Mike Scott is a freelance journalist based in the UK.
Socially responsible investing is a rapidly growing investment vehicle for business around the world. Mike Scott takes a look at some of the largest and most successful SRI funds, and explains how family businesses can get involved
Socially responsible investing (SRI), which takes into account social, ethical, environmental and corporate governance issues, as well as traditional financial criteria, has increased dramatically. According to independent publisher Ethical Performance, there are over 380 ethical or ecological funds in the world, mostly in the US and Europe.
The top SRI equity fund in the US over one year and three years is the New Alternatives Fund. The five-year leader was Winslow Green Growth Fund. "There has been an unbelievable change in terms of the climate for green investing in the US," says Matt Pasky of Winslow. "According to figures from New Star (a global investment fund), there is more money going into green investments than into China right now."
Other successful US funds include Pax, which started the first US SRI fund in 1971, Calvert, Neuberger Bergman and MFS Union Standard. With the focus now turning to energy efficiency and "green buildings", it is also possible to invest in environmentally-friendly property funds such as the Hines CalPERS Green Development Fund.
About €1,000 billion is invested in SRI funds in Europe, about 15% of total investment, and the market is growing by 15–20% a year, says Matt Christensen, executive director of the European Social Investment Forum (Eurosif). Switzerland has the biggest SRI market, which is not surprising given its strong banking market. Other European providers that have performed strongly include Belgium's KBC, UBS of Switzerland, the Swedish SEB and German financial giant Allianz.
In the UK, net sales of ethical funds hit £100 million in the first quarter of 2007, three times as much as the previous year, according to the Investment Management Association, and ethical funds under management reached £5 billion for the first time. In fact, the number of ethical funds sold in the first quarter of 2007 exceeded sales for the whole of 2006.
This growth has coincided with a surge of interest in the environment and climate change in particular, as well as a focus on the behaviour of investors by charities and campaign groups. It is also being driven by performance – in the past, investors have recognised that by investing money ethically, they would sacrifice some returns.
But in the year to the end of January 2007, the best performing fund in the UK All Companies sector was Co-operative Financial Services' Sustainable Leaders Trust, which posted a gain of 29.3% on the year, more than double the sector as a whole. Jupiter's Environmental Income trust also rose by more than 25% over the past year; F&C's Stewardship Growth Fund gained 21% over the same period; while the Henderson Global Care Income Fund was also up 21% in the year to the end of January 2007, putting them all comfortably in the first quartile of performance.
A fundamental change
There are a number of reasons for this improvement – partly it is due to the change of emphasis in SRI funds, from negative screening that excluded investing in products such as alcohol, tobacco and gambling, towards an "engagement" approach, where specific investments are not necessarily ruled out providing the fund managers can engage with the companies they invest in to try to improve their social and environmental performance. Funds are also focusing on "best-in-class" companies, which tends to lift returns.
Emma Howard-Boyd, head of SRI at Jupiter Asset Management – which runs two of the biggest UK SRI funds, the Ecology Fund and the Environmental Income Fund – believes there are three drivers for the strong performance of SRI funds. "There is an increasing amount of regulation in this area," she says. "Corporate commitments, which are being backed up by financial commitment, and a changing consumer dynamic. In particular, there is growing interest in investing in environmental solutions – people want to do something and it is seen as a way of hedging against the effects of climate change."
Environment, social and good corporate governance (ESG) issues, the core of SRI, have moved from the fringes to the mainstream of business thinking. "There is a growing consensus that, from a long-term investment perspective, these issues are important," says Christensen. "Also, dealing with ESG well is seen as a proxy for good management."
However, Harry Wulfsohn, of multifamily office Stenham, says SRI is not even on the radar of most family offices that he deals with. "The focus is on performance – any SRI activity by families will probably be done in other parts of their portfolios, such as charities."
Christian Werner, chief investment officer of Sustainable Asset Management (SAM), agrees that the focus should be on performance, but says that sustainability criteria are a powerful tool to drive income growth. "Many SRI funds are still working with exclusions – we use our insights on extra financial issues to create performance," he says.
Nevertheless, Alexander Scott, of the Institute for Family Business, says that while only a select few family offices currently invest along SRI lines, many more are taking a careful look at the sector as it reaches appropriate size and attracts the prerequisite talent in investment management.
"As issues such as climate change, third world debt and health have an increasing media profile, there has been a natural growth in interest in this area from families," he says. "And as social investment moves from being purely ethical to profitable, a family's main investment portfolio can be a force for good. As investment experience develops and commercial opportunities in the sector increase, there is likely to be less of an implicit or actual performance trade-off for investors."
Consequently, many in the wealth management and investment community believe that SRI funds are a good fit for family businesses. According to Stephen Hines, of the Ethical Investment Research Service (Eiris): "If family-owned businesses have a reputation for being good employers, strong environmental stewardship or good community relations, SRI investment is only natural – if it is good business for them, it is good business for everyone."
Investing in a socially responsible way is one of the most significant ways a family-owned business can demonstrate its commitment to social and environmental issues. According to George Latham, manager of Henderson Global Care Income Fund: "We have found that investing with a long-term time horizon in companies that are benefiting from a shift to sustainable development and those that are demonstrating superior management of their corporate responsibilities is both a good source of investment return and well-aligned with an increasing number of investors' interests."
The long-term focus of SRI funds is also an obvious overlap for families concerned about passing on their business to the next generation. "We have many long-term holdings," says Howard-Boyd. "We take a long-term strategic view in our investments and stick with companies through any teething problems or growing pains they might have. If you are building a business to pass on to your children, it is a natural extension to look at longer-term investing."
Werner says: "We focus on sustainable themes (SAM's funds include the Smart Energy fund and Sustainable Water) because we think that long-term drivers, such as climate change and demography, make them a good long-term investment, and we can show there is a correlation between performance on sustainability and performance in the market.
Doing it your way
Another option taken by some wealthy families is to set up venture capital funds to invest in areas that interest them. Ben Goldsmith, youngest member of the Goldsmith dynasty, which is famously interested in environmental issues (brother Zac is editor of The Ecologist magazine), set up WHEB Ventures, which runs a £25 million venture capital Fund specialising in environmental technology companies, largely in the areas of renewable energy and clean industrial processes. Meanwhile, Andre Heinz, heir to the baked beans fortune, is co-founder of the Sustainable Technologies Fund, a private equity growth fund that focuses on clean technology in the Nordic region, having worked on sustainability issues since 1993.
"There are going to be some major success stories in this area, such as the clean tech equivalent of Google," says Christensen. "This is the most exciting time to be in this business that I have ever seen."