Make Money With A Clear Conscience

Saving and Making Money

21 September 2007 | 0 Comments

You can invest ethically without having to sacrifice performance.

At first glance, ethical investing seems like an attractive idea. It means you can invest in the stock market and sleep soundly at night if you believe investing in tobacco or defence companies is morally wrong.But there is a potential problem. Can ethical investors make decent profits? You might think that ethical investing strategies under-perform, but actually the evidence suggests that you can make a good return from ethical investing. However, before I look at performance figures, we should take a quick look at what "ethical investing" means. In this article I'm going to be focusing on investing via unit trusts, and in that sphere, different ethical funds have different approaches or mandates. But whatever the mandate, an ethical fund will avoid companies that fall outside its mandate. For instance, the well-known Jupiter Ecology fund has a policy of investing worldwide in companies which demonstrate a positive commitment to the long-term protection of the environment, and screening out those that don't.Following this to a logical conclusion, it also means the fund manager must sell shares which no longer meet the ethical criteria of the fund. It's this restrictive investment policy which leads some observers to conclude that ethical funds must, by their very nature, underperform. It's true traditional ethical funds routinely reject the stock of companies involved with tobacco, alcohol and gambling, to name a few, and undeniably there are some very profitable companies operating in these sectors. Non-ethical fund managers may have the advantage of a greater universe of stocks at their disposal. But I would argue that a fund which is managed ethically runs under a no more restrictive policy than one which can only invest in a specific geographic region or say, solely in undervalued companies.  There is also a lot of sense in the notion that a strong social, environmental or ethical record can boost shareholder value as a more ethical approach can boost brand loyalty and avoid reputational risk.More recently, ethical investment has developed to encompass a strategy called `engagement'. Instead of excluding companies which fail ethical criteria, some funds actively invest in companies with less than perfect ethical records with a view to using their clout as institutional investors to drive improvements in their business practices. It has been argued that engagement is nothing more than a diluted version of ethical investing, but by excluding unethical companies the status quo is preserved. Engagement is all about encouraging corporate social change. But to return to the main question, do ethical funds always perform poorly? I'm not going to argue the current best-performing funds are ethical because that isn't true. Many of the best-peforming funds over the last year have been focused on emerging markets. But equally you won't find all the ethical funds languishing at the bottom of the performance tables either. The table below shows how ethical funds compare against their non-ethical counterparts, index trackers and the FTSE 100.Ethical Funds Versus Non-ethical1 year3 years5 years10 yearsEthical Funds18.3%57.2%65.9%97.7%Non-ethical Funds13.7%52.3%67.1%103.4%Index Trackers15.5%59.1%67.1%81.7%FTSE 10013.2%48.0%41.9%43.5%Source: Lipper Hindsight/Investment, Life & Pensions Moneyfacts. % growth as at 1 July 2007.So on average ethical funds have done pretty well over the short term. They've beaten non-ethical funds over the last one and three years, and even beat the Foolish favourite, the index tracker, over the last year. Admittedly, ethical funds have fallen behind non-ethical funds over five and ten year periods, but there is less than a 6% differential betweeen the two over the last decade which you might feel is an acceptable lag for keeping your conscience intact.I think well managed ethical funds are certainly capable of holding their own. If you've always thought investing ethically and making money mix like oil and water, then it's time to think again. More: Does It Pay To Be A Goody Two Shoes?

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