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Carbon trading investment opportunities likely to increase as US enters market

 

Financial Express 09 June 2008 by Leonora Walters

Although global carbon trading markets are a growing investment area retail investors have few opportunities to access these assets, however, as the United States starts trading funds could come down to retail level and provide an attractive alternative to equities.


Carbon markets during 2007 were worth €46bn (£36.75), a 100% rise on 2006, the majority of which was represented by the European Union Emissions Trading Scheme. This area of investment should increase because the United States is likely to introduce a cap and trade system.

Although the exact nature of this market is uncertain after the Kyoto agreement expires in 2012 it is very likely there will still be a carbon market. Tom Hill-Norton, partner at Plane Tree Capital, believes there will be very strong demand for both renewable energy and carbon credits after 2012 as people try to reduce emissions.

But none of the 58 funds dedicated to this area, which have €7bn in assets under management, are available to smaller investors. Retail climate change and ethical funds, of which there have been a number of launches over the last nine months, do not typically invest in carbon trading as they focus on companies which reduce carbon, according to Mark Hoskin, adviser at Holden & Partners.

Exceptions include F&C Asset Management’s Global Climate Change Opportunities and Stewardship funds, which hold AIM listed Trading Emissions, which invests in environmental and emission assets.

A few other AIM stocks offer access to carbon emissions trades, including Eco Securities, Econergy International and Camco International.

However the share price on some of these companies has not performed well recently, according to David Hopkins, director at Carbon International. The companies have underperformed because they underestimated the time it would take to generate carbon credits from the projects they are involved with, as well as investor uncertainty about what the carbon regime will be like after 2012.

But Hopkins suggests that Trading Emmissions and Camco will recover in 2009 when the post 2012 regime is decided.

Terry Coles, fund manager at F&C Asset Management, expects the carbon trading market to become more profitable when it becomes more established, benefiting from the rising price of carbon. He believes it should be good for long-term investors.

And Hoskin believes funds will come down to retail level as the market expands, in particular the US. He said it could be an attractive asset class providing regular income returns in a similar manner to property, a good way diversify from equities. Existing hedge funds such as the €40m Carbon Assets Fund have managed to generate yearly returns of 20%.

However Plane Tree Capital does not envisage offering retail funds in future. It is due to launch a €50m to €75m private equity fund which invests in renewable energy projects which produce carbon credits, and is setting a €5m minimum investment level.

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You can help the world but any old green fund won't do

The Independent, 18 May 2008 by Julian Knight

Can you have it all? As National Ethical Investment Week starts, that's the question being asked by more and more consumers. Can their investment choices both bring them big returns and do the right thing by the planet and its people?

Looking at the raw statistics, ethical funds – which normally don't invest in arms, tobacco, mining or alcohol companies, as well as some drugs groups – have fared no worse than most non-ethical funds in the past couple of years. But they are hardly stand-out.

"There are plenty of decent-performing ethical funds," says Hugo Shaw from independent financial adviser (IFA) Bestinvest. But the very big hitters tend to be funds that pick from the whole universe of stocks."

However, Mark Hoskin, at IFA Holden & Partners contends that some ethical managers have performed better than others by being more selective. "Funds that simply buy what remains after taking out guns, mining and tobacco have been weighed down with telecoms and, in particular, banks. Managers who were more creative with the shares they could invest in, potentially avoiding banks, have done better," says Mr Hoskin. He cites the Standard Life ethical fund, Aegon's ethical corporate bond fund and F&C Stewardship as examples of investment vehicles that do their research and have avoided much of the credit crunch woe.

There are now more than 100 ethical funds available to UK investors and the sector is worth around £6bn. That seems a big number but it isn't in terms of the overall global investment market. "The universe of ethical funds is small. If people want to invest in the UK stock market through an ethical fund then they are well catered for, but outside these shores the choice is much more restricted," says Mr Shaw.

This can mean that, unless they put their principles on hold, investors will be denied the chance to put their money in a number of different economies – an approach that can spread risk as well as giving exposure to potentially high-growth areas.

"There are global funds such as Jupiter Ecology but you can't get access to specific sectors like Japan, the Far East or emerging markets. Ethical investing means research and there is precious little appetite to do this among overseas funds," says Mark Dampier from IFA Hargreaves Lansdown.

But that doesn't mean the big returns are out of reach. "Companies that deal with new technologies such as pollution controls and alternative energy are a massive growth area," says Mr Hoskin. "Funds that invest in these sectors should be on to a winner long-term."

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Even in a crunch it can still pay to have ethics

The Observer, 18 May 2008 by Heather Connon 

' Investors need to see environmental investing not as "green", but for what it is: solid investment, based on sound principles.'Mark Hoskin of Holden and Partners, a financial adviser that specialises in ethical investment, will be broadcasting this philosophy in a series of investor meetings to coincide with the first ever National Ethical Investment Week, which kicks off today.

The same truth could be applied to fund managers, however, for there is a huge disparity between the philosophy, investment approach - and, crucially, the performance - of the various 'green' funds available. It is no longer enough for investors simply to look for funds that meet their ethical criteria: they need also to consider how the managers of the available funds interpret their remits.

Traditionally, ethical investing simply meant avoiding the bad - such as tobacco, alcohol, arms manufacturers and big polluters - and splitting the fund among the remaining companies in the market. That meant green funds usually had a big exposure to areas like banks and utilities, which met these criteria, while avoiding resources, ruled out on both pollution and employee rights grounds.

That was just about justifiable when the stock market was relatively evenly spread between different sectors and the performance of these sectors was relatively uniform. But that is no longer the case: mining, oil and gas companies account for more than a quarter of the market while banks account for 15 per cent. If miners and other traditional ethical exclusions are ruled out, banks become a sizeable 30 per cent of the investable universe.

As anyone with an eye on the stock market reports knows, mining companies have been soaring recently - the sector is up 17 per cent over the last six months and a massive 65 per cent over the last two years - while banks have plunged 13 per cent over six months and 24 per cent over a year. Not surprisingly, that has taken its toll on many of the ethical funds.

Ted Scott , manager of the F&C Stewardship fund, the oldest and most established, admits that his lack of exposure to miners, and his holdings of housebuilders, retailers and selected banks, has made it a difficult time. 'That is what equity investing is all about - you have to just hold on during the tough times and hope that things will get better.'

But Hoskin's research into the companies held by ethical funds suggests that some fund managers are doing more than others to protect themselves against the downside. While Prudential's ethical fund has a massive 56 per cent of its portfolio in financial services and telecoms companies, and a further six funds have more than 40 per cent in these two sectors, others have only a limited exposure - Standard Life UK Ethical has just 6 per cent while CIS Sustainable Leaders is just 17 per cent.

