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ORP33 - An Analysis of European Ethical Funds
ACCA Occasional Research Paper No. 33
This paper has analysed 20 ethical investment funds from five European countries in detail through interviews with fund managers and ethical researchers. It was found that the first ethical funds in Europe were launched in Sweden and the UK. Indeed, in most other European countries ethical funds became more common only in the 1990’s. A number of Churches and the environmental movement played a key role in starting many of the pioneering ethical funds. The interviews demonstrated that both positive and negative ethical criteria differ significantly between funds. The ethical funds followed one or both of the following strategies:
1. Ethical screening – or use of negative and/or positive ethical criteria
2. Engagement with company management – or turning the bad firms into good.
Especially, the funds pursuing both strategies simultaneously would seem to meet the objective of incorporating values into the investment process. These strategies would benefit from an ethical advisory committee with external experts and active communication with unit holders (eg newsletter and answering queries from unit holders). Examples of funds adopting all strategies and actively communicating with their unit holders were the Friends Provident Stewardship Unit Trust, the Jupiter Ecology and the NPI Global Care funds. In-house research expertise on ethical issues complemented by external research was a common factor for many of the leading ethical funds such as CIS Environ. Depending on which strategy the funds use and factors such as; how the funds put their ethical policies into practice, the motivation for entering the market place and other considerations, the ethical funds were classified as following either a twin track, commercial ethic or integrated approach. Among the sample funds the twin track approach was most common, but the most common approach among all European ethical funds is the commercial ethic and the integrated is the rarer approach. Many ethical funds faced some tension between the ethical and the financial performance. An example of a current sensitive issue is genetically manipulated crops, some ethical funds avoid companies producing these, but others have not yet formulated a policy on this issue.
A number of studies have demonstrated that ethical funds may outperform or perform as well as similar non-ethical funds26. The conclusion is thus that ethical funds seem to offer a viable alternative to ordinary funds for those investors who do not want to divorce their values from their investments. It is worth noting that some interviewees mentioned the Triodos bank as an alternative for those with environmental concerns, and authors such as Moore (1988) have argued that investment in Shared Interest and Traidcraft provide an alternative investment for ethical investors.
Finally, some future trends were identified.
1. More pension money will be invested ethically.
2. Mainstream players will increasingly launch ethical investment products.
3. Engagement with companies on ethical issues is becoming more common.
People in Europe will start to influence how their pension money is invested. The UK is leading the field with 32 ethical pension funds in May 200127. Due to new legislation in the UK an increasing number of company pension funds have also adopted ethical investment policies (UKSIF, 2000a). It is expected that growth in this area will continue in the UK and in other European countries such as Sweden.
Another trend is the increasing number of mainstream players entering the market. A recent example in the UK was the launch of six ethical funds by Morley, the fund manager for CGNU, the UK’s largest insurance group. Other examples include the launch of the FTSE4Good ethical indices in the summer of 2001 and a New Energy Technology Fund from Merrill Lynch, a big name in global fund management28.
Finally, engagement with company management on ethical issues is increasing. For example Friends Ivory & Sime now have 11 people working on ethical research and engagement. It also seems that shareholder activism as a form of engagement is increasing, as the BP/Amoco annual general meeting in April 2001 demonstrated.
Environmental technology funds
Funds which seek to invest primarily in companies that provide environmental technologies and services. The companies typically are involved in recycling, renewable energy and waste management. Funds in this category include the Swedish SEB Miljöfonden, Wasa Miljöteknikfonden and previously the Swiss Orbitex Health and Environment and the UK Commercial Union Environmental Trust. These funds focus on certain sectors.
Ethical funds
An ethical fund uses non-financial criteria in its security selection process. These criteria range from eco-efficiency to exclusion of companies producing alcohol, pornography, tobacco or weapons. Certain companies and or sectors are therefore excluded for ethical reasons. In addition there is often a positive bias towards certain sectors such as renewable energy and a focus on companies with progressive environmental and ethical policies. Examples of ethical funds include: Friends Provident Stewardship Unit Trust, NPI/Henderson Global Care Unit Trust, Sovereign Ethical, Scottish Equitable Ethical, Murray Johnstone Ethical World, Gyllenberg Forum (Finland), Banco Samarit Fond (Sweden), ASN Aandelensfonds (Holland), ABF Het Andere Beleggingfonds (Holland), Bacob Defensive Stimulus (Belgium). Some ethical funds have an environmental focus, although many other ethical issues are considered. Examples include: CIS Environ, Jupiter Ecology, KBC Eco Fund (Belgium), KD Fonds Ãkoinvest (Germany), Ãkovision (Germany), Robur Miljöfonden (Sweden). This latter group of funds has sometimes been referred to as environmental or green funds.
Socially responsible funds
The UK Social Investment Forum defines socially responsible investing as ‘investment that combines investors financial objectives with their commitment to social concerns such as social justice, economic development, peace or a healthy environment’. This term is therefore very similar to the notion underpinning ethical investing, and for the purpose of this paper the two are treated as synonymous. The established term in Europe has been ethical fund, whereas socially responsible investment fund has been the established term in North America.
Sustainable funds
All economic activity has an environmental impact, which in most cases is negative. It is therefore difficult to see how even the most ethical fund could be fully sustainable environmentally and socially. Some funds – by virtue of addressing environmental, ethical and social issues – call themselves sustainability funds. For the purposes of this paper these funds are categorised as ethical funds. Examples include: Sustainable Performance Group, Oekosar Sustainable Development in Switzerland and Storebrand/Scudder Principle World Fund in Norway. There are also funds based on the Dow/Jones Sustainability Index such as Leonia Arvo in Finland. None of these are fully compatible with sustainable development.
