Ethical funds
There are a range of pooled investment funds which incorporate social, environmental and ethical criteria into investments. You may provide a fund that enables charities to invest in line with their mission and achieve their financial objectives, or help charities to find such a fund.
In this section:
What are ethical 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, open-ended investment companies (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 charities may wish to investigate whether an option is available for institutional investors.
Responsible Investment Issues
These types of investments are ready-made financial products where investors’ money is pooled and a fund/investment manager decides which shares to buy. This means that a charity would not choose exactly where its money is invested and it is likely to have very limited influence over the investments of the fund.
But some fund managers have direct fund holder involvement through committees or feedback processes.
A charity may need help to select a fund that suits its needs – in terms of investment strategy as well as fitting with its 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. Advisers and fund managers may be able to help a charity consider how a fund operates as well as where it invests the 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
The following list may be useful for advisers:
- 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 Ethical Screening website includes a searchable database of ethical funds for use by FSA registered financial advisers.
The Eurosif SRI Funds Service provides details of European SRI funds, including information on performance and risk measures.
Further information
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.