Not surprisingly, therefore, there is also a big divergence in performance of these funds: Old Mutual and Prudential, the two funds with the largest exposure to financials and telecoms, would have turned £100 into £81 and £88 respectively while CIS Sustainable Leaders would have made £104 and Standard Life UK Ethical £94 - which, while a loss, is still ahead of Holden and Partners' benchmark for ethical funds, which fell to £91 over the same period.

The truth is, says Hoskin, some managers seem content simply to passively invest in what they can, while others more actively try to seek value within the constraints. But that is the same across the investment fund universe. 'Well managed funds do well, badly managed funds do badly. This is not an ethical issue,' says Hoskin.

He believes that the key area in which ethical funds will be able to make a difference is on the environment, one of the fastest-growing, and most sought after, areas of investment today. Certainly, any new ethical fund that has been launched in the last few years has tended to focus on climate change, alternative energy or a similar environmental issue - Allianz, Schroders, Impax, Jupiter and Pictet are among the managers to have had launches in this area.

And some of the specialist funds in this area have done well: while the FT World Index is down almost 5 per cent and the FTSE 100 index down almost 10 per cent over the last year, Allianz Global Eco Trends is up 24 per cent, Blackrock New Energy up more than 11 per cent and Pictet's Water Fund up 2.15 per cent.

There are plenty of reasons for arguing that this outperformance should continue. Bruce Jenkyn-Jones, director of investments at Impax Asset Management, points to the continued rise in the price of fossil-based fuels, which is increasing demand both for alternative sources of energy and for ways to use existing resources more efficiently, together with increased regulation on everything from emissions to water use, as key drivers of the sector.

Tim Dieppe, director of socially responsible investment at Henderson, thinks that healthcare will also be a big theme in the future. 'It is still seeing growth both because of changing demographics and because governments need to cut their spending,' he says, Companies specialising in these areas also have the advantage of being relatively resilient to the rapidly slowing economy.

Henderson is confident that there are plenty of opportunities in the area of sustainability, which it has made its speciality. There are more than 1,320 companies, worth more than $5 trillion (£2.5 trillion), in the universe of companies that its Industries of the Future fund can invest in; the fund's 'themes' include safety and social finance as well as the more traditional environmental areas. And Impax estimates that its potential investment universe has grown tenfold over the last decade.

But not all ethical funds have exposure to these areas. Hoskin picks four funds to watch: Industries of the Future, which has 51 per cent of its portfolio in pure environmental stocks; Jupiter Ecology, with 50 per cent; First State Asia Pacific Sustainability, 43 per cent; and F&C Stewardship International, with 20 per cent. Allianz Global Eco Trends and Blackrock's New Energy are good choices for those interested specifically in climate change.

Whichever fund you choose, of course, you need to be confident that the manager's ethical strategy matches your ethical views.

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Investing in green funds is not black and white  

The Financial Times 17 May 2008 By Alice Ross  

The coming week is the nation's first ever National Ethical Investment Week, when fund houses and MPs will be falling over themselves to persuade us to invest in good causes.

But the figures for ethical fund performance at the moment are grim. Ethical funds lost an average of 8.7 per cent after tax in the year to mid-May, according to Morningstar.

You might think that with losses of this sort you would be better off giving the money to charity - and avoid paying fund managers to lose the money for you.

However, ethical funds do not always produce such bad performance. They put on an average 16 per cent over the same period in the previous year, as the table below shows, with some, notably CIS Sustainable Leaders and Jupiter Environmental Income, doing excellently with returns of 28 and 27 per cent respectively.

The reason for this year's poor performance cannot just be the credit crunch. On average, all the non-ethical funds monitored by Morningstar lost just 2.2 per cent over this past year, while the previous year they only put on 9.3 per cent. Why should ethical funds have such wild performance swings?

There are two main factors impacting on ethical fund performance in times of volatility. First, they cannot switch their focus to the degree that non-ethical funds can. George Latham, manager of Henderson's Global Care Income fund, believes the underperformance this year has more to do with the fact that sectors in which his fund, and many other ethical funds, cannot invest have, unusually, all been performing well in tandem. These are oil and gas, aerospace and defence, tobacco and mining.

Second, a number of ethical funds invest more in small and mid-caps. These tend to be the dark green funds - those that apply negative screening principles and refuse to invest in, say, nuclear energy or medical animal testing. Light green funds are those that take a positive screening approach and will consider investing, for example, in a traditional energy company if it is also expanding its renewable investment. This makes it more likely they will be able to expose themselves to large caps.

The large cap bias explains the top two performers this year - which are actually the same fund, with Aberdeen managing the St James's Place version. The fund has nothing in small caps, about 25 per cent in mid caps and the rest in large and mega caps.

Some funds, such as those from Jupiter and F&C, apply both principles, though unluckily for Jupiter, its two green funds have been hit by the factors impacting on ethical performance. The Environmental Income fund focuses on large caps but cannot take advantage of the oil and gas boom, while the Ecology fund has been hit by the small and mid cap underperformance, where it predominantly invests.

This all makes it incredibly difficult to compare ethical funds in any meaningful way. To confuse matters further, as wealth management firm Holden & Partners points out in a recent guide, not all ethical funds are environmental. And not all environmental funds are ethical. Most climate change funds, such as those recently launched by Schroders and Virgin, are not defined as ethical but seek to make money mainly from growth in environmental technology. The same goes for Impax Environmental Markets, an investment trust.

When choosing an ethical fund, investors therefore need to be even more selective than they normally would. You cannot gain exposure to ethical in the same way you could just invest in a China fund to get exposure to China. Investors could make their choice based on how they think small caps are going to fare, for example, or how strictly the fund screens stocks, which is an indicator of how flexible it is likely to be when the market is volatile.

But as Julia Dreblow, SRI marketing manager at Friends Provident says, ethical funds should not market themselves on performance alone. Market volatility, she says, sorts the wheat ethical investors from the chaff. "The main message is that medium and longer term arguments for funds in this sector are very strong," she argues.

Certainly, ethical investment allows less leeway and less opportunity to make a quick buck on the season's current trend. But then those keen to jump on the hard commodity bandwagon are unlikely to take an interest in ethical investment in any case.

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Investing with the Angels

Third Sector, 30 April 2008 by Matthew Little

Nearly £9bn is invested in the UK's green and ethical funds. But finding the fund to fit your charity's mission can be tricky.

It once provoked gales of laughter in corporate boardrooms and fund management houses, but ethical investment is now on the verge of becoming the new orthodoxy. The latest figures show that nearly £9bn is invested in the UK's green and ethical funds, compared with less than £1.5bn in 1997. According to some analysts, however, ethical and socially responsible investment is a victim of its own success. In conquering the mainstream, it has become a pale shadow of what it was once meant to be.

A report published in February by financial consultancy Holden & Partners argued that when SRI and ethical funds emerged in the 80s, they promised to invest in companies that protected the environment. But their modern-day counterparts actually invest in very mainstream companies, such as Vodafone and the Royal Bank of Scotland. Oil companies such as Shell, BP and Total also often feature in the top 10 holdings of many funds that claim to be based on environmental principles. "Investors in SRI funds who were hoping to be buying into the low-carbon economy might find that they are exposing themselves largely to multinationals that are more part of the problem than part of the solution," the report says.

