This piece first appeared in Reader's Digest in October 2000
 The text here may not be identical to the published text


Ethical Investing: Can You Afford It?

Put Your Money Where Your Mouth Is

Does slave labour build your pension? Is your ISA nuclear powered? Do powerful chemicals fertilize your unit trust? We often worry about how well our investments are doing. But how often do we wonder what harm they might be doing on the way? Of course, you may not care as long as the return on your money is good. But now the ethical investment movement says that in the long-term ethical companies will perform better. And of course, it is always the long-term we should consider for our stock market investments.

The argument goes like this. Take tobacco. We have known that smoking is dangerous for thirty years. But it is only in the very recent past that courts in the United States of America have awarded billions of pounds damages against the tobacco companies. Eventually, ethical campaigners say, companies making a dangerous addictive drug will face growing costs imposed by courts or government which will affect profits. At some point, the value of the company could vanish in a puff of smoke.

Less dramatic arguments are put forward in other areas broadly called ‘ethical’. Take those companies which produce environmentally damaging chemicals. They may be perfectly responsible and act within the rules, but the laws which constrain them will tend to get tougher and, in the long-term, damage profits. And there is a subtler force at work.

Justin Modray, an investment advisor at Chase de Vere, explains.

"The public are warming to ethical brands, which are very strong now. So in the long-term yes they should perform better. Also you can say that if ethical issues are becoming more important, now is the time to buy into ethical companies – demand will push up the price."

So ethical companies can be good for your bank balance as well as your conscience. But before you rush off and look for an ethical investment, you have to decide what particular harm you object to. Some people want nothing to do with armaments. Maybe you do not like drugs of any sort, including tobacco and alcohol. Green activists may want to keep their money out of intensive farming or companies involved with genetically modified organisms. Your conscience may be pricked by multinationals which exploit workers in developing countries. Or maybe your chips are down for gambling. Then there is mining, chemicals, nuclear power, animal welfare…some people have even sold their Marks & Spencer shares – not because the price has fallen 45% in the last year, but because the company has abandoned its ‘buy British’ policy and is canceling contracts with many UK clothing manufacturers for cheaper products made abroad.

Once you have made your choices, you need to find an ethical fund which is broadly in line with them. Here you will need professional advice. Although the funds will tell you their ethical policies, you also have to consider standard investment advice. Even if your money is all ethically invested, you must consider the balance of risk and security and decide if you want to invest in different parts of the world and different kinds of business. Even free-range, organic eggs should not all be put in one ethical basket.

Although there is growing enthusiasm for ethical funds, their performance has not been outstanding. In the long-term they may prove the best place to be. But that is an act of faith. Justin Modray of Chase de Vere is interested but not over-enthusiastic.

"It is a small part of our business but a growing one. On the whole it is fair to say that ethical funds are not in the top quarter of funds, the top funds are not ethical ones. So investors who tend to look at performance tables over the previous five years are not likely to invest in them."

However, the evidence from the last five years is not discouraging to people to want to invest ethically. Chase de Vere identified for Reader’s Digest 37 broadly ethical unit trusts out of a total of more than 2000 – less than one fund in 20. Over the five years to the end of June 2000, the average ethical unit trust grew by 92.8%. Over the same period the index which measures of the growth in most London shares (the FTSE All-Share) grew by 114.9% and the FTSE world index grew by 126.3%. So the average ethical unit trust did rather less well than the UK or the world stock markets as a whole. But then so did the average of all the unit trusts – putting on just 96.1% over the five year period. And among the ethical funds some did much better – Framlington Health for example more than quadrupled its investors’ money, with a growth of 354.6%, an excellent result. So, as with any investment, picking the right fund is the key to making money. And many ethical funds outperformed many which do not make that distinction.

In the United States of America – where ethical investment has been an issue for some years – there is a wider choice of ethical funds. One stockbroker called Kinder, Lydenberg and Domini passed hundreds of American companies through a range of environmental and social tests. The biggest and best four hundred now form the Domini 400 Social Index (DSI 400). From its formation in May 1990 that index has consistently done better than standard index of the top 500 companies used as a benchmark of the US economy – the S&P 500. At the end of June 1999 the DSI 400 beat the S&P 500 over one year, three years, five years and ten years. £1000 invested in the Domini 400 companies ten years ago would be worth £5983. Invested in the S&P 500 companies it would be worth £5150. So ethical investment not only is socially responsible but would have made you an extra £833 on each £1000 invested over ten years.

That might give us a guide to how ethical funds they will perform in the longer term in the UK. Though if we are to believe the campaigners, ethical funds should do better in the future than they have in the past.

And there is another powerful force that could force the pace of ethical investment. From July 3rd this year, pension trustees must include their policy on what is called Socially Responsible Investment when they tell members about their overall investment policy. And any member of a pension scheme can demand to see what those policies are. Of course, trustees still have an obligation to maximize returns for their members. But that is now clearly possible, even with an ethical investment plan. So, if members raise the issue with their trustees, we could see the full force of the pension funds – which own half of all the shares in UK companies – being brought to bear on ethical issues. And when that happens companies will have to take social responsibility much more seriously.

October 2000

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