Green's in this spring

"Green" investments will be a major area in which Asset Managers will be concentrating their marketing and, indeed, fund management resources in 2002. This article hopes to give you some insight into what problems may exist for investors who want good quality investment returns, but do not wish to invest in companies that harm the environment.

If there is one area of investing that brings about vociferous debate more than any other it is ethical investments. We would all like to save the world, or at least play our part in doing so. However, how many of us want to do so by limiting our investments to ethically acceptable ones?

Difficult isn't it, deciding what is more important? A good return which will allow us and our families to achieve the things we want, or perhaps a lesser return for ourselves, but the nice feeling that we are supporting companies that are not doing things which might harm people, the environment or the planet.

I mention a lesser return because, when compared to the market as a whole, very few ethically pure funds have consistently been in the top performers. Indeed, the most contentious issue is what actually constitutes an ethical company or investment.

At present, it is estimated that 13% of assets in the US are managed using socially responsible criteria, compared with 9% in the UK, 8% in France, 6% in Germany and 0.8% in Italy! These figures are likely to rise, especially in Europe where people are suddenly becoming more ecologically aware since Mr Bush decided to renege on his predecessor's acceptance of the Emissions Treaty.

What is acceptable?

Perhaps you would like to invest into an environmentally friendly fund or company. Your first problem is deciding what an ethically pure fund actually is? The Ethical Investment Research Service (Eiris) excludes companies that derive income from gambling, have a poor track record on pollution, are involved in the armaments trade or produce nuclear power (supposedly one of the cleanest forms of energy) and finally, that more than 10% of their turnover is derived from the sale of alcoholic beverages or tobacco.

Mutual Funds tend to be split into "dark green" and "light green" sectors. The dark green sector, typically invests in companies that provide solutions to issues such as pollution or climatic change. Most of these funds are invested in smaller technology companies, and were doing well up until last year, but have now fallen in value along with the rest of the sector. This may account for their fall in popularity recently. The light green sector takes a "best of sector" approach and then chooses companies, which have an on-going commitment to reducing the impact of their practices on the environment.

The difficulty is that a company which meets the criteria this year may not do so next year. For instance, it may have won a contract with a "non environmentally friendly" company. This could well make the company more profitable, but unacceptable to the fund manager, or you, as an investor.

What about Technology?

Many investors feel that they are safe with a technology company and yet many innovations have been derived from, or will be used for, military purposes. For example, probably the best performing technology fund over the last year has been the Circus Capitals fund. This fund invests 25% of its assets into a joint venture with DERA (the UK Government Research Agency) which was set up for military purposes. However, the joint venture uses this research to develop such innovations as a test for mad cow disease, which identifies whether a cow has the disease without having to kill it first. Surely, a step in the right direction and ecologically friendly to my mind. However, this technology is derived from military technology.

Similarly, healthcare products should be considered "green" and yet there is the debate as to whether testing of drugs on animals is acceptable. One fund manager has stated that they will invest in funds which test products on animals, providing they are in the area of life saving drugs for humans.

Most funds avoid oil companies and yet a case can be made that conglomerates like British Petroleum are doing more to clean up the planet than many other "greener" companies.

Mobile phone companies are another sector which, on the face of it, are pure and yet there is now the debate as to whether radio masts and the phones themselves are "cooking our brains".

Difficult to decide

The reason for this article is to point out how difficult it is to invest in a pure, environmentally friendly fund or company, as there are really very few companies that fully meet all the criteria on a consistent basis, and if they did, the return to investors may be below their expectations to achieve their own personal goals.

Therefore, for those of you who are environmentally minded, you really have a difficult decision when it comes to investment. I hope that this article gives you some idea of the potential dilemmas one faces when deciding on ethical investments.

Ivan Doherty
ipd@ifg-asia.com

Ivan Dohety MLIA (dip) is Chief Operating Officer of IFG Asia. Part of The IFG Group PLC and registered with the Ministry of Finance in Japan to give investment advice.

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