Buying into the corporate line

"We think that a lot of ethical funds are resting on their laurels," says Mark Hoskin, a partner at Holden & Partners. "They are buying into the corporations' corporate responsibility line and every company under the sun, even mining companies, has a great corporate responsibility line."

Does the fact that many ethical funds could be more truthfully designated as 'non-unethical', at best, pose a problem for charities? For many, maybe not. A large proportion of charities that approach ethical investment still do so from the perspective of wishing merely to exclude stocks that conflict directly with their charitable objectives. The remainder of the portfolio can be invested according to conventional principles.

"If a charity wants to invest ethically, it will be influenced by the issues that are most important to it," says Sam Collin, charity adviser at Charity SRI, a project that aims to raise understanding of ethical investment among charities.

"That will vary because the sector is so diverse. An animal charity might want to ensure that it does not invest in companies that test cosmetics on animals, but that might be only a small proportion of what it can invest in. So it will be investing in a lot of mainstream companies."

But that limited approach will not suit everyone. A growing number of charities, encouraged by the Charity Commission's acceptance that SRI funds produce financial returns as good as those generated by conventional funds, now try to invest according to broad ethical or sustainability principles. Even if a charity wants to focus on one issue, that doesn't mean its investment choices will be simple.

An animal welfare charity, for example, might decide that its mission demands that it excludes not only companies that engage in cosmetics testing on animals, but also testing for medical research purposes. It might want to screen out firms that are involved in intensive farming, which would rule out supermarket stocks. Construction companies that damage natural habitats might also be blacklisted. The International Fund for Animal Welfare's criteria on ethical investment excludes so many sectors that it cannot find a compatible ethical fund to invest in.

Going it alone

A charity that wants to invest ethically can go it alone, if it is large enough and has potential investments valued at more than £500,000. It can ask a fund manager to invest its funds in a segregated portfolio that fits its ethical criteria. This was the approach taken by the RSPB. "We employed Merrill Lynch, now Black Rock, as our investment managers," says Alan Sharpe, director of finance and IT at the charity.

"We did all the work with ethical investment advisers Eiris. We told them the companies we would like to exclude and they picked the stocks. It's very time-consuming and it's not something that many charities would have the skills to do in-house."

For most charities, the only realistic option is to invest in a pooled ethical fund. Ethical and SRI funds vary - some will invest in a large number of mainstream companies on a 'best-in-class' basis, whereas a minority will choose companies that make a positive difference to problems such as climate change, selecting renewable energy or organic agriculture stocks.

Deciding which of the plethora of funds that call themselves 'ethical' best aligns with a charity's ethical demands is no easy task. If it can afford it, a charity can hire an investment adviser to research the market and produce a list of suitable funds. Hoskin recommends this route. "Charities are coming to this blind," he says. "No charity I know knows anything about investing ethically. Charities pay for lawyers, so why aren't they paying for investment advisers?"

There are, however, free resources for charities that want to investigate the ethical market themselves. Charity SRI, for example, hosts a database of ethical funds designed for charities. It gives details of the ethical issues they consider and their policies. "It's quite easy to search for funds according to ethical criteria, because you can tick which issues you are most concerned about and it tells you which firms cover those," says Collin.

She says the database can be used to shortlist appropriate funds, but she advises charities to investigate the underlying holdings of funds they are interested in to see what companies they invest in, and to examine their financial returns.

Whatever pooled ethical funds charities choose to invest in, they will never achieve a perfect alignment with their ethical requirements, says Hoskin. Pooled funds, by their nature, require compromise. "You buy into a fund's philosophy and you will never completely match, no matter what its criteria," he says. "You will take a view and say 'it's close enough'. That's all you can do."

That, and the need to maximise investment returns, could mean investments in many mainstream companies. Investment manager F&C manages a portfolio of socially responsible funds on behalf of the Charities Aid Foundation. The funds exclude 55 per cent of the FTSE, shunning tobacco, arms, gambling, alcohol, pharmaceuticals and most oil companies. But they do invest in other firms whose ethics have been questioned.

"We quizzed F&C about Tesco," says Gill Nunn, director of charity financial services at CAF. "My personal view is that I'm not so sure I would invest in Tesco. But their view is that Tesco's core business is a basic necessity sold quite cheaply. They are currently acceptable - but if things change, the holding will be sold."

The RSPB decided to abandon its segregated ethical portfolio in 2005 because it needed greater diversification. The charity appointed financial advisers Cambridge Associates to research the pooled ethical fund market and recommend appropriate vehicles, both in terms of ethical criteria and financial performance. The RSPB then invested in several funds, which it reviews annually.

Sharpe accepts that the pooled fund approach involves compromise. "It's a trade-off," he says. "In theory, we could have a portfolio that was perfectly aligned with what we want. But in practice, we just haven't got the firepower to construct such a portfolio, so we came down on the side of saying that the most practical approach is to use a pooled fund and accept that we'll find one that is closely aligned to our interests, but not perfectly aligned."

Sharpe says the decision to use pooled funds rather than shoulder the burden in-house has also led to better choices over ethical investment. "What we are doing now, taken overall, represents a better fit with our principles because we've got managers who are spending their time analysing companies and coming to much better informed decisions. We've lost some of the flexibility, but we have gained better-informed decision-making."

WHAT DOES ETHICAL INVESTMENT MEAN?

Ethical or socially responsible investment means that the values or concerns of investors are taken into account in selecting which companies to invest in. The desire to maximise financial returns is not the only motivation, though proponents of ethical investment claim that ethical funds perform financially at least as well as conventional funds.

Since the first ethical fund was launched in the UK in 1984, ethical investment has taken a variety of forms. One of the most common kinds is negative or ethical screening, whereby companies involved in activities such as arms production, tobacco or animal testing are excluded from portfolios. Many funds labelled 'socially responsible' are based on best-in-class screening, which selects the best performing company in a given sector from a social or environmental point of view. In theory, this approach could include the 'best-in-class' tobacco company. Other funds may adopt a positive screening approach, selecting companies that promote solutions to social and environmental problems, such as renewable energy. Charities can also take an activist or engagement approach, investing in companies that might not be very ethical at all to try to improve their behaviour through dialogue with management or voting at company AGMs.

Mission or programme-related investment involves charities investing in enterprises in order to further their aims directly. This is not officially classed as investment by the Charity Commission because there is no duty to obtain the best possible financial return.

Sources: Holden & Partners, Charity SRI.

