Ethical funds
There are a range of pooled investment funds which incorporate social, environmental and ethical (SEE) criteria into investments. You can search for a fund that enables you to invest in line with your mission and achieve your financial objectives.
In this section:
What are ethical funds?
Unit trustss
OEICs
Investment trusts
Funds of Funds
Responsible Investment Issues
How Responsible Investment Operates
Questions to ask
Finding ethical funds
Further information
What are ethical funds?
An ethical or socially responsible investment (SRI) fund is a fund where the choice of investments is influenced by one or more social, environmental or ethical criteria. Ethical funds tend to come in the form of unit trusts, OEICs and investment trusts. Of course not all unit trusts, OEICs and investment trusts are ethical. Charities can also invest in common investment funds.
Some ethical funds have institutional as well as retail share classes. Institutional classes of share tend to have lower initial and annual charges and higher minimum investment levels (typically between £100,000 and £500,000). When selecting a fund you may wish to investigate whether an option is available for institutional investors.
A unit trust is an investment fund shared by lots of different investors. It is an 'open-ended fund' which means the fund gets bigger as more people invest and gets smaller as people withdraw their money. The fund is divided into segments called 'units'. Investors take a stake in the fund by buying these units.
Open Ended Investment Companies (OEICs)
An OEIC is a company whose business is managing a fund. The company's shares are listed on the London Stock Exchange, and the price of the shares are largely based on the underlying assets of the fund.
OEICs are open-ended, which means that they can adjust the amount of shares in the fund by either issuing or eliminating shares. If an investor wishes to sell their shares they can sell them back to the fund, rather than to other investors.
An investment trust is a company listed on the London Stock Exchange whose business is to invest in other companies. They are 'close-ended funds' because there are a set number of shares and this number does not change regardless of the number of investors. The share price will fluctuate according to supply and demand for the shares.
A small number of ethical funds are ‘funds of funds’. The manager of this type of fund does not put investors’ money directly into the stock market, instead they invest it in other managers’ funds. They offer similar conditions to the other three pooled funds and are generally suitable for lump sum investments. To ensure the 'fund of funds' is following the ethical criteria you require you would need to check the underlying policy of each of the funds 'contained' in that fund.
Responsible Investment Issues
These types of investments are ready-made financial products where investors’ money is pooled and the fund manager decides which shares to buy. This means that you would not choose exactly where your charity’s money is invested and you are likely to have very limited influence over the investments of the fund.
But as an investor you could write to the fund provider to express your views. Some fund managers have direct fund holder involvement through committees or feedback processes.
It is important for your charity to select a fund that suits your needs – in terms of investment strategy as well as fitting with your mission through any social, environmental or ethical criteria.
How Responsible Investment Operates
There are several ways in which pooled investments can incorporate Responsible Investment criteria into the investment process. You may wish to consider how a fund operates as well as where it invests your charity’s money.
- development and Responsibility - how an ethical investment policy is developed and adhered to
- investment strategy - which social, environmental and other ethical criteria (if any) are applied.
- research - the use of internal research teams and/or external research providers.
- communication - the communication of activities and performance, and asking investors about their concerns and priorities.
- Corporate governance and voting - a policy that will guide how fund managers use their votes at AGMs and shareholder resolutions. Publishing voting records.
Questions to ask when selecting a fund
- How active is the fund in engaging or communicating with companies? Does it put pressure on companies to improve their policies and practices?
- What happens when a company in the portfolio breaches any of the ethical investment criteria of the fund? E.g. is there immediate divestment or is the company informed to enable it to take remedial action?
- How thorough is the research available to the funds on the companies in which it invests? How regularly is the research updated?
- Is there an ethical committee or advisory board that is independent of the investment process, to make sure the fund sticks to its published ethical policy?
- How does the fund communicate with its investors? Does it have a newsletter or hold investor meetings? What mechanisms exist to allow investors to voice their concerns?
- How does the fund use its shareholder influence at company AGMs? Does it have an active voting policy which follows its ethical policy?
Finding ethical funds
More details of a range of ethical funds can be found in the Database of funds and fund managers.
The EIRIS Guide to Ethical Funds provides details of over 90 UK-domiciled ethical retail funds, including unit trusts/OEICs andInvestment Trusts. It provides fund profiles, ethical performance ratings and portfolio analysis tables and is intended to assist investors and their advisers who want to compare the policies and practices of retail ethical funds.
You can also download a full list of ethical retail funds from the EIRIS website.
The Eurosif SRI Funds Service provides details of European SRI funds, including information on performance and risk measures.
Further information
To find out more about ethical fund terminology you can use the glossaries available on the following websites:
Investor Words
This is Money
Investment Management Association
UKSIF’s online training course provides guidance on the selection of pooled investment funds
The Eurosif Retail Transparency Guidelines aim to create more clarity on the SRI principles and processes of fund managers. The website gives details of which fund managers are signatories to the guidelines and their approach to SRI.
