THE SUNDAY TIMES (UK): Funds that prove ethics and investment can mix: “CERTAIN companies attract the wrath of the socially aware. Nestlé, Nike, Barclays bank, Coca-Cola and Shell are among the global brands that have suffered from organised consumer backlashes.” (ShellNews.net) 13 March 05
Socially responsible investing is increasingly popular in America but there are few Irish
options for buyers, says Douglas Dalby
March 13, 2005
CERTAIN companies attract the wrath of the socially aware. Nestlé, Nike, Barclays bank, Coca-Cola and Shell are among the global brands that have suffered from organised consumer backlashes.
Investors can show their displeasure by refusing to buy into companies of which they disapprove. This has led socially responsible investment (SRI) to become increasingly popular in America — and a popular topic in Ireland.
What constitutes “ethical investing” is open to debate. For many people, however, it involves avoiding putting money into nuclear power generation, weapons manufacturers, supporters of oppressive regimes, firms that employ child labour, companies that use animals to test cosmetics and those that pollute the environment.
Eiris, a British company specialising in ethical investment research, says over the past 25 years more people have been taking ethical considerations into account when making decisions about what to do with their money. “Socially responsible investors (both individuals and organised groups such as pension funds) are increasingly using their shares as a way of influencing corporate behaviour,” it said.
Since 1997, American assets in professionally managed social investment funds are believed to have doubled and now account for nearly 13% of the total. In Britain, there are 38 ethical investment funds. So far, there are four funds available to Irish investors.
Ethical investing hardly features on the radars of most Irish investors, but the likelihood is that this type of investment will become increasingly popular as we follow the lead of the Americans.
People have been able to invest in ethical stocks for almost 20 years but until recently there were only two Irish-managed funds available to individual investors: the Stewardship fund from Friends First and the Socially Responsible fund from Hibernian Investment Managers. These have recently been joined by two funds from Allied Irish Banks, which had been open only to charities and pension funds.
Along with the standard investment criteria, such as a stock’s valuation relative to the market or the strength of its management team, ethical fund managers also need to assess possible equity purchases on an SRI basis. Not only does this disbar those firms that engage in activities seen as distasteful but it also favours companies that have an equal employment policy or invest in their local community.
Many fund managers still appear to hold the view that the terms “ethical” and “investment” are mutually exclusive, arguing that they shouldn’t have their hands tied by considerations other than profit. There has been a perception that ethical funds do not provide comparable returns to other managed funds but according to Paul Hurley, the group marketing manager at Friends First, this is a misconception. “We have a very competitive fund that stands comparison with the index and with our other managed products,” he said.
Hurley said the one-year return on the Stewardship fund is 10.5% compared with 9.3% on other Friends First managed funds. Over a two-year period, returns were 15.8% and 14.9% respectively. As of February 2005, however, assets under management in the ethical fund were only €12.5m out of total funds under management of €4 billion.
Hurley points out that ethical investment does not represent some kind of anti-capitalist movement. On the contrary, it encourages companies to conform to best practice by linking their actions directly with investment. The Stewardship fund includes blue chips such as Vodafone, Tesco and Statoil.
Personal conviction rather than the pursuit of mammon was the catalyst behind Ray McNicholas’s decision to set up Ethical Financial in Dublin in 1996. Although specialising in such investment, he cautions that it is not for everyone.
“They are all equities-based, so they are more exposed than other funds — you would certainly have to think twice before recommending them to someone on the 50- or 55-year-old mark,” he said.
The minimum premium on an ethical life-assurance plan is €40 a month and €70 a month on a pension plan. Although he argues that returns are comparable with other funds, McNicholas acknowledges that ethical investment comes at a premium, with an administration charge of 1.125% compared with 0.75% in most funds because of research costs to find suitable companies.
Paul McCarville, a director of Setanta Asset Management, said that although individuals had become interested in ethical investments, charities continued to be the driving force.
“Generally, Irish people are a lot further behind the curve in understanding the whole investment market — I have had only two inquiries from individuals in the past five years, but charities insist on it,” he said.
While certain sectors such as arms manufacturing, tobacco, alcohol, pornography and nuclear power will always be likely to fall into the forbidden category, McCarville says there is a stage “where aspiration has to meet reality”.
“We would be allowed to invest in companies where 5% of their total revenues were derived from certain practices that could be declared unethical,” he said.
Noel Minogue, the director of marketing and sales at AIB Investment Managers, said the bank had been operating ethical funds for several years but they had been targeted solely at institutional investors, principally charities and pension funds. In the past couple of months they had opened to retail investors but the minimum principal was €10,000 and some institutions were reluctant to set up a particular fund.
“To justify it many institutions would have to look at bringing in at least €20m to €25m over time to make the costs viable,” he said.