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Sustainable funds set for huge growth

The Observer, 2 March, 2008  By Huma Qureshi  

The £190m CIS Sustainable Leaders Trust fund last year became the first socially responsible investment fund to top the UK All Company sector, beating more than 300 other mainstream unit trusts in terms of performance. For the 36 months to 31 January it provided a total return of 40.5 per cent, against 35.2 per cent of the UK FTSE All-Share and the 27.7 per cent average return achieved by funds in the UK All Companies sector. The fund includes Scottish & Southern Energy in its top 10 holdings because it is 'totally committed' to lowering its carbon impact, says Andy Hammerton, spokesman for CIS. 'Because we take all aspects of a company into consideration, we believe we can deliver the best possible returns for a customer,' he adds.

Independent financial adviser Holden & Partners also recommends the Jupiter Ecology Fund and the Henderson Global Care UK Income fund. 'Both of these are strong-performing sustainable funds,' says Mark Hoskin, a partner. Steve Waywood at Morley Fund Management, believes sustainable funds are 'definitely a growth area'. 'There is a much greater awareness among consumers, policymakers and politicians of the need to develop sustainable themes working for the future. There is serious money to be made,' he says.

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Profits and principles

The Guardian, 21 Feb, 2008  By Proinsias O'Mahoney

More people are putting their money into ethical funds. But many might be shocked to learn how it's being invested.

What does the fast-food multi-national McDonald's have in common with oil giant Shell and uranium miners Rio Tinto? No, not that they have long been the focus of angry protest by campaigners, but that their shares now feature in a wide array of ethical investment funds. Long lampooned in financial circles as the preserve of those who care more about their conscience than a decent return on their money, a new study by Holden and Partners, who advise on ethical investments, says that most of these funds are now "surprisingly mainstream" in their choice of stocks.

Some investors who were initially tempted by the "ethical" tag attached to such funds are now starting to look hard at their portfolios and ask some difficult questions - the principal one being what exactly is meant by the term "ethical". Take one of the most popular ethical fund providers - Standard Life Investments. The company recently announced that it was dropping airline stocks from its ethical funds after asking its investors to identify sectors that they wished to exclude. But according to its manager's latest annual report, the fund lists the mining group Xstrata, as well as Expro International Group, an oilfield services company, in its top 10 holdings. Which is worse in terms of environmental impact? An airline, a company that services oil wells, or a mining firm?

Similarly, the top 10 holdings by Marks & Spencer's ethical fund, launched last year to much fanfare, includes oil companies Shell and BP. Does this sit well with the fact that M&S also announced last year a £200m programme to become carbon neutral within five years?

These are just two high-profile examples: the Holden report says that the same stocks "appear over and over again in the socially responsible investment (SRI)/ethical funds" and "only one out of 58 funds analysed claimed to have more than 50% of its portfolio in environmental stocks". Indeed, Standard Life and M&S's ethical funds look comparatively idealistic next to the Aberdeen Ethical Engagement fund, which holds investments in BP, Shell, Rio Tinto and British American Tobacco.

In a fast-growing market, shouldn't there be tighter control and transparency about how a fund interprets and uses the word "ethical"? One of the most high-profile critics of the screening practices of these funds is US environmental campaigner Paul Hawken. In 2004, he denounced the SRI industry in the US as having "no standards, no definitions and no regulations other than industry regulations" and of making the term ethical "so broad it is meaningless".

Today he says: "The situation has not got better. [Financial] performance has become the primary driver. They [ethical funds] are doing everything they can to be acceptable to the broadest possible clientele, and with that has come dilution of meaning and standards."

The issue of performance has, naturally, attracted media and investor attention. SRI advocates proclaim that returns are as good, if not better, than conventional funds. Indeed, some say they could perform even better: the Holden report suggests that ethical funds are losing out by not chasing "pure-play" environmental stocks. It points out that the FTSE ET50, an index of the world's 50 largest firms engaged in environmental technologies, has appreciated by 150% since January 2006, trouncing returns on offer from conventional portfolios. But it's hard to pierce the perception that returns would suffer if tougher screening criteria substantially diminished the choice of stocks on offer to ethical fund managers. This concern means that "the return-on-investment tail is wagging the social responsibility dog," says Hawken.

His critics take a different view, supporting the "best in class" approach adopted by many fund managers. Launched in 2001, the

FTSE4Good index was designed to track the performance of companies that "meet globally recognised corporate responsibility standards". Far from "straying into the quicksands of judgmentalism", as the Daily Telegraph opined at the time, the FTSE Group has made clear that its index's purpose is not to contain "squeaky-clean companies". Rather, it seeks to engage with companies and to "encourage progress toward greater corporate social responsibility". In essence, rather than shunning whole sectors, it now aims to favour the best behaved within otherwise controversial sectors. This philosophical shift paved the way for the inclusion of global mining giant Rio Tinto in September 2007.

It's a far cry from the early days of the ethical investment movement. In 1984, when the Friends Provident Stewardship Unit Trust became the UK's first ethical fund, it was christened "Brazil" by sceptical City analysts, because only "nuts" would invest in it. Today, the industry is said to be worth more than $2 trillion worldwide and more than £8bn in Britain alone.

But has the industry had to "sell out" to increase its attractiveness to investors? It might not be that simple. Tesco, initially excluded from the FTSE4Good index, rectified its environmental policies to gain inclusion. In 2004, researchers at the University of Dundee found the Tesco case "is not an isolated example" and that FTSE4Good's approach has "had a clear impact on a significant subset of companies and their stakeholders".

Hawken, though, does not buy into this gradualist argument: "If the standards are too broad, they cease to describe a better world. Instead they describe nice ways to continue the destructive world that is already in place."

Also, what is ethical to one investor may well be a cop-out to another. For this reason, there is simply no way round potential investors poring over the small print before committing, says Mark Robertson of EIRIS, the independent ethical investment specialists. "There are almost 100 ethical funds in the UK today. Some employ strict screening; others prefer to adapt the 'best in class' approach. We'd suggest investors check the ethical investment approach of each fund to identify those which most closely matches their ethical interests and concerns."

However, investors with a, let's say, more cavalier approach might prefer the US-based "Vice Fund". Unashamedly unethical, its founder, Dan Ahrens, even wrote a book entitled Booze, Bets, Bombs and Butts based on its favoured sectors - alcohol, gambling, armaments and pornography - which traditionally have all been excluded from ethical funds. The fund has outperformed the S&P 500, an index of America's 500 largest firms, in each of its five years of existence and is ranked in the top 2% of US funds. Ahrens has boasted that it's not just "sin stocks and arms suppliers" that he prefers. He is also a Microsoft fan, because "we had to throw in a little antitrust" - a reference to the software giant's long-running court battles over anti-competitiveness. Doubtless, Hawken and other SRI critics would find that poetic - Microsoft shares have long been a staple holding in mainstream ethical funds.

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Storm brews over the content of ethical funds

The Observer, 17th Feb, 2008  By Huma Qureshi

There are plenty of climate change and eco options, but few are really green. Ethical and climate change funds that claim to be socially responsible are failing to invest in companies which support the environment, a new study claims.

