John Stepek on why it doesn’t always pay to invest with a conscience
John Stepek on why it doesn’t always pay to invest with a conscience
If you were among the many shoppers who have made their way to the new branch of Daylesford Organic in Pimlico since it opened in February, you’d have been confronted by three floors of ‘organic produce’, every square foot a veritable ‘breath of the countryside in London’ as the company’s website likes to have it.
This massive pick-and-mix of virtuously sourced, organic goodies, from hand-made cheddar to free-range chicken burgers, is designed to leave you with a full stomach and a clean conscience − and, the more cynical might suggest, a considerably lighter wallet.
Regardless of whether you feel that Daylesford is promoting healthy living and sustainable farming, or is simply a new lifestyle choice for wealthy urbanites with a somewhat idealised vision of country life, there’s no denying the success of the organic movement.
Consumers in the US and the UK in particular have taken the concept to heart; according to research group Datamonitor, UK sales have doubled in the past six years to £1.6 billion, and are expected to hit £2.7 billion by 2010.
The rise in organic’s popularity has been mirrored by an equally rapid growth of interest in lifestyles and concerns that once would have been considered ‘alternative’. Few things can demonstrate the stellar rise in interest in the environment more amply than the sight of the Tories and Labour fighting it out over who can promise to raise green taxes the highest, for example.
And as people take more interest in supporting causes they approve of through the products they consume, they are also taking an interest in how they can invest their money to reflect these concerns. And why not? After all, if your meat and veg can be organic, and your energy can come from a wind turbine, then why can’t your investments be green and free-range too?
Sounds like a great idea – but of course, it’s not that simple. Let’s look at the organic food sector, for example. We’ll leave aside for the moment the controversy over whether companies such as Daylesford are bad for local producers or not, or whether the organic movement is even sustainable, given that it takes up more precious resources, such as land and water, to yield a smaller number of crops.
Whatever the rights and wrongs, the population has bought into the organic story whole-heartedly, which should mean that as well as supporting a cause you believe in, an investor should be able to turn a tidy profit too.
The trouble is, everyone else thinks so too. And here’s where we run into the first problem with putting your investment money where your mouth is − you have to think about the investment angle as well as the ethical angle. And the consumer love affair with all things green has not gone unnoticed by the City and Wall Street.
For example, you can’t invest directly in Daylesford, which is privately owned, but you can buy shares in a similar US company, Whole Foods Market, which plans to open a massive store in High Street Kensington later this year.
This organic supermarket arouses suspicion among the more anti-corporate elements of the green lobby − chief executive John Mackey has memorably compared unions to herpes − but its organic credentials are hard to attack, while despite the anti-union stance, workers are treated very well, with the highest-paid employee allowed to earn no more than nineteen times what the lowest-earning employee gets.
Business has been booming − and if you’d invested in the shares ten years ago, when organic food was still vaguely alternative, you’d have made well over ten times your original stake by now.
But those kinds of returns don’t go unnoticed for long − investors have piled into Whole Foods Market and the shares now look rather expensive. And when consumers take to a story the way that we and the Americans have taken to the organic story, it’s not long before even the most cynical competitor realises they’d better jump on board.
Wal-Mart, which fulfils broadly the same hate figure for trendy middle-class Americans that Tesco does for our own well-heeled suburbanites, is piling into the organic food market, with the result that Whole Foods is now merging with one of its former rivals, Wild Oats Market, to try to keep up with competition from its larger mainstream rivals.
Of course, if you’re an experienced investor, this doesn’t matter − you’ll be happy to sift through potential ethical stocks yourself until you find one that you reckon can deliver both profits and moral satisfaction. The less experienced stock picker, on the other hand, might be tempted to leave it to the professionals.
There are plenty of funds to choose from − in fact, there are now nearly 90 ethical retail funds available in the UK, with ten opened in the past year alone, according to Ethical Investment Research Services. But even here there are some tough choices to be made.
