IFAs are well placed to offer advice on green and ethical investment.  There is no single right or wrong way to do this and different advisers use different methods.  Some have extensive ethical fact find questionnaires; others prefer to talk around issues that may be of interest. 

If you are thinking of sustainable, responsible, green or ethical investment funds it can be useful to have an idea of what is available first.  This can help you to feel more comfortable with the terminology and concepts that may come up in conversation when talking with your adviser.   

There is no single definitive way to subdivide this market however one useful method is to group funds together into their green or ethical ‘style’. The seven main styles of green and ethical investment are:

Style 1: Sustainability Themed funds

 Key eco feature: Encouraging more sustainable business practices through investment 

These funds tend to invest across most business sectors, selecting companies which are considered to have long term sustainable business plans and good environmental and social practices. They may also be involved in actively encouraging better business practices.

Style 2. Balanced Ethical funds

Key eco feature: Investing in companies with higher ethical standards

These funds vary, but are likely to invest in most areas of business, often selecting ‘best of sector’ companies and avoiding those that do not meet the standards required by the fund.  These funds aim to benefit from investing in companies that have superior environmental, social and/or ethical credentials.  Funds may also aim to encourage more responsible business practices through dialogue or shareholder activism. 

Style 3. Traditional Ethical funds

Key eco feature: Avoiding negative companies

These funds strictly avoid a range of negative issues and therefore exclude more companies than other ethical approaches.  They are likely to avoid not only involvement in more controversial industries such as armaments manufacture or tobacco, but may also avoid other areas such as animal testing, aviation, alcohol or nuclear power.  They may also employ positive screening criteria. These funds tend to exclude a significant number of larger companies.  

Style 4.  Faith Based funds

Key eco feature: investment in line with faith based values

This is a small group of funds that are managed to offer compliance with a specific religious agenda.  The best known of these is Shariah funds which are intended primarily for Islamic investors.  Funds of this kind often employ external experts to guide fund managers.  These funds tend to avoid certain business areas - such as banking and gambling which are unacceptable for their investors.

Style 5. Environmentally themed funds

Key eco feature: Investing in greener companies

Funds of this kind integrate environmental issues into their investment strategies. Ethical and social issues are also taken into consideration by some environmental funds but investment decisions tend to be linked to analysis of environmental themes such as energy, waste, transport and resources.   Some funds focus on a range of environmental themes, others focus on a single issue such as climate change, water, or forestry.  All aim to benefit from holding companies with strong policies or practices in the areas they research. 

Style 6. Clean Technology funds

Key eco feature:  Investing in leading edge cleaner technologies

Funds of this kind focus on companies that specialise in newer, cleaner technologies such as recycling, clean energy, waste management or resource management.  Funds of this kind do not normally consider additional ethical implications, focusing instead on the longer term investment opportunities relating to their specialist area or areas.  These funds often invest heavily in innovative smaller and midsized companies.

Style 7.  Engagement only

Key eco feature: Encouraging positive change through dialogue

This approach is very different from Styles 1-6.  Fund managers with ‘engagement only’ strategies do not alter where they invest for ethical, social or environmental reasons.  Instead, they use their share ownership rights to encourage higher standards of management of key environmental, social or governance issues that may impact the value of company shares.  Fund managers do not necessarily promote that fact to individual investors however – preferring instead to refer to themselves simply as ‘responsible investors’. 

These seven styles represent the main approaches that are available to individual investors today.   There is however variation within each group and there are elements of cross-over between some of the styles.  Some funds could potentially fit within more than one style.    These groupings refer to ‘green and ethical’ issues only and do not relate to issues such as performance, risk or charging structures in any respect. 

When considering where to invest you may be interested in more than one style - and that can be useful as it increases choice.   Or you may want to think about investing partly in green or ethical options and partly elsewhere.  It’s fine to pick ‘n’ mix... there are no rules setting out what individual investors should or should not do!  

Whatever your preference, knowing which style or styles are of interest to you will help you to identify a forward looking investment strategy that can help meet a your personal goals. 

The value of investments can fall as well as rise and this means that you could get back less than you invest. Some funds carry additional risk because of the assets they invest in.

Julia Dreblow / www.sriServices.co.uk