Investing responsibly can be confusing. Learn about the difference between ethical, socially responsible and environmental funds and what they are good for.
 | Socially responsible investors have developed a number of different strategies to pick the right stocks for their funds and make money responsibly |
Ethical Investments – Values First
Religious groups like the Quakers and the Methodists are usually credited as the first to consequently apply ethical principles to their business engagements. When investing, they avoided so-called “sin stocks,” such as alcohol or gambling. While this might sound good to the morally concerned, it clashes with the long-held theory that limiting the diversity of investments also reduces profit and exposes one more to market volatility.
Among the first examples to go beyond simple “avoidance-investment” was the Pax World Fund. This SRI fund was launched in 1971 by two Methodists who tried to boycott companies profiting from the Vietnam War. The company’s motto, ”enable investors to do good while doing well,” translated into an investment policy that, apart from avoiding “sin stocks,” is based on a process called social screening to avoid unsustainable businesses.
Socially Responsible Investments – Choosing Best of Class
About a decade ago, this negative selection process was complemented by a best of class approach - positive social screening. “The agenda broadened considerably," explains Andy White of Innovest Group. "It is not just about whether a company makes armament or not. Now, there are also other issues people are concerned about like environmental protection or labor rights down through the supply chain.”
Negative screening, avoiding certain fields of business and the respective companies, has always been seen as problematic in terms of return on investments, explains White. “Ethical investing has always been very much a small niche part of the market and this has never changed very much,” he says. Linking it to a best practice that holds the potential of above average growth was meant to make up for this drawback.
Environmental Funds - Going Mainstream
One of the latest trends in the market are thematic funds specializing on the environmental sector such as Jupiter’s Environmental and Ecology Fund, Merrill Lynch's New Energy or Allianz RCM Global EcoTrends. Focusing on new technologies, these funds generally invest in small and medium enterprises that are pushing the technologies further. Shares from such companies profit from the public attention on climate change and talk about takeovers through market leaders. But they are also more volatile. About a year ago solar power companies had been in great demand, but the sudden realization that the technology is less advanced than initially thought had sent the sector plunging.
editor: Thilo Kunzemann
publishing date: March 16, 2007