Kreander, 2001
Executive summary
This paper has analysed 20 ethical investment funds from five European countries in detail through interviews with fund managers and ethical researchers. It was found that the first ethical funds in Europe were launched in Sweden and the UK. Indeed, in most other European countries ethical funds became more common only in the 1990’s. A number of Churches and the environmental movement played a key role in starting many of the pioneering ethical funds. The interviews demonstrated that both positive and negative ethical criteria differ significantly between funds. The ethical funds followed one or both of the following strategies:
1. Ethical screening – or use of negative and/or positive ethical criteria
2. Engagement with company management – or turning the bad firms into good.
Especially, the funds pursuing both strategies simultaneously would seem to meet the objective of incorporating values into the investment process. These strategies would benefit from an ethical advisory committee with external experts and active communication with unit holders (eg newsletter and answering queries from unit holders). Examples of funds adopting all strategies and actively communicating with their unit holders were the Friends Provident Stewardship Unit Trust, the Jupiter Ecology and the NPI Global Care funds. In-house research expertise on ethical issues complemented by external research was a common factor for many of the leading ethical funds such as CIS Environ. Depending on which strategy the funds use and factors such as; how the funds put their ethical policies into practice, the motivation for entering the market place and other considerations, the ethical funds were classified as following either a twin track, commercial ethic or integrated approach. Among the sample funds the twin track approach was most common, but the most common approach among all European ethical funds is the commercial ethic and the integrated is the rarer approach. Many ethical funds faced some tension between the ethical and the financial performance. An example of a current sensitive issue is genetically manipulated crops, some ethical funds avoid companies producing these, but others have not yet formulated a policy on this issue.
A number of studies have demonstrated that ethical funds may outperform or perform as well as similar non-ethical funds26. The conclusion is thus that ethical funds seem to offer a viable alternative to ordinary funds for those investors who do not want to divorce their values from their investments. It is worth noting that some interviewees mentioned the Triodos bank as an alternative for those with environmental concerns, and authors such as Moore (1988) have argued that investment in Shared Interest and Traidcraft provide an alternative investment for ethical investors.
Finally, some future trends were identified.
1. More pension money will be invested ethically.
2. Mainstream players will increasingly launch ethical investment products.
3. Engagement with companies on ethical issues is becoming more common.
People in Europe will start to influence how their pension money is invested. The UK is leading the field with 32 ethical pension funds in May 200127. Due to new legislation in the UK an increasing number of company pension funds have also adopted ethical investment policies (UKSIF, 2000a). It is expected that growth in this area will continue in the UK and in other European countries such as Sweden.
Another trend is the increasing number of mainstream players entering the market. A recent example in the UK was the launch of six ethical funds by Morley, the fund manager for CGNU, the UK’s largest insurance group. Other examples include the launch of the FTSE4Good ethical indices in the summer of 2001 and a New Energy Technology Fund from Merrill Lynch, a big name in global fund management28.
Finally, engagement with company management on ethical issues is increasing. For example Friends Ivory & Sime now have 11 people working on ethical research and engagement. It also seems that shareholder activism as a form of engagement is increasing, as the BP/Amoco annual general meeting in April 2001 demonstrated.
Environmental technology funds
Funds which seek to invest primarily in companies that provide environmental technologies and services. The companies typically are involved in recycling, renewable energy and waste management. Funds in this category include the Swedish SEB Miljöfonden, Wasa Miljöteknikfonden and previously the Swiss Orbitex Health and Environment and the UK Commercial Union Environmental Trust. These funds focus on certain sectors.
Ethical funds
An ethical fund uses non-financial criteria in its security selection process. These criteria range from eco-efficiency to exclusion of companies producing alcohol, pornography, tobacco or weapons. Certain companies and or sectors are therefore excluded for ethical reasons. In addition there is often a positive bias towards certain sectors such as renewable energy and a focus on companies with progressive environmental and ethical policies. Examples of ethical funds include: Friends Provident Stewardship Unit Trust, NPI/Henderson Global Care Unit Trust, Sovereign Ethical, Scottish Equitable Ethical, Murray Johnstone Ethical World, Gyllenberg Forum (Finland), Banco Samarit Fond (Sweden), ASN Aandelensfonds (Holland), ABF Het Andere Beleggingfonds (Holland), Bacob Defensive Stimulus (Belgium). Some ethical funds have an environmental focus, although many other ethical issues are considered. Examples include: CIS Environ, Jupiter Ecology, KBC Eco Fund (Belgium), KD Fonds Ãkoinvest (Germany), Ãkovision (Germany), Robur Miljöfonden (Sweden). This latter group of funds has sometimes been referred to as environmental or green funds.
Socially responsible funds
The UK Social Investment Forum defines socially responsible investing as ‘investment that combines investors financial objectives with their commitment to social concerns such as social justice, economic development, peace or a healthy environment’. This term is therefore very similar to the notion underpinning ethical investing, and for the purpose of this paper the two are treated as synonymous. The established term in Europe has been ethical fund, whereas socially responsible investment fund has been the established term in North America.
Sustainable funds
All economic activity has an environmental impact, which in most cases is negative. It is therefore difficult to see how even the most ethical fund could be fully sustainable environmentally and socially. Some funds – by virtue of addressing environmental, ethical and social issues – call themselves sustainability funds. For the purposes of this paper these funds are categorised as ethical funds. Examples include: Sustainable Performance Group, Oekosar Sustainable Development in Switzerland and Storebrand/Scudder Principle World Fund in Norway. There are also funds based on the Dow/Jones Sustainability Index such as Leonia Arvo in Finland. None of these are fully compatible with sustainable development.