Ethical Past Performance

Ethical investment need not mean lower rates of return. It is now increasingly the case that companies which demonstrate strong SRI track records have performed favourably to mainstream indicies. Over the longer term ethical funds have demonstrated strong performance while investing in well run, progressive companies.

Positive criteria often indicate well-managed and forward-looking businesses- there is often a link between a company with a good track record of SRI issues and one which is well run in other areas of the organisation. Responsible corporate behaviour is a key element of competitiveness. Industries that harm society or the environment are being hampered by tightening Government intervention as well as adverse publicity.

The additional research and auditing processes carried out by ethical fund analysts can have wider implications in terms of the information given to fund managers before stockpicking. This can improve the quality of the fund as a whole, compared to non ethical funds where additional diligence has not been undertaken.

SRI funds have often performed as well as, and sometimes significantly better than, non ethical funds. Ethical funds, rather than being a niche backwater of investment, have become prominent and able to attract and retain some of the industry's most talented fund managers who remain in their positions on principle. Hence investors have started to choose ethical funds based on, not in spite of, their performance.

Many ethical funds are unable to invest in mining, pharmaceutical and natural resources funds - sectors which can outperform. However, as companies have started to take environmental considerations more seriously, there is a wider investment universe for fund managers to choose from. The impact of global warming and climate change have contributed to increases in demand for renewable energy sources. Ethical sectors such as renewable energy and transport solutions are sectors which have been buoyant. Green energy funds are often highly reactive to oil prices. When crude is expensive, alternative energy share prices tend to rise as their energy looks relatively good value. If oil prices drop, this can have a detrimental impact on the competitiveness of green energy companies, causing their shares to suffer.

It is essential to research and select fund managers who are capable of demonstrating consistent outperformance relative to their benchmarks. It also emphasises the need to diversify. Mergers and Acquisitions are a particularly prevalent occurrence within the SRI sector, since their exposure to smaller companies means that their share price can be inflated by takeover bids. Often ethical funds have big holdings in young, high-growth companies which can be susceptible to higher than average rates of volatility. SRI funds which yield an income, such as Jupiter's Environmental Income fund, tend to invest in larger companies.

<<Insert>> MM table of past ethical performance. Compare this with non-SRI funds and rank in relation to respective sectors NOT other SRI funds.

One of the best performing ethical fund across unit trusts, insurance funds and pension funds is the Aegeon Ethical Equity fund, which is accessible as a pension via Scottish Equitable. This fund happens to have the largest number of negative screening criteria applied to it. Hence there does not seem to be a connection between more rigorous negative screening strategies and underperformance. This is also evident with Norwich Union's range of Sustainable Future's funds which also have some of the most comprehensive negative screening strategies, yet has outstanding past performance results. However, it does not necessarily follow that rigorous screening of negative criteria means better results. Another outperforming ethical fund, CIS, has one of the fewest negative screening criteria. Similarly, the Jupiter Environmental Income fund screens out very few negative factors, yet has performed particularly well.

A study from the independent environmental researchers Trucost assesses UK investment funds and calculates the carbon intensity of their holdings. This is termed a "carbon footprint". In its report "Carbon Counts: The Trucost Carbon Footprint Ranking of UK Investment Funds.", June 2006, it concludes that most SRI funds have carbon footprints significantly lower than the FTSE All Share. The best performer was the Scottish Widows Environmental Investor with a rating of 337 CO2 tonnes weighted by market value. This compares to an average FTSE Allshare rating of 1133 tonnes. Its study found no link between low carbon emissions and reduced returns.

Trucost have also developed a "Carbon Optimised Portfolio" which mirrors the sector weighting of the FTSE 350 index but rebalances companies’ weightings within the index with overweighting of less carbon intensive companies and underweighting of more carbon intensive companies. The result is a portfolio which has the same returns as the index with a tracking error of 0.5% but a carbon footprint 25% lower than the FTSE 350. This helps to demonstrate that performance need not be compromised by environmental concerns. "

Trucost also estimate that if a tracker fund went underweight in high carbon emitting stock and overweight in low carbon emitting shares, past performance could be matched, whilst carbon emissions could be reduced by 25%. This theory was successfully back tested as far as 1988.

Over the past 3 years, the average ethical fund has grown by 63.6% as against the average non-ethical fund, which has delivered a return of 59.8%. Over 5 years, ethical funds have returned an average of 60% as against the market as a whole which returned 52.3%. <<Can be volatile- comment.>>

Ethical funds took three of the top 10 positions awarded by the Investment Management Association's UK All Companies sector last year.