BACKGROUND TO SOCIALLY RESPONSIBLE INVESTMENT

Broadly speaking, there are three approaches to socially responsible investment (SRI).

Support

Support, also known as positive screening, seeks to invest in those companies with a commitment to responsible business practices, positive products and/or services. This approach can come in a number of forms. These include best of sector, thematic investment (such as investing in environmental technologies) or investing in companies providing basic human necessities.

Avoidance

Avoidance, also known as negative screening, is the most commonly recognised form of socially responsible investment. Avoidance means not investing in companies that do not meet the ethical standards by which the fund is run. Most ethical funds, for example, will not invest in companies with a poor track record on environmental pollution.

Engagement

Engagement, also known as shareholder activism, is applied by some fund managers to encourage more responsible business practices. It relies on the influence of investors and the rights of ownership. This might not alter stock selection and mainly takes the form of dialogue between major investors and companies on issues of concern, and may extend to voting practices. Fund managers may engage on areas such as inappropriate remuneration and climate change.

Click here for more on screening criteria.

PERFORMANCE

There is a common concern that screened socially responsible investments underperform other investments. However, the evidence from a number of studies does not appear to support this.

A CIS report Sustainability Pays in 2002 reviewed many studies of performance and concluded that "the use of social, environmental and ethical screens does not impact negatively on share performance". Another performance study carried out by ABN Amro Asset Management in September 2001 found that responsible investment "has generally not led to a long-run risk-adjusted under performance".

An independent report by WestLB Panmure in November 2002 - 'More Gain than Pain' - commented that there was: "No sign of a systematic performance disadvantage" and: "Although the observation period is not long enough to be able to draw final conclusions, a simple performance comparison already shows that the frequently voiced hypothesis of a systematic return disadvantage of socially responsible investment is clearly not supported by the present data."

"After controlling for investment style, we find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period."
- International Evidence on Ethical Mutual Fund Performance and Investment Style; Bauer, Koedijk, and Otten (2002 Winner of the Moskowitz prize for reporting on socially responsible investment)

A comprehensive report by an analyst at UBS Warburg in 2001, showed that returns are no more affected by an SRI style than for any actively managed fund driven by an investment style (Chen; 2001, pp. 13-15). It is these active style and factor bets, which have determined the performance of such funds rather than any SRI logic per se. The report points out that most actively managed funds under-perform their passive benchmarks and SRI funds are no different in this respect (Chen; 2001, pp. 14).

"Ethical funds have performed more or less on a par with their non-ethical equivalents"
- Investment Management Association, Guide to Ethical Investment 2003

For details of our Ethical Funds Screening Service click here.