Ethical and Environmental Funds – “Heroes and Villains”

Our advisers name the best and the worst of the ethical and environmental funds.

Heroes and Villains

Background

Twenty years ago at Barchester Green investment we used to produce a list for our clients of what we called “First, Second and Third Division” ethical and environmental funds. Ethical funds were the ones excluding companies involved in certain areas of business which were considered anti-social or worse by prospective investors while environmental funds sought out companies making a positive contribution to the environment. Ethical funds sometimes, but not always, included pro-active companies in their funds. These classifications were not based simply on financial performances but on the degree to which we believed the fund had ethical or environmental integrity in defining the way in which it operated and the extent to which it held to those criteria. We tended to like funds where, among other things, there was an inhouse research team rather than just reliance on EIRIS (Ethical Research and Information Service) and where we found fund managers who would communicate openly about their investment strategy. Examples of First Division funds would have been Friends Provident Stewardship, Scottish Equitable (now AEGON) Ethical (now Ethical Equity) and Jupiter Ecology as well as the newly launched Clerical Medical Evergreen (subsequently the Insight Evergreen and closed in 2010). TSB’s Environmental Investor fund advertised by bearded zoologist David Bellamy accompanied by late eighties fashionable dolphins was an example of a second division fund as, although we liked the ethos, there was doubt about the level of ethical – as distinct from environmental – screening. The Credit Suisse Fellowship fund was also regarded as something of a curate’s egg – good in parts – as, although there was nothing especially wrong with the companies in which they invested, they didn’t seem to quite catch the imagination. The Third Division Funds were those which usually just bought in research, whose literature (no internet in those days) was either very general or non-existent and whose major holdings (then as now) showed little difference from mainstream funds.

This year's list

Revisiting this exercise in 2010 there were some common threads running through the answers from our ten advisers when asked to name the best and the worst of the ethical and environmental funds. The dominant theme among the worst offenders was that their top holdings had little or nothing to do with ethical and environmental investment and, in many cases, contained stocks from which those who believed they were investing in ethical companies would run a mile if they knew where their money had been placed.

BP oil spill

It was particularly relevant to carry out this exercise in the wake of the BP oil spill given BP’s (somewhat surprising) presence in various environmental funds. One of the major criteria for many ethical funds is the exclusion of companies on the grounds of serious or repeated environmental offences. In the wake of the oil spill it is difficult to see what justification there can be for including BP in any fund which claims to be ethical. When some of the more doubtful holdings in ethical funds are uncovered it also raises a question mark over the recent figures showing £5.9bn of ethical funds under management (See this press release from ePolitix among others). The funds may have “ethical” or “environmental” in their name but they really can not justify that label.

Environmental investment

However, it is not all bad news. Investors with non-financial criteria in 2010 are somewhat different from those in 1990. when the major issues were apartheid and armaments. The latter is still significant and other oppressive regimes have replaced South Africa but seeking a solution to environmental problems is now the major non-financial issue in making financial decisions. As you might expect, our top funds reflect this concern as does the sheer number of environmental and “climate change” (a new classification) funds which have been launched in the last five years. This shift from ethical to environmental investment seems to be a further development which began when the phrase “socially responsible investment” started to be used interchangeably with “ethical” in the late ’90s. “Socially Responsible Investment” (SRI) has long been regarded by many purists as a sort of “Ethical Lite.”

Banks and building societies

For example, until the early 1990s the idea of ethical funds containing holdings in banks was laughable because of the amount of third world debt which they held. When, by 1995, that debt had generally been removed most of them were considered to have been rehabilitated sufficiently to be included in many of the ethical funds while those banks which had previously been building societies had never been involved in overseas debt in the first place so their hands were clean. Many of the latter category of demutualised building societies have since been swallowed up by mainstream banks – exactly what opponents of demutualization predicted. How appropriate is it to include banks in ethical funds remains an open question.

Religious products

It is perhaps worth considering in this context that one of the areas seeing the biggest areas in which ethical investment has grown is the range of Sharia compliant products for the Muslim community for which one of the main exclusions is banks due to the Koranic prohibition on the charging of interest. “Mainstream” ethical investment as we have come to know it in the UK springs from a different religious tradition, Christianity, chiefly via its Methodist and Quaker manifestations and it is possible that the dwindling number of regular churchgoers in the UK is reflected in the shift from ethical towards environmental investment. In years to come we might hope for a more universally agreed set of values to be applied to investment decisions in accordance with a less tribally based approach to spiritual matters. However, in the enthusiasm to embrace environmental funds caution is required for those to whom ethical values remain a priority. A number of environmental funds do not necessarily include ethical screens so that, for example, while a company might be included because it manufactures solar panels, if that factory is in China, there may be no guarantee that it observes the labour practices expected of a company ranking for inclusion in an ethical fund.

