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Investing in a moral maze

‘Beware the fund manager dressed as an eco-warrior,’ says Jonathan Compton, the founder of Bedlam Asset Management. A maverick who delights in tweaking the tail of the mainstream investment industry, Compton is contemptuous of ethical investing, also known as SRI or socially responsible investing. ‘Sanctimonious, hypocritical twaddle,’ he calls it. For all the noble intentions of many people in the field of SRI, it is hard to disagree entirely. There are few corners of the financial services industry which throw off quite such a whiff of cant, smugness and sheer muddle. But there’s no denying SRI’s popularity — both with the City and with private investors. Since Friends Provident pioneered the first ‘ethical’ unit trust 21 years ago, a substantial industry has grown up. Today £5.5 billion of British savings is invested in about 75 different ethical vehicles. The number of ethical unit-holders and other investors has grown to 470,000, according to the Ethical Investment Research Service (Eiris). Allowing for multiple holdings, a reasonable guess might be that a quarter of a million people — the population of Wolverhampton — count themselves as ethical investors. That means it is still a minority sport: Justin Modray of

Can ethical investment change corporate behaviour for the better, asks Patrick Hosking, or is it merely a cynical marketing ploy by fund managers?

independent financial advisers BestInvest, says, ‘Some of our clients express a passing interest, but the wallet tends to take precedence over the conscience.’ In the 1990s it was concern about the environment that spurred demand for ethical funds. Today, says another IFA, David Flowers of Flowers McEwan, ‘There’s a shift towards social justice, probably as a result of Make Poverty History and Live 8’ There is something compelling about the cuddly message of SRI. In theory, it’s for anyone who has a few thousand pounds to invest and would like to nudge capitalism an inch or two towards being less venal, dirty, cruel and exploitative. In practice, it is sometimes seen as little more than a marketing ploy by investment houses who leave no stone unturned in their search for new sources of revenue. Some

fund managers, whose own moral compasses would happily spin three times before breakfast if it would bring in fees, have rushed to launch ethical vehicles, which can be very lucrative, because SRI fund management fees are much higher than those for conventional funds. And SRI investors tend to be loyal, unlike mainstream investors who are much more likely to redeem their holdings after a patch of poor performance. According to Karina Litvack, head of SRI at F&C Asset Management — the biggest player with £2.3 billion of ethical funds under management — ‘the customers are very sticky’. Ethical funds work in many different ways. Some screen out chunks of the economy they deem to be unethical, from armsmaking to tobacco, gambling and pornography. Some positively seek out industries deemed to be good, or at least not bad. Railways and mobile phones are particularly popular. Some concentrate on proselytising — seeking to use their influence as shareholders to push companies into behaving better, by polluting less or shunning tyrannical regimes. This is known as ‘engagement’. Inevitably, SRI funds throw up more questions than they have answers for. Most obviously, who decides what is ethical? Customers might legitimately ask how the likes of Norwich Union, Legal & General

THE SPECTATOR28 January 2006 31