The report by independent financial adviser Holden & Partners reveals most ethical funds are 'surprisingly mainstream' in their overall portfolios, with very little investment in committed environmental companies.

'Some funds that are branded as ethical do not look any different to non-ethical funds when it comes to the companies they are investing in,' says Mark Hoskin, partner at Holden & Partners, which specialises in offering ethical and environmental financial advice.

'A socially responsible investor will choose a fund precisely because it is branded "ethical". They won't necessarily look at the underlying investments because they trust they will be ethical. But some investors would be surprised to see what their holdings really are.'

Socially responsible investment (SRI) funds use a form of ethical screening to select which stocks and sectors they will invest in, using a mixture of negative and positive criteria. Each fund has its own interpretation of these positive and negative factors- one may categorically choose not to invest in a company that has any involvement in animal testing, while another might invest in companies that carry out legally required animal testing only for the production of life-saving medicines rather than, say, cosmetics.

However, the study reveals that several ethically branded funds hold stocks in oil giants such as Premier Oil, Shell, Neste Oil and BP. 'This throws up questions about the screening process used by some companies,' says Hoskin. 'Can it be an ethical fund if some of its biggest holdings are in oil?'

Credit Suisse Fellowship Fund's top 10 holdings include HSBC, GlaxosmithKline, Vodafone, Schroders and Associated British Foods. It holds just 2.5 per cent of its money in environmental companies. Likewise, Legal & General's £126.7m ethical fund has just 0.747 per cent of this invested in environmental stocks. Its top 10 holdings include Barclays, Tesco and Lloyds TSB.

'None of these top 10 companies stands out as particularly ethical,' says Hoskin. 'An investor might expect a more ethical weighting.'

A spokesperson from Legal & General says: 'Our ethical fund is an index- based fund based on the whole economy and isn't pretending to only operate in a particular fashion and only choose to invest in, say, wind farms. We are not making any judgment on what is ethical and what isn't - we filter companies based on what market research tells us consumers consider to be ethical.

'On that basis, it is perfectly accurate to call it an "ethical" fund, because we invest in companies that contribute to the entire economy and operate under ethical practices based on what consumers tell us they believe to be ethical.'

Environmental approaches

Those that do have bigger environmental holdings include Henderson Industries of the Future fund, 51.1 per cent of which is invested in environmental solution providers such as solar power company Solarworld.

Jupiter's £291.25m ecology fund invests 50 per cent of its holdings in companies such as Bioteq Environmental Technologies, which builds water treatment plants, and Augean, a specialist waste and resource management group.

Jupiter, F&C and Norwich Union all have dedicated ethical research teams which actively analyse and decide upon the companies in which they can and cannot invest. Standard Life regularly petitions its investors to find out which environmental issues they are most concerned about, adjusting the holdings in its ethical funds to reflect this. Last week, the company announced its SRI funds would no longer be investing in airlines, after a third of its investors called for the company to drop holdings in this sector. More than half of its investors said they saw climate change as one of their top three concerns.

Climate change

Climate change funds, which invest in environmental companies, are a big growth area according to many fund managers. James Vaccaro, investment director at Triodos Renewables, a purely environmental retail fund, says: 'Companies are under pressure to develop alternative sustainable energy sources for the future, and investors should benefit from this demand.'

In the past three months, at least six climate change funds have been rolled out by investment companies, including Allianz, F&C, HSBC, Jupiter and Schroders. Strictly speaking, these funds do not necessarily fall into the same definition as an 'ethical' fund as they generally do not follow the same strict screening process. Instead, they will typically invest in any company working on climate-related projects or solutions.

'We see climate change primarily as an area of importance as an investment theme rather than purely in ethical terms,' says Farley Thomas, who runs HSBC's climate change fund, which launched last November.

'We have been very careful not to specifically brand our fund "ethical" - it's just an amazing coincidence that something which is a great investment also happens to be ethical. We see it more as a mainstream global investment area.'

HSBC's biggest holdings are in energy provider Eon, Vestas Wind Systems and international industrial services group Suez. The fund will only invest in companies that generate at least 10 per cent of their revenues from climate change activities, but Thomas says he would not exclude investment in sectors such as nuclear power within the climate change fund.

'The reality is that the world needs alternative energy and the best way to support that is to invest in companies based on their overall sustainability and ethical behaviour, regardless of their sector,' he adds. 'Alternative energy, like windpower, is not yet mass-produced, but nuclear energy is a proven large-scale energy source. Ultimately, whether we invest in a nuclear power company or not depends on its performance.'

Virgin Money launched its climate change fund in January. It says it will 'invest in all industry sectors, but only in companies with lighter-than-average environmental footprints for their sector.' Ten per cent of the fund is instead in 'solution providers specialising in offering solutions to environmental problems', with the rest invested in the European market.

Holden & Partners, however, believes Virgin Money's climate change fund does not display a big enough commitment to the sector to be given the name that it has. 'It's just a European equities fund with only 10 per cent invested in what it calls solution providers,' says Hoskin. He says the name will attract ethical investors who may be disappointed when they find out where their money is ending up.

'There are some genuinely focused climate change funds around, such as HSBC and the Impax environmental markets investment fund, which state that they will only invest in companies with revenue generated specifically from good environmental practices,' says Hoskin. 'But Virgin Money's fund doesn't have this sort of criteria. Climate change funds are new and there is a lot of interest in them, but a lot of companies are fudging things a bit. It's a great marketing push to call something "climate change" at the moment, and we think Virgin Money has done this.'

Virgin Money says: 'Our climate change fund invests in companies across all sectors, but only those that do a better job than their peer group in minimising their environmental footprint. The effect of this type of investing will be to see the stocks of lighter-footprint companies outperforming those of heavier-footprint companies.

'In our view, nothing can bring greater pressure to bear on company management teams to lighten their footprints than seeing their competitors' share prices outperform theirs. We think this benefits both investors and the environment in a more tangible way than the traditional approach, which in our view is just one small part of the answer.'

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Modern investors turn into sun worshippers

The Telegraph, 14 Feb, 2008  By Tom Stevenson

Saving the planet is busy work. When Mark Shorrock came to update investors in his clean-tech incubator fund Low Carbon Accelerator recently, he was amazed to see that he had investigated 448 alternative energy hopefuls in the last year.

From greener fridges to concentrated solar power, even biofuels from algae, LCA is at the sharp end of an explosion in technological innovation against which the dotcom years pale. It's not just a techie thing either - the money men are excited.

"I went to Singapore and Hong Kong recently and the big Asian funds are getting interested. I've been cold-called by 20 funds recently - mainly US - saying 'when you next raise money come and see us'. The time is right - I don't have to explain climate change any more or what we do."

Funds queuing up to invest in clean tech is not the only echo of the technology bubble, though. Renewable Energy Corporation found out this week what happens when sky-high expectations are disappointed. The world's biggest producer of the polysilicon used in solar panels fell as much as 23pc on Wednesday after the Oslo-quoted giant warned of delays and higher costs at a silicon plant it is building in Washington state.

