Socially responsible investing (SRI) seeks to get a big bang for your buck while bringing about social change. It is also called social investment, sustainable, socially conscious, ‘green’ or ethical investing. SRI funds do better than you think. Here’s why:
1. Many are Grade A+ performers
SRI funds have been around long enough to make hard performance judgements. Do they pay off? “Absolutely,” says William Hunter of Edinburgh-based Hunter Wealth Management.
He says that between the start of 2012 and end of 2016 Premier Ethical, which invests in UK companies, returned 102.91%. “That’s a doubling of your money. Another fund, Royal London Sustainable World,” he goes on, “returned 99.6% in that time period. You can’t be unhappy with that.”
In 2016 research multi-manager investment company Architas examined the performance of ethical funds over a 10-year period. More than 50% outperformed the FTSE All Share.
2. They’re more broadminded than you think
Investing in Dove shampoo and Lipton tea (Unilever) doesn’t shout ‘ethical’ to everyone. But the maker of Flora margarine and Knorr stock cubes pop up in a range of SRI funds.
Other well-known brands include Compass Group, Worldpay, Legal & General and the London Stock Exchange – not to mention a bunch of high-street retailers including Asos.
Some stick to investing in companies that have a more robust ethical record than competitors. “They may be green-neutral,” says William Hunter. “A lot are companies that aren't causing damage as opposed to companies that might clearly be damaging the environment.”
Meanwhile, some companies that have no obvious ‘green’ credentials may simply have a good environmental track record. They may just choose to be low key about it.
3. They’re future-proof
Or as near as you can reasonably expect. SRI funds aren’t all about solar panels and climate change. Some invest in emerging markets where governance isn’t always great. But broadly, SRI funds are forward-looking.
Their fund managers are often examining global trends. They’re figuring out the best companies that will benefit from long-term shifts in consumption, demand and demographics. This is especially in areas such as water treatment, communications, agriculture and waste management (‘money in muck’).
A relative newness of some of these areas means there’s opportunity for value creation, possibly boosting returns further. So value and growth potential.
4. There’s a high price for sin
Back in 2010 the Deepwater Horizon oil rig disaster in the Gulf of Mexico saw the worst oil spill in US history. BP saw 50% of the value of its shares wiped out between April and June 2010. The tragedy, which killed 11, decimated many people’s savings.
BP’s dividend was slashed (later restated), shocking private and institutional investors; no major UK occupational pension dared go without the dividend oil titan. Many have now ejected out of fossil fuels.
Even the US Rockefeller Foundation (the Rockefeller fortune was built on Standard Oil) has dumped the asset class.
At the time of writing, late March 2017, BP’s share price had lifted to 456p but remains, almost seven long years later, 25% down on its 641p April 2010 value. Most SRI funds do not invest in oil or extraction or other high-risk areas.
5. They can do the distance
If you’re investing for your dotage, you’re going to be investing long-term. You want to get it right (and prove it’s fine to be in stocks and have a clear conscience).
However, Jason Hollands, managing director at Bestinvest asset management, warns of periodic setbacks – like any other fund or asset class.
“Very few fund managers have a style or approach that works well in all conditions. But there’s no reason why, over a fuller cycle, they [ethical funds] will offer perfectly good returns.”
But stay clear of single strategy SRI funds, adds William Hunter. He says they may invest only in one area or direction. “Look at multi-asset funds that are spread over shares, bonds, cash and gilts. Not every sector does well at the same time. Index trackers are also fine.”
So diversify. You don’t have to be 100% invested in SRI funds; many investors have a mix.
6. You’re backing the good guys
Back in the 18th century, Quakers had strict rules about investing in the slave trade.
Roll forward to 1962 and Martin Luther King started pioneering work with Operation Breadbasket, an organisation that put pressure on white businesses to take on more black contractors. Corporation boycotts were organised.
Then, in the 1980s, London’s South Africa House became the target for the anti-apartheid movement taking in highly visible protests against Barclays, Shell and BP; Barclays’ share of the UK student bank account market was hammered.
''World opinion counts,’’ said Sir Timothy Bevan, chairman of Barclays in November 1986, announcing the sell-off of its South African unit. ‘’And world opinion has changed quite a lot.” Investing for good continues to evolve.
7. But – achtung! – be careful
There’s no agreed definition of an SRI fund or how they’re measured (some ‘ethical’ funds even hold oil companies in their portfolio).
Up to 2015 many SRI funds had Volkswagen in their holdings. The German car giant, then an FTSE4Good member, scored highly on several benchmarks. Specifically ESG – environmental, social and governance. Or, rather, just the first two.
VW’s loose grip on governance allowed it to cheat consumers through engine management software that suggested their cars were cleaner than they really were. Post-crisis, the value of VW shares crashed.
In other words, pay attention not just to environmental and social factors. A company’s corporate governance is the biggest red flag of all.