What makes a responsible investment?

Consumers are increasingly concerned about climate and social injustice. The retail industry has been quick to capitalise on the rise of ‘conscience consumerism’.

There can be little doubt that historians will look back on the past three years as the time when environmental issues became mainstream. The catalysts for change started in 2006 with the unexpected box-office success of Al Gore’s An Inconvenient Truth. This was followed in swift succession by the Stern Report, which highlighted the economic consequences of climate change, and the Intergovernmental Panel’s Climate Change Report , which established beyond reasonable doubt that human activity is contributing to climate change.

Such was the media attention these received that the British public’s awareness about climate change nearly doubled in 2007 compared with 2006 and two out of three people now say they are more likely to buy from a company that is taking action to tackle it ¹ . It is not just green goods that are flying off the shelves. Ethical shopping has doubled in the past five years, according to the Co-op’s Annual Ethical Consumerism Report, with UK sales of Fairtrade products up 61% in 2007 over the previous year. The UK’s biggest retailers are competing with each other to see who can be the greenest and fairest of them all, with Tesco’s commitment to introduce carbon labelling and Marks and Spencer’s Plan A sustainability programme setting the pace.

The debate for 2009 is whether the global economic downturn will reduce the impetus for companies to improve their sustainability credentials. The state of the economy is impacting on consumer spending, but The Co-op believes economic downturn will not hit sales of ethical or environmentally-friendly food products, arguing that consumers’ emotional attachment to many ethical products is now well embedded so they will have an advantage over other products in a downturn. In addition, some ethical choices appeal to consumers’ economic sensibilities as much as to their emotions, for example energy saving products with an economic payback would appear well-placed to deal with the economic climate. If the consumer voice can maintain the pressure on companies to act more responsibly then there will be no excuse for companies not to continue with their CR programmes unabated.

How is the Socially Responsible Investment (SRI) industry responding to people’s desire to make a difference through their investments?

Consumers are beginning to realise they can make a difference not just by what they put into their supermarket trolley but through how they invest their money. Growth in green and ethical investments has been equally impressive. £8 billion is now invested in UK ethical funds ² and the number of ethical funds on offer is approaching 100, up from a couple of dozen a decade ago.³

As the UK’s market leader in ethical investment, Friends Provident has benefited more than most from this consumer surge in interest. Investment in the Stewardship ethical fund range which Friends Provident founded more than twenty years ago topped the £3 billion mark at the end of 2006 and continued to perform well in 2007, although this dipped in 2008 to £2.2 billion, following the general fall in asset prices. We have added new funds to supplement our range of market-leading Stewardship products, including the AGEON Ethical Corporate Bond, Credit Suisse Multi Manager Ethical and Jupiter Ecology.

Choice and performance

Investment approach and risk profile are critical factors driving consumers’ decisions, but for ethical consumers a range of choices to suit their different social, ethical and environmental concerns is equally important, if not more so. For many people, ethical screening of funds, pioneered by Friends Provident in 1984, is sufficient. This reassures them that their money is not being invested in sectors or firms that make or sell products or services they disapprove of, such as armaments, gambling and tobacco.

However, some people prefer not to invest in our 'Stewardship' range of ethical funds, though they still want their investments to be a positive force for good. That is why, in 2000, we adopted reo®, which stands for 'responsible engagement overlay.' This actively encourages the companies in which we invest our customers’ money to become more responsible, either by engaging them in discussion on environmental, social and governance (ESG) issues, or by using our influence as shareholders in companies to vote for change.

We are now in a new phase in the evolution of responsible investment, as consumers look to invest their money in companies that directly tackle climate change issues, such as renewable energy, recycling and green technology. Friends Provident was among the first to provide products to cater for this emerging trend, introducing new SRI products in 2007 which provide opportunities to invest in positive solutions to environmental and social problems.

Increased consumer interest in SRI has also led to more companies raising their standards and demonstrating their green and ethical credentials, which has also been spurred on by the number of organisations that have been set up to promote a principled approach to investing. These include the Principles of Responsible Investment (PRI, a UN initiative that has signed up around 160 institutional investors), the Equator Principles (a set of standards for banks to manage social and environmental issues in project financing), The Carbon Disclosure Project (the world’s largest investor coalition) and more recently, ClimateWise.

Availability and advice

With so many SRI products now on the market, the challenge has been to ensure there are enough independent financial advisers (IFAs) with SRI knowledge and expertise to meet the demand.

A survey in 2005 by the UK Social Investment Forum (UKSIF) found that only half of all independent advisory firms asked clients about ‘ethical concerns’, and over 70% of them provided no training for advisers on responsible investment at all. This prompted the creation of an industry-wide programme called Retail Revolution, organised by UKSIF with Friends Provident as lead funders, to provide training support on SRI products for financial advisers.

Over 9,000 Responsible Investment Toolkits for Financial Advisers were sent out and by January 2007 the number of IFAs listing ‘ethical investment’ had doubled from 6% to 12%. However, three times as many consumers sought advice on ethical investments in January 2007 compared with two years previously, so there is still a way to go to encourage more IFAs to embrace ethical investment.

The challenge now is to make the public more aware of what products are available and who to go to for advice. This prompted the staging of the UK’s first ever ‘National Ethical Investment Week’ from 18-24 May 2008, co-sponsored by Friends Provident. It also marks the first time the financial services industry has worked together, under the umbrella of UKSIF, to raise consumer awareness of green and ethical investment choices.

1. Source: Carbon Trust
2. Source: EIRIS, December 2007
3. Source: EIRIS, February 2008

Friends Provident Ethical Concerns Barometer 2007

The UK's top 10 ethical concerns in 2007 are as follows:

Provision for the elderly
War
Immigration
Pollution of land, sea or air
Child Labour
Energy conservation & renewable energy
Poverty (both adult and child) in developed countries
Climate Change
Waste management and recycling
Human Rights