Michael McNamara, an analyst at specialist investment bank Jefferies, warned: "The market is less confident, solar shares were last year's winners and they are high-risk plays."

REC's shares have tumbled by almost two-thirds in three months. It is not alone. Other flagship stocks in the clean-tech sector have crashed in recent weeks as the sky-high valuations attached to alternative stocks, especially solar, have started to look too ambitious. Price-earnings ratios of 30 or 40 are typical, making growth rates of 30pc a year not just desirable but essential.

Q-cells, a German solar company, began the year at €98 (£73) but had collapsed to €55 within three weeks. Iberdrola, a Spanish wind-power group, crashed from €11.90 to €7.80 from November to January.

Matthew Page, co-manager of the recently launched Guinness Alternative Energy Fund, says: "The wider market correction is having an effect and there's a flight to quality. There was a lot of hedge fund money in solar, which was the hot topic in 2007. I don't agree, but some pe%

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Eco-investors told to do their homework

Edie  Feb 11 2008 By kate Martin  

Eco-conscious investors are being warned to read the small print before putting their money into ethical funds to ensure they know just how much of their cash will be invested in environmental causes.

 A report by independent financial advisers Holden and Partners examining the top 10 ethical and socially responsible funds in the UK has shown that very few invest in companies which are directly tackling climate change.

The firm warned many members of the public may think that ethical equates to environmental, but often the funds have holdings in large mining or oil companies such as BP.

Mark Hoskin, partner at Holden and Partners, told edie: "An ethical fund will have a whole range of issues that it will look at, such as human rights, animal testing or weapons. Environment is only part of that.

"But we were surprised, even as advisors because we thought they might be more involved in environmental stocks."

Environmental holdings can also be more risky than investing in multinationals which may have a questionable environmental record.

Mr Hoskin said: "I think investors need to go to advisors who know what they are doing and can work out what the investor is trying to achieve.

"The investor may be prepared to risk their money if it is for environmental reasons."

He added that Holden and Partners, which plans to update the guide every six months, expects climate change funds to be a large growth area.

The report A Guide to Climate Change Investment, shows that of the funds that gave full information about their holdings, Henderson's Industries of the Future scored most highly with 51.1% of its fund in environmental solutions providers, compared to less than 1% in L&G Ethical Funds portfolio.

The report also revealed that there are a number of purely environmental funds that investors can take advantage of, such as Impax Environmental Markets Trust Plc.

Publication of the report coincided with an announcement from Standard Life Investments that its ethical fund will no longer invest in airline stocks after its annual ethical investor survey revealed 30% of customers wanted airlines excluded.

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Going Green

The Telegraph, 09 Feb, 2008 By Paul Farrow

 Green investment is a grey area – with even airline stocks appearing in 'responsible' funds.

I'd like to think I have a green side. I don't own the must-have hybrid car, the Toyota Prius, but I do drive a diesel which is marginally better than petrol.

I may not have got to the stage of recycling my bath water but I do recycle my rubbish.

Like most of us I check the labels on cartons and food packets for a pair of those swirling black arrows. If there is, into the recycling box it goes and I can sleep easy knowing I am doing my bit for the environment.

Or am I? Every week the box comes back still half full of cartons and packets that are supposed to be recyclable but are seemingly not. It is as though my borough is paying lip service to the notion of being green.

They are not the only ones. It's officially cool to be green so banks, lenders and fund groups have been dreaming up ethical options for customers. Whether it's planting trees on behalf of customers or abandoning paper statements, they are desperate to show they really do care.

But you do wonder – even Barclaycard admitted last year that its ethically minded Breathe card was jumping on the bandwagon.

It hasn't always be cool to be green. Take fund management groups – most used to scoff at green investing. There used to be just a smattering of funds available to the ethically conscious investor – now we have more than 50 to choose from.

When a colossal brand such as Virgin launches a Climate Change fund, as it did late last month, you know that green is a sure-fire way to win consumers over. When the first ethical funds appeared in the early 1980s a fund manager would not typically invest in stocks if they were associated with industries such as tobacco, brewing, armaments, oil or pornography.

But now the vast majority of green funds focus on "socially responsible investment", or SRI as it is known. Rather than screen out stocks, funds that follow the SRI route take a more positive approach, investing in companies that adopt good environmental and social practices, regardless of sector.

Naturally this more proactive approach means that companies that would not otherwise be included on some of the strictest funds can be included in so-called ethical portfolios.

Oil companies, for instance, are typically excluded from green funds – many extract oil in countries such as Venezuela and Kazakhstan, where human rights exploitation occurs. But a stock such as Cairn Energy could count because its fields are in Bangladesh and India, which pass its labour and human rights criteria.

In short, the burgeoning ethical investment fund arena is becoming a minefield. It's amazing the types of stocks held in funds - many of them may not be what your ethics dictate.

Climate change funds are the latest wheeze and if you are warming to their credentials you might want to cast your eyes over Holden & Partner's Guide to Climate Change Investment.

The firm analysed the top 10 holdings of every SRI fund available to private investors in the UK.

Most had only insignificant holdings in clean-tech or environmental companies – instead banks and telecoms companies dominated. Only one out of 58 funds analysed claimed to have more than 50pc of its portfolio in environmental stocks.

Indeed, Virgin has admitted that many stocks in its fund will invest in companies that make a large contribution to greenhouse gases, and this could include airlines.

It argues that it operates in the real world and it is about investing in companies that have a lighter footprint than their peers in any given sector. The Holden report doesn't surprise me.

There is already doubt that many fund managers going down the SRI route do not have the resources actively to build a relationship and influence companies they invest in.

It wasn't so long ago that another report, from FairPensions, claimed that the majority of Britain's biggest occupational pension schemes were keeping their members in the dark about the environmental and social impact of their investments.

It argued that the lack of transparency meant a supporter of Amnesty International may unwittingly be backing business ventures in states with oppressive regimes, or someone who regularly donates to Friends of the Earth could discover they have effectively been supporting an oil company's climate change denial policy.

At least the age-old myth that ethical investors have to compromise on performance has been turned on its head. Performance from many groups has rivalled that of their non-ethical peers, with many frequently at the top of the performance tables, and all of a sudden green fund managers are not the hippies they were once perceived to be.

In the spirit of doing the right thing, recycle your rubbish, stop flying or invest in an ethical fund by all means – just make sure you are fully aware of what companies it invests in. It would be green of you not to.

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Ethical Funds fail to tackle Climate Change

The Guardian, Feb 09 2008 By Tony Levene

Ethical funds stand accused of ignoring climate change concerns - with many socially responsible vehicles offering little more than mainstream stocks with the most morally objectionable companies screened out.

According to IFA Holden & Partners, which specialises in SRI funds, "a closer look at SRI funds shows many invest in large companies which are far from cutting edge in terms of providing climate change solutions".

