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Belisaire Demandant L'aumone by Jacques Louis David
Business and Finance

Making good money

Merryn Somerset Webb
Is it possible to use your money for good without just giving it away?

Today, being green is pretty mainstream. The ethical investing industry even has its own dedicated index (FTSE4Good) and the UK is home to around 100 different funds all claiming to help you feel good about where you put your money and make at least as much as other, less caring, people along the way.

But is this really possible? Probably not. First you might think about just how your define sustainable and ethical. About 80% of the companies in the FTSE 100 index make it into the FTSE4Good index, as did BP until its little accident in the Gulf. Would you consider all those firms to be do-gooders? I’m guessing not.

And here we have the problem. Most people would agree that an ethical fund shouldn’t invest in tobacco or defence companies. But what about nuclear power? It’s nuclear but it is also clean energy. Big banks? They behave shockingly badly (and still are), but we still need them. Without them where would we keep our saved money or borrow new money? Fast food companies and pharmaceutical firms? You can make a case either way. And what about technology? It makes up a large part of most ethical funds because it is somehow considered to be cleaner. But is a huge firm that arranges itself in such a way as to avoid paying tax (such as Amazon) really ‘good’?

And what of a firm that uses rare earth metals mined in horrible conditions (almost all producers of phones)? Then there is retail. You might think that’s pretty harmless but most retailers will have arranged to have at least some of their manufacturing done in Asian sweat shops. The fact is that if you buy an ethical fund you are delegating decisions to a manager who may think that things you are horrified by are just fine, and vice-versa.

Fundamental contradictions

That’s just the beginning of the problem. Fans of the ethical approach claim that it reduces risk – well-behaved firms are less likely to end up in trouble with the law, for example, and are more likely to retain good staff over the long term. But it also it very often means that funds are too concentrated in some sectors and underrepresented in others. In particular, they tend to have little money invested in the ‘old’ economy industries that provide the dividend payouts that all studies show us really drive investment returns. The result? The majority of these funds fail to keep up with the market. They make you less money than funds that ignore sustainability to focus entirely on doing well.

Possible solutions

My own view is that the solution to all this is to invest with a fund that, while not necessarily branded ethical or socially responsible, actively encourages a sense of social awareness in companies in which it invests. One firm that takes this approach is First State, which, while a mainstream business, also considers ‘environmental social and governance issues’ across its own business and those in which it invests. It also tends to perform pretty well – the First State Asia Pacific Fund is up 63% over the past five years.

If you want to put your money to work in a less conventional way, you might look at Zopa.com. This is a website that allows you to lend your money directly to a variety of other people using the website as a middleman. That allows those with money to spare to make a higher rate of interest than they would get at the bank (albeit with a rather higher level of risk) and those who need money to get it at a slightly lower rate. And the beauty of the system? It cuts out the big banks we all so love to hate.

firststate.co.ukzopa.co.uk. Follow Merryn on Twitter @merrynsw. Image: Belisaire demandant l’aumone by Jacques Louis David (Wiki Commons)

The fact is that if you buy an ethical fund you are delegating decisions to a manager who may think that things you are horrified by are just fine

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