on principle of the person opening the account rather than overall returns although the returns can be very good also. We have seen a lot of 'themed' investment in last 3 years of so around the ethical and green themes as they play a bigger part in the planets continued sustainability and this has spilt over to financial markets and funds available as well as investment performances.
Ethical investment means investing in line with your principles, supporting companies that benefit the community and avoiding those whose products and services or business practices you find morally objectionable. The first ethical fund in the UK was launched in 1984.
Ethical funds have a wide range of different objectives determining what sort of companies they can put money into and no two funds are the same.
In this growing area investors wishing to invest their money ethically are not short of options. Around 50-100 retail funds that would fall into the ethical catch-all definition are available from a range of companies including Abbey, Henderson and Standard Life.
Ethical funds are sometimes defined on a scale from 'light green' to 'dark green'. Light green funds are those using some ethical principles and applying broad-brush criteria to avoid companies making money from tobacco, arms and pornography, for example. Jupiter Ecology is a good example of a darker green fund that applies more stringent criteria. Moreover, not all funds are 'dark green'. Some have a broader selection of investments to choose from.
They can take advantage of market trends, offering better potential for higher returns. Past performance suggests that some ethical funds have equalled or beaten their conventional counterparts.
Although past performance is not necessarily a guide to the future, the new developments to the industry may strengthen this record.
It is instructive to note that a few years ago, a new performance index - FTSE4Good, was launched, in which shares were screened on the basis of criteria discussed elsewhere.
What most ethical investors make clear whenever they are asked is that while they do want 'good' performance from their investments, they are less concerned with shooting out the lights in terms of their potential returns.
In that respect, ethical investments are returning all that is expected of them and, in some cases, far more.
So while ethical investments may not provide the headline returns afforded by other sectors which are seen as more glamorous, with some careful stock-picking, investors can deliver strong returns, while maintaining a clear conscience.
Positive & Negative Screening
All ethical funds screen companies to decide whether they should be allowed into the portfolio. There are two types of screening that are commonly used: negative and positive. Negative screening is where you exclude certain things, usually alcohol, tobacco, arms and pornography companies or companies in oppressive regimes.
Positive screening tries to include companies that add something to the community, that have good corporate governance. Firms that offer good working conditions, energy-efficient buildings and corporate recycling policies might also be considered in a broadly positive light. The aim of the fund manager is to look at the shares available to invest in and create a viable portfolio that offers the opportunity of capital growth, income, or both.
Using a mixture of the two types of screening lets the fund manager consider more arguments.
Another way in which some fund managers incorporate socially responsible principles into their management is by talking to companies. And ethical funds often take this dialogue and engagement with companies to different levels. Cadbury's, for example, might be asked where it is sourcing its cocoa from to check that it is not an area that underpays or mistreats workers. One of the most hotly debated points about ethical investment is whether you can reap good rewards by investing in 'good' companies. The answer is pretty much as it would be for any other style of fund: there are good performers and there are bad performers.
Ian Hudson, Hudson Green & Associates Ltd:
Choosing a bank account according to your ethical principles is not always easy. The question you ask raises the concern that you may not receive a competitive return on your investment because it is doing good. Just because you have strong values should not mean that you should forego the potential for greater returns. Nonetheless, there is a price for making your money more focused and restricting the ability of the bank to lend, or conversely, there is a premium to be earned by not focusing your funds in an ethical manner. When you look at it conversely, the idea of receiving a poor return diminishes, not least because when compared to rates offered by a selection of banks as outlined below, there is not a great deal of difference.
The question, "can I receive a decent rate of return?" can mean two things too:
1. Can I receive a competitive rate of return?
2. Can I receive a morally good rate of return which matches my principles?
It is not for the adviser to instruct you to forego higher interest rates in favour of your ethics, however, it is the adviser's job to advise you which is the most appropriate according to your principles. If your values are important to you, then the rate of return available diminishes in importance, thus it is not really the rate of return which is most important, rather it is being able to understand your values. Seeking advice from an Independent Financial Adviser ensuring they understand your values greater will only help you to find the most suitable investment approach.
Cash ISA Rates Available
Three deemed ethical accounts:
Ecology Building Society: 4.10 % + 1% bonus if no more than 1 withdrawal within one year
Triodos Bank: 4.35%
Co-operative Bank: 4.75%
Source: company websites
Three ordinary non-screened accounts:
Alliance & Leicester: 6.00%
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