Peter Holden says: "Most funds' top 10 holdings are surprisingly mainstream. Names like Vodafone and Royal Bank of Scotland occur again and again. Some hold BP, Shell or even Total. But few hold top 10 stakes in companies which are directly tackling climate change."

And that, he believes, means ethical fund buyers have been missing out. Since January 2006, the FTSE All-World index has gained around 50% but the FTSE ET50 - an index of the world's 50 largest environmental pure play companies has soared by 150%.

Of the 58 ethical funds listed in the new Holden Guide to Climate Change Investment, just one - Henderson Industries of the Future fund - has more than 50% invested in firms combating global warming.

Many funds, including those from Scottish Widows and Marks & Spencer, did not reveal their climate change exposure but of those that did, Legal & General had the least with under 1%.

But it is clear that ethical investors have become more critical of funds packed with banks, supermarkets and carbon emitters. Standard Life's ethical funds will now scrap its airline stock holdings following investor feedback. But they have a long way to go to achieve climate change plaudits.

The Holden guide shows that just 11.5% of its £120m UK Ethical fund is invested in environmental shares.

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A world of difference

Investors Chronicle, Feb 07 2008  By John McLeod  

It used to be thought that investing ethically would hit your returns, but right now it could be your best hope of making a profit. Global warming may be one of the greatest challenges facing the world, but at the same time it might also be one of the greatest opportunities for investors -especially with global growth slowing and rising concerns about recession.

 In the past, fund managers would have dismissed environmentalists as tree huggers, but now they're rushing to establish climate change funds. The past few months have seen open-ended climate change funds launched by Schroders, HSBC and Virgin (the first new fund from Virgin for over 12 years). Private investors can also look forward to further imminent open-ended climate change fund launches from Allianz, Bramdean, F&C and Impax.

 The investment case is compelling, given the need for action on the environment. According to the Sustainability Yearbook 2008, produced by accountant PricewaterhouseCoopers and fund manager SAM: "Studies suggest that two additional planets would be required to sustain consumption in first-world style by everyone on earth. So, if our present habitat is unable to supply the energy and raw materials necessary for our survival, the options are either to become even more efficient or to make greater strides in innovation, or to do a combination of both."

  Green technologies:

Pressure for investment in clean energy is being driven by a combination of supply pressure, with the oil price breaking the $100-a-barrel level, and demand pressure, as governments are starting to impose targets.

Robin Batchelor, manager of investment trust Merrill Lynch New Energy Technology, comments: "Oil is trading at around $90 a barrel, reminding the market of the need for alternative energy, so that energy consumers, such as utilities, are beginning to appreciate alternative energy’s secure and less volatile price profile compared to traditional hydrocarbons."

Mr Batchelor continues: "The new energy sector was buoyed by news that China plans to invest over a quarter of a trillion US dollars in renewable energy by 2020 in order to support the Chinese target of generating 15 per cent of its energy from renewables by that date."

Charlie Thomas, manager of open-ended fund Jupiter Ecology, adds: "The European Commission has set some stretching targets for the European Union to generate 20 per cent of energy from renewable sources, although the UK has been given a lower target of 15 per cent, as it lags behind other members, with only 2 per cent coming from renewable sources."

Nevertheless, green technology companies can be volatile and might not be immune to a market downturn, even though the long-term fundamentals are strong. Alex Davies warns: "You don’t see as much value as you used to a few years ago. If the economy experiences a recession, these stocks are likely to be hit." He notes that the average price-earnings ratio of companies in open-ended fund Allianz RCM Global Ecotrends (due to launch in Britain on 14 February) is 24. However, Mick Gilligan, of broker Killik, argues: "It's not a sector you buy on a valuation basis. If you look at multiples, they're not cheap relative to the market but, if you take a long-term view, the sort of people who could become their customers could double their earnings overnight. If Wal-Mart decided to have solar panels on all its supermarkets, it'd make a huge impact."

  Ethical funds:

Given the degree of volatility involved, even the most committed environmentalists would be unwise to commit all their assets to funds focused solely on alternative energy.

Patrick Connolly, points out that many of the holdings are in companies that are actually polluters. For instance, between 70 and 100 per cent of the Virgin Climate Change Fund can be invested in "lighter footprint companies". The test is that a company's greenhouse gas emissions should be in the lower half of its industrial sector. This means some unlikely firms are eligible, including car manufacturer Peugeot.

 You could take more diversified exposure to green investing by using an ethical investment fund. There is a wide range of options, from 'dark green' funds to 'light green' ones. Some funds focus on excluding unethical companies, using a range of criteria. Ethical funds originated in religious circles, so the more traditional funds exclude areas such as gambling, tobacco, alcohol and pornography. Other ethical funds have a greater focus on environmental issues. For instance, Standard Life has just announced that its ethical funds will now exclude all airline companies due to their carbon emissions.

There is certainly a wide market for ethical funds - a recent survey by Alliance Trust Savings found that 26 per cent of online investors take ethical criteria into consideration before investing.

 Peter Holden, of ethical IFA Holden & Partners, points out that conventional ethical funds show wide variations in their approach to green technology. For example, Henderson Industries of the Future open-ended fund has over 50 per cent of its portfolio in "environmental solutions providers", whereas Legal & General Ethical holds less than 1 per cent of its assets in eco-tech companies.

 Some ethical funds exclude entire sectors, whereas others will hold 'best-of-breed' companies, picking the least bad companies in a sector. Some ethical funds will invest in 'dirty' companies and then try to engage with management to force change. Alternatively, ethical funds can screen out offenders, while non-ethical funds from the same management house use voting and engagement to force change (as at F&C and Morley).

Missing out entire sectors can affect performance, though, and ethical funds tend to have a high weighting in small and mid-cap companies. Large caps are more likely to have some exposure to unethical business areas - a report by Ethical Investment Research Services (Eiris) last December revealed that 54 of FTSE 100 companies "have operations in countries identified as being at high risk for human rights violations".

Avoiding large caps can lead to out performance in a bull market, but tends to increase volatility and can lead to underperformance in a bear market.

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Ethical funds' exposure not so green

Daily Telegraph, Feb 06, 2008 By Tom Stevenson   

Funds that are marketed as 'ethical' are failing to invest in companies offering environmental or climate change solutions, despite research showing that these are the key issues for their investors.

A surprising lack of exposure to pure-play environmental companies is the major finding of a comprehensive study of socially responsible (SRI) funds, which also concluded that there was often little difference between the composition and performance of ethical and mainstream funds.

The results of the survey by independent financial adviser Holden & Partners came as Standard Life, a leading ethical fund manager, said its SRI funds had stopped investing in airlines after 30pc of its investors called for it to cut all exposure to the industry. Air traffic is considered to be one of the fastest-growing causes of CO2 emissions.