The Best:

1. Jupiter Ecology

A longstanding environmental fund – launched in 1988 – which has come through a rough spell in the early years of last decade but emerged with a new fund manager, Charlie Thomas, in 2003. Investment is spread between the UK, Europe, North America and the Far East where it used to be more heavily weighted to the USA. Nothing invested in the financial sector (although at the time of writing 10% is in the Money Market pending investment) – it actually is a fund which invest in what is says it is. It is also one of the environmental funds which also applies ethical criteria in its stock selection.

2. The IM WHEB Sustainability Fund

Launched in June 2009 and invests in a variety of environmentally-sensitive holdings including companies providing solutions to climate change by offering alternative energy and energy efficient solutions. In addition, changing weather patterns mean that potable water is increasingly scarce in many parts of the world and the fund invests in companies who deal with this through metering, purification, conservation and supply. They also support an ageing global population by supporting healthcare products and services. Fund manager Clare Brook has been a leading figure in ethical and environmental fund management in the UK for the last twenty years pioneering departments at Jupiter, Aviva and NPI (Henderson).

3. Black Rock New Energy Technology

Specialises in solar, wind, wave and hydrogen power and the associated technologies. It is available as an investment trust and rather volatile so prospective investors should be prepared for a few ups and downs over the years. It tends to do well when the oil price rises and everyone’s mind is concentrated on finding alternative solutions. Utterances from the White House have a similar effect for good or ill.

4. AEGON Ethical Equity Fund

An ethical fund which has never made any claim other than being a purely defensive fund – i.e. does not seek companies with especially pro-active environmental stances. It has however, consistently stuck to those criteria and has resisted the temptation of following the trend of other ethical funds that now include banks. It has also managed to keep its fund manager, Audrey Ryan, in place for the last eleven years.

5. Impax Environmental Leaders

This focuses on three key environmental sub-sectors – alternative energy and energy efficiency, water treatment and pollution control and waste technologies and resource management. It is the second such fund to be launched by Impax, the first being Environmental Markets.

The Worst:

1. Zurich Environmental Opportunities Pension Fund

A 7.6% holding in Shell, 5.9% holding in BP and a 4.3% holding in Rio Tinto would put this fund high on an environmental investor’s blacklist. BP may be developing alternative energy sources but this is a miniscule part of their business compared with the pollution caused by the Deepwater oil spill. How can these companies possibly be included in a fund with this name? Neither do the remaining companies in the top ten seem to embody much (if anything) in terms of offering environmental opportunities – HSBC, Vodafone (beloved by almost every fund manager, ethical and non-ethical), AstraZeneca, Standard Chartered, GlaxoSmithKline and Tesco. They may or may not be ethical but they certainly ain’t environmental.

2. Jupiter Environmental Opportunities – OEIC

Not such a serious offender as Zurich in as much as there is no sign of Shell, BP or Rio Tinto in the top 10 but 10% is held in an unholy trinity of banks – HSBC, Lloyds and Barclays – which, regardless of the debate on ethics, are hardly environmental. When Jupiter were quizzed by us a year or two ago on this subject the response was that these constituted the “Income” part of the fund’s name – an argument which would carry more weight if there was some evidence of the “Environmental” part of it in the portfolio as well.

3. Marks & Spencer Ethical – OEIC and ISA

Another disappointment made worse by the fact that it is using the brand of a company included in various ethical funds over the years for its good employee relations and generally positive record in other areas of Corporate Social Repsonsibility. 4.6% in Shell, 4.3% in BP. I suppose it doesn’t claim to be an environmental fund but how many people putting their money into an ethical fund would really be happy with holding these companies plus some of the other doubtfuls – Glaxosmithkline, Astrazeneca, HSBC and Standard Chartered?. The fund is run by Jupiter who really ought to know better.

4. Scottish Widows Environmental Investor

This was once the TSB Environmental Investor but we seem to have moved a long way from David Bellamy and the dolphins of 1988 to a fund in which 35% of it is invested in financials.

5. Prudential Ethical

Like Scottish Widows Environmental Investor it has over one-third of its money placed in banks and life insurance companies. Unlike Scottish Widows it doesn’t claim to be an environmental fund so isn’t overtly breaching the label quite as badly – provided you agree that banks are ethical. The Pru also gets a mention for being part of restrictive setup – members of the Teachers’ pension scheme who might have thought they were investing in an ethical fund as part of an additional pension arrangement and then decide they don’t like it (or any other fund offered by the Pru) can’t actually transfer their existing holding to another plan even though they might have stopped their contributions.

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