Is the Ethical Fund Boom Sustainable?

Sustainable investment, once the domain of tree-huggers and environmentalists, is being described as the biggest financial mega-trend for half a century.

But is anything new on offer or are the big beasts of the City simply hoping the “do good” image of such investments will help rebuild the tattered reputation of the Square Mile?

Today, there are at least 700 investable companies involved in tackling climate change alone and big-name investors are falling over themselves to get involved in other ethical projects from education to health.

Last year, Stanley Fink, formerly of investment manager Man Group, set up Earth Capital Partners, a venture capital fund specialising in investments that address the challenges of sustainable development, such as climate change, water scarcity, food and energy security.

Fund manager Angus Forbes, who launched sustainability fund Natural Capital in November, says the move towards ethical and sustainable investments is the biggest opportunity for 50 years and will help rebuild the face of finance.

“It really is the most exciting development I have witnessed in my career, even above the institutionalisation of hedge funds in Europe in the early nineties,” said Forbes, who has spent 20 years in the City, most recently at hedge fund GLG.

“The pursuit of society to get us to a sustainable position will be the biggest capitalist trend of the rest of my lifetime. It must be similar to being an investor in the late forties and realising that consumerism was the 50-year trend”.

While some might dismiss the growth in interest in sustainable investing as “greenwashing”, others point to the involvement of formerly mainstream investors.

“There are two ways of looking at it,” said Toby Webb, managing director of business intelligence firm Ethical Corporation. “It is either a cynical move by companies caught with their pants down or these City guys are generally pretty bright and are good at spotting good investment opportunities. There is a huge opportunity for the City to invest in the early stages of environmentally innovative companies before they get snapped up for billions by big groups at a later date”.

According to the independent Ethical Investment Research Service, £6.8 billion is invested in UK ethical and environmental investment funds and 44% of investors take an active interest in the ethical credentials of financial products. In the past, one of the main criticisms of ethical and sustainable investments was that they were often too narrow and specialist for mainstream investors. Also, investing in new technology-based funds can lead to a bit of a rollercoaster ride.

However, according to Penny Shepherd, chief executive of sustainable investment and finance association UK Social Investment Forum (UKSIF), green and ethical investments are just like any others. “The point is to benchmark them against any other investment in a portfolio,” she said. “It is not about whether an ethical investment pays off or not. It is about whether any investment pays off”. One of the other perceived problems in ethical investing is that there is no common terminology in the multitude of funds on offer and some have very different interpretations of sustainable and ethical.

Mike Fox, head of UK equities at Co-Operative Asset Management, which has been running sustainable funds since 1990, said investors must do their own research. “Sustainable and ethical are nebulous terms,” he said. “Everyone has a different view on what they mean. Generally, ethical means the avoidance of negatives, for instance, not investing in things like oil or mining while sustainable means doing something good for society, such as raising standards of healthcare. What is certain is that how you make money today is as important as the amount of money you make. The environment, welfare and corporate governance will be the defining trends of the future”.

This article first appeared in on 11 January 2010.