Investors are no longer fooled by 'greenwash'

As interest in ethical funds gathers pace it has also become more sophisticated and investors are no longer fooled by 'greenwash'.

Earlier this month, the Investment Management Association (IMA) revealed in its latest quarterly statistics that ethical funds under management in Q2 of this year had reached £5.6bn, an increase of 32% on the same quarter last year, prompting a plethora of comment about the growing popularity of ethical investment. But F&C's Hilary Aldridge, who with Ted Scott manages the market-leading 'dark green' Stewardship Growth and Stewardship Income funds, said that whilst demand for ethical funds was growing, investors are also more savvy when making their ethical investment decisions.

"Undeniably the popularity of these products has increased and this is likely to continue into the future but it is not a case of investors jumping on the bandwagon without doing their homework. "Investors are becoming increasingly well versed on a range of ethical issues from climate change to waste management, arms trading and human rights. They are also wary of companies promoting an ethical and environmentally friendly image, to deflect attention from less savoury activities they are involved in – a phenomenon known as 'greenwash'."

According to research by consultancy firm McKinsey the early approach of ethical funds, which was to simply screen out the 'sin sectors' such as tobacco and arms trading, "tended to force an unacceptable trade-off between social criteria and investment returns" .

"Investors do not want to buy a product simply because it is green," said Aldridge. "They also want a well managed, quality fund which can generate good returns whilst at the same put their conscience at ease through a combination of positive and negative screens and a programme of active shareholder engagement. The strong returns of the Stewardship Income and Stewardship Growth funds have dispelled the myth that to invest ethically you have to sacrifice returns. Responsible companies make good investments."

But according to an IFA Census by NMG Research, 38% of IFAs don't feel well enough informed on the screens being applied by managers when selecting investments. Only 6% felt well informed.

"F&C's Stewardship funds are classified 'dark green', which means IFAs and their clients can feel assured that we actively look for companies that strong are performers in terms of sustainability. We apply the strictest ethical criteria to our process. Although we as fund managers undertake the final evaluation of whether or not to invest in a given company, each of the companies we invest in has been screened by our dedicated Governance & Sustainable Investment team with the oversight of an independent external Committee," concluded Aldridge.

The Stewardship Income Fund has returned 113.89% over five years compared to the UK Equity Income sector which has returned 85.1%. The Stewardship Growth fund has returned 105.43% over five years compared to the UK All Companies sector which has returned 79.57% over the same period.