A new sustainable investment fund launched by Co-operative Investments – part of Co-operative Financial Services – illustrates the ‘co-operative difference’ when it comes to making money for investors.
Zac Hocking, head of investments at Co-operative Investments, says: “We screen out tobacco, armaments, nuclear power, oil production and some other things – including whether a company operates in countries where human rights are not respected.”
But, he adds: “One of the things we are keen to explain is what the fund does invest in, rather than what it does not. At present, ethicals represent just 2% of the fund market. That is because typically they are not often directed at mainstream investors. People think there must be some kind of cost to this. We are saying no.”
While Hocking insists there does not have to be a cost to investing ethically, he is dubious about the quality of reseach that suggests it produces better financial returns. “It depends how you interpret the data,” he says. “You can argue it both ways. They can produce just as good – or just as bad – performance as other funds.
“There are times when certain funds perform better. Typical funds do well when the stock market does well. When it falls it can go the other way. You find ethical funds are not terribly exposed to banks, so they avoided all this carnage.”
Hocking accepts that the earliest ethical funds tended to be more volatile than non- ethical funds – they had periods in which they appeared to perform very well, and then there were years in which they underperformed. The underlying reason, as much as anything, was that they were insufficiently diversified – making performance highly dependent on the results from a few companies.
The new Sustainable Diversified Fund is designed to correct this – as the name suggests. It is not just invested in shares, but also in bonds, property and cash. This spread of investments should reduce the volatility and cut the risk factor. This could be important to enable the fund to reach client groups that ethicals previously failed to reach. It may be assumed that people who want to invest ethically are also more likely to seek lower risk investments.
The fund puts ethical and performance screening together when selecting investments. “We have a team of analysts whose job is to exclusively analyse the strategy of a company, its products and market position,” says Hocking. “And we have another team of people who look at the corporate governance in those same companies, looking at the social, environmental and ethical policies. These teams of analysts together produce a report on whether they think a company is suitable for investment.
“This gives us a feel of whether a company is suitable for long term investment – and we are keener to invest over the longer term than are our competitors.”
Co-operative Investments is confident that this is the right time to launch a major new sustainable and ethical investment fund. It believes that fundamental changes to the world’s economy – the growing strength of China and India, the need for greater urban regeneration, the global ageing population and the threat of climate change – together create excellent opportunities for an ethical fund.
At a glance, this might seem odd – there is an assumption that manufacturing is moving to lower cost countries where pay rates are so low that they must be regarded as unethical. But Hocking says the perspective needs to be broader than this.
“If we are looking for good opportunities we would look at areas with large populations, where key services and infrastructure are needed.” he explains. “All those are services that are considered to be supportive of basic human needs and human health. So those will be opportunities that we would expect companies that are seeking our investment to exploit sustainably.
“An ageing population is going to have an increased need for knee and hip replacements. So we would expect healthcare companies to exploit that profitably. Climate change creates opportunities for companies like Johnson Matthey that can exploit opportunities for clean technologies and grow profitably in the UK and abroad.
“It’s getting more expensive to extract fossil fuels, so we expect renewable energy to expand and companies like Southern & Scottish – which is the largest provider of renewable energy in the UK – to exploit their use of renewable sources.”
It is a powerfully argued case. It is also one that makes sound sense in many ways.
According to Business Week, ethical investments are outperforming traditional, non-ethical funds.
One of the keys to improved performance is a change of leadership in the White House, says the leading magazine of commerce and industry. Barack Obama has changed course decisively from the Bush inheritance, putting a premium on the use of renewable energy sources – and on the value of the stocks of the companies producing sustainable energy.
“In the first seven months of 2009, ‘green’ mutual funds such as the Winslow Green Growth Fund and the Calvert Global Alternative Energy Fund have outperformed the Standard & Poor’s 500-stock index by a factor of 3 to 1,” reports Business Week. “Other investments, such as eco-focused exchange-traded funds — instruments that track specific indices, including ones dedicated to green-friendly companies — are also reporting double-digit gains since the start of the year. “
Confirming the trend spotted by Co-operative Investments, the magazine also reports a demand by investors for funds that are both ethical and low risk – a combination increasingly achieved by diversification across types of asset class, stocks, technologies and geographical regions. But, it says, not all the ‘ethical’ funds are as pure as others.
There is another warning implicit in the Business Week article. One of the green energy companies that remains undervalued in stock market terms is the Danish Vestas company, the world’s largest wind turbine manufacturer. The company is in the process of closing its plant on the Isle of Wight because of the lack of demand for turbines in Britain.