 Holden's Guide to Climate Change Investment analysed the top ten holdings of every SRI fund available to retail investors in the UK. Most had relatively insignificant holdings in clean-tech or environmental companies and were instead heavily invested in banks and telecoms companies. The bias reflects the relatively narrow focus of the FTSE 100 index and the tendency of ethical funds to screen out oil and mining stocks from their portfolios, Holden said. Prudential's Ethical Trust had a 56pc weighting in financial services and telecoms companies.

 Only one out of 58 funds analysed in the study claimed to have more than 50pc of its portfolio in environmental stocks. Henderson's Industries of the Future fund has 51pc of its fund invested in environmental companies such as Praxair and SolarWorld. L&G's Ethical fund, by contrast, held less than 1pc in environmental companies and its top ten holdings included BG, BHP Billiton and Xstrata. Many ethical funds.

 Peter Holden, a partner at Holden & Partners, said "SRI and ethical funds have not kept pace with the public's appetite for environmental solutions. Many are investing in mainstream 'old economy' companies whose contribution to solving environmental problems is questionable."

Last year Standard Life surveyed its own investors, finding that more than 50pc saw climate change as one of their top three concerns. Eight of the top ten concerns highlighted by investors related to the environment.

 Julie McDowell, head of SRI at Standard Life, said: "The views of investors in our ethical funds are of paramount importance to us. We seek, wherever possible, to reflect those concerns in the criteria applicable to our funds."

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Just how green is your ethical fund manager?

 Daily Telegraph, Feb 06, 2008 By Damian Reece, Head of Business 

Standard Life has taken a leaf out of the old Midland Bank's book - it's become the "listening fund manager". After bowing to the demands of investors in its ethical funds, it's decided to sell all its airline stocks.

Each year it asks its customers which industries its socially-aware funds should and should not invest in and adjusts its portfolios accordingly (sounds like a recipe for disaster to me). The latest poll showed 30pc of its investors thought it should ground its airline shares, which it has done. It might just be on to something if a study of other so-called ethical funds is anything to go by. An analysis by financial adviser Holden & Partners of all the socially responsible funds available to UK retail investors showed that most are investing as if blissfully unaware that the top ethical consideration of investors these days is the environment.

Only one ethical fund out of 58 could show even half of its fund invested in clean-tech or environmental companies. Most are little more than FTSE 100 trackers with the oil and mining stocks taken out. In some cases, they are just telecoms and banking sector plays, with the likes of Vodafone and Royal Bank of Scotland appearing frequently.

Of course, ethical and environmental are not interchangeable and the remit of socially responsible funds is wider than saving the planet. But as eight of investors' ten biggest ethical concerns, according to a recent Standard Life survey, are related to the environment, socially-focused funds are at the very least guilty of not keeping up with the times. The bigger charge is that many of them are simply slapping an ethical label on bog-standard funds to get a marketing edge. How responsible is that?

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Fund management: 'Greenwash' muddies the waters

 

Financial Times, Feb 04, 2008 By Fiona Harvey, Environment Correspondent

Green is good, but is good green? There is a large and growing number of "green" funds in the market, some of which are also marketed as ethical investment funds, and some not. But many investors are unaware of the stark differences that sometimes exist between funds that are ethically managed - good - and funds that seek to capitalise on the business opportunities of climate change – green.  

"Very loose language is used by general ethical and SRI [socially responsible investment] funds [in regard to whether they are invested on environmentally sound principles], and a lot of confusion persists [between green and ethical funds]. We all tend to get landed under the same umbrella," says James Vaccaro, managing director of Triodos Renewables , a member of the Triodos family of companies.  

In part, the confusion arises because of the sheer number of such funds now available. "The number of green and ethical investment options is growing all the time and there's more choice available now than ever before," says Mark Robertson of Ethical Investment Research Services . "Over the last few years, we've seen a huge increase in the amount of money invested ethically."

The environmentally focused funds available in the UK include some of the biggest names, such as Jupiter's veteran Ecology Fund; HSBC, which has a Climate Change Fund; Allianz with its Global EcoTrends Fund; Schroders' Global Climate Change Fund; F&C's Global Climate Opportunities Fund; and a host of others.  

Ethical funds and green funds are often lumped together for historical reasons, says Ian Simm, chief executive of Impax: "In the 1990s, you had to be ethically or SRI-minded to want to put your capital in this [green] market."  

But investors who imagine that their ethical funds are also saving the planet, or that their green funds are managed with socially responsible principles in mind, might need to think again.

Ethical or SRI funds usually start off from a position of negative screening. They filter out companies that are involved with certain activities that some investors find morally questionable: armaments manufacturers fail to make it through most of these filters, for example, as do tobacco companies.  

But such funds may include many companies that green investors would prefer not to be associated with, says Mark Hoskin, partner at Holden and Partners, an independent financial adviser specialising in ethical investment products. For instance, there would be nothing to prevent most ethical or SRI funds from investing in oil companies such as Shell or BP.

Some green investors balk at such sectors, and want to see their money rewarding companies taking risks in developing the "low-carbon economy" that scientists say must replace our thirst for fossil fuels.  

Prime targets for green investment include renewable energy, waste management companies and companies with technologies in water efficiency and energy efficiency.

The picture becomes even more complicated, however. Shell, BP and some other fossil fuel energy companies are also active in markets such as renewable energy. These green activities make up only a tiny part of the oil companies' turnover, but they are buttressed by efforts to reduce greenhouse gas emissions from other parts of their business.  

Do these factors make such companies acceptable to the green fund manager? That depends on the fund. Investment criteria vary as widely among green funds as between green and SRI funds. Mr Hoskin points to one of the latest entrants, the Virgin Climate Change Fund. The fund, managed through GLG Partners, bills itself as "an environmental fund with a difference", whose managers "cherry pick companies which have the potential to deliver the highest economic returns, and then identify those with the best environmental credentials".  

Between 75 per cent and 100 per cent of the fund will be invested in companies that have an environmental footprint that is smaller than the average for their sector, with up to 15 per cent invested in companies that adopt environmental practices and up to 10 per cent in companies providing environmental goods or services.  

But Mr Hoskin says this is the wrong way about, and that this approach makes a mockery of selecting companies on a green basis: "It's complete greenwash." Scott Mowbray of Virgin acknowledged that the fund could invest in oil or mining companies that made a large contribution to greenhouse gases, but defended the strategy. "Our fund is different in that it operates in the real world rather than investing in companies that are green. [It is] about investing in companies that have a lighter footprint," he says. 

Is green investing a passport to higher returns? Virgin notes: "Analysis shows environmentally aware companies can deliver a better investment return." But other studies have found little difference between companies managed on greener principles and their unreconstructed fellows.

That said, the greenest sectors of the economy are experiencing a growth spurt, fuelled by the urgency of tackling climate change. Mr Simm says overall growth in environmental sectors such as alternative energy and water technologies runs at about 20 per cent a year.

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