A major study of ethical investors in the UK using a questionnaire survey, personal interviews with investors and with key informants in the industry, focus groups, a computer simulation experiment and media analysis.
For more details contact:The methods employed included a questionnaire study of ethical investors (N=1, 146); 20 interviews and discussions with key personnel in the ethical/green investment movement; focus group discussions (comprising on average seven participants each) with 29 non-ethical investors and 49 ethical/green investors; 20 telephone interviews with investors who specifically take a financial loss in investing ethically; and finally a computer simulation study of the investment choices of 27 ethical investors and 29 "standard investors".
1. Who are the ethical investors?
In many ways the profile of ethical investors is much the same as for "standard investors":
the majority are over 45, with professional qualifications. The most striking features are that
fully 31 per cent work (or have worked) in the education sector and 14 per cent in health:
only 4 per cent and 5 per cent respectively are from the manufacturing and retail sectors.
Sixteen per cent described themselves as supporters of the Labour Party; 7.7 per cent Liberal
Democrats: there were more ethical investors who were supporters of the Green Party (2.4
per cent) than the Conservative Party (1.8 per cent). Of the charities, 37 per cent are
members of the National Trust, 31 per cent Amnesty International, 29 per cent Oxfam, 28 per
cent Friends of the Earth, 26 per cent Greenpeace. Sixteen per cent were allied to the Church
of England, 10 per cent to the Society of Friends. All of which leads to the conclusion that
ethical investing is part of a "life style" package and that these people have already taken
action in a number of ways, putting their moral concerns into practice.
2. What do they want and what do they think they are doing?
Most UK ethical funds avoid investing in companies which are failing ethically (e.g. by
having poor pollution records, or by being involved in the manufacture of armaments).
Another approach, more common in the USA, is to retain investment in such companies while
seeking to improve their ethical performance by means of active engagement with them. The
survey results reveal that large majorities of ethical investors support the status quo of current
ethical unit trust practice, agreeing that they want to avoid companies doing harm; help
companies who make a positive contribution to society; and to remain ethically clean. There
is a little less enthusiasm, although the majority still support it, for the more radical step os
using investments to campaign for change. There is comparatively little support for this
campaigning to take place in companies with poor ethical records whilst maintaining
investments in them.
The focus groups revealed that ethical investors recognised that an important part of their motivation was to salve their consciences, yet this was not the whole story: they felt, like water dripping on stones, their choices were having an influence for good in the market place. The use of these kinds of metaphors suggests that change is seen an inevitable but gradual process, shying away from more radical options as they were seen as "too political".
3. Are they prepared to take a loss?
From among our questionnaire sample, approximately 80 per cent of ethical investors had
"mixed" portfolios, containing ethical and "standard" investments. On average respondents
had about 31 per cent of their total investments invested ethically. The majority felt that
ethical investments were no more risky than other investments, although there was a tendency
to believe they produced lower returns. Over 80 per cent say they would stay with ethicals
where the return was 8 per cent compared to an "ordinary" unit trust return of 10 per cent;
loyalty even remaining with the comparative figures of 5 and 10 per cent respectively.
("Ordinary" investors changed their portfolios more readily.) These results are substantiated
by the computer simulations which showed that ethical investors more readily moved into
ethicals when they performed well and were more likely to stick with them when they
performed badly.
At the most extreme, people who invest in Shared Interest, who receive interest rates of half (or less) the interest rate paid by building societies, are most clearly putting their money where they morals are, although this money was frequently referred to as "spare cash".
4. Authenticity
Friends Provident, a large mutually owned life insurance company, originally set up in the
1830s by Quakers, gave birth to the largest UK ethical unit trust, Friends Provident
Stewardship, in 1984. Since 1984 about 30 additional ethical unit trusts have been set up in
the UK, managed by some 20 mainstream institutions. Collectively these funds have
approaching 150,000 investors and 1.3 billion pounds sterling of funds under management.
The 17 ethical funds that have their own ethical policies (usually avoidance criteria) use the
services of the Ethical Investment and Information Service (EIRIS), which has a sophisticated
database of some 1000 UK companies. Consequently, when these funds claim that they do
not invest in companies which manufacture armaments, for example, they can be sure of
considerable accuracy: the same perhaps cannot be said of some of the funds which do not
use EIRIS.
Ethical unit trusts and Independent Financial Advisers (IFAs) are themselves engaged in a debate between financial return and moral commitment. Financial advisers worry when moral commitment might weaken financial performance: there is a belief that ethical investors want their cake and eat it and as financial advisers they feel a professional responsibility to give, first of all, sound financial advice. The same is true of IFA, although there are some groups, such as Holden Meehan, who specialise in ethical and green investments. It is perhaps this general concern for financial integrity which leads most ethical trusts not to withdraw from companies they find are behaving badly until the price is right. This contradicts the wishes of ethical investors themselves, where only 19 per cent feel that trusts should "hold onto the shares for a reasonable period until it can sell them for the best price" under these circumstances. Thirty-four per cent prefer instead that trusts should "stick with the company in order to persuade it to change (until such time as it realises this is hopeless)"; and 40 per cent support the option "sell investments immediately, stating publicly why it is doing so, even if this affects the fund's performance".
5. Policy
Can ethical/green investing make a difference and if so how? Three ways are suggested:
culture, share boycotting, engagement. The mere existence and growth of these funds may
contribute to a process of cultural change. The disproportionate coverage in the press has
made them highly visible and while the stock market first treated them with derision, they are
now taken much more seriously. The share boycotting idea is that by avoiding certain
companies this will reduce the price of those shares. While, under certain circumstances,
boycotting companies may work in consumer markets, presently ethical investing is such a
small part of the Stockmarket that boycotting will have little direct effect. The most
successful way forward may be active engagement. In the United States, for example, the
Coalition for Environmentally Responsible Economies (CERES) has managed to persuade
companies to sign up to a set of principles about corporate environmental practice. By 1995
over 50 companies had endorsed the principles and not only the ones you might expect like
Ben and Jerry's and the Body Shop, but also very large companies such as General Motors,
Sun Oil, ITT and Polaroid. At present, in the UK, there is a reluctance among investors to