‘Dark green’ funds tend to adopt negative criteria − they avoid industries that most people would consider unethical, such as alcohol, tobacco, gambling and the weapons trade; ‘light green’ funds on the other hand, invest in companies that make a positive contribution, such as alternative energy stocks.
There are other approaches, which the more cynical might suggest are a way of paying lip service to ethical investing, while still being able to buy into some of the biggest stocks in the UK.
These funds will buy into companies like the oil majors, for example, as long as they are making at least some attempt to improve their environmental record. The other big idea used to justify this is the policy of ‘engagement’, whereby the fund manager uses their clout to attempt to persuade companies to adopt more ethical policies.
This may well work for smaller companies, but the idea of a single fund manager being able to persuade a BP-sized company to swap drill rigs for solar panels wholesale is just laughable.
On top of this, everybody’s ethics are different, which is why investing via funds can be dissatisfying. You may have nothing against the drinks industry,
for example, but would rather not invest in big tobacco or arms dealers, but also want to invest actively in companies helping to solve water shortages in China. And everyone has different investment goals − some are more tolerant of risk than others; some want to generate an income, while others are happy to lock their money away for the longer-term.
Finding a specific fund to match all these criteria might be a tough call − and that’s where many fund managers offer services to high-net-worth individuals (with around £250,000 or more to invest) whereby they will individually screen stocks with your own specific ethical and investment aims in mind.
Of course, as we’ve already noted, where there’s money to be made, there’s also a disorderly queue to join the bandwagon − and not all fund management groups are equal when it comes to investing your money ethically.
Lee Coates of the Ethical Investors Group cites the case of one well-known fund management group which told a titled client that ‘we could adopt ethical criteria, but we would just be pandering to you being a silly little girl’. The family, needless to say, took their considerable wealth elsewhere.
Clearly, this is an extreme case, not to mention a somewhat unwise approach to customer service. But in many ways, blunt honesty is preferable to the more likely answer, which will be to humour the client, but not necessarily deliver.
‘In the wealth management market there are a lot of fund managers out there that say they can [invest ethically]. If I’m being nice, I’d say they genuinely try, but fail to do it. If I weren’t being nice, I would say they knowingly lie,’ says Coates.
So how can you avoid this? It’s pretty straightforward − any wealth manager who says they’ll invest your money ethically has to sit down with you and find out what that means to you, and draw up a list of potential investments that match your requirements. And this is the most important point − you have to know what you want.
‘For some people, this will come down to straightforward religious or cultural reasons – various Islamic financial products have come about because of stipulations against usury in that religion. But one man’s usury is another’s efficient use of capital; and for those of us who have no guiding principles beyond the general nagging feeling that we should be doing something good with our money − or at least, not doing anything bad − deciding what you truly believe in can be harder than you might think.
As Lee Coates says, an element of compromise is likely to be necessary. For example, when vegan clients are asked what their investment criteria are, they might respond by saying they want to avoid any companies associated with abusing animals.
‘I slide a piece of blank paper along the desk and tell them, “That’s a list of the FTSE 350 companies you can invest in”. Because name me a company that doesn’t serve meat in their staff canteen.’ The Ethical Investors Group offers an ethical stock screening service from £500, and a free ethical funds directory which can be sorted according to various ethical criteria.
Not everyone’s a fan of ethical investing of course.
One well-known, wealthy investor has ruled out screening for ethical issues, on the grounds that it is too complicated, and takes up time that could be better spent on other things.
Who is this curmudgeon? Actually, it’s Bill Gates, both the richest man in the world, and, through the Bill & Melinda Gates Foundation, arguably the most generous too. This $35-billion philanthropic body finances grants of more than £1.5 billion a year – perhaps it’s better to concentrate on ensuring that your investments make money, which you can then spend ethically in whichever way you please.
After all, $1.5 billion can buy a lot of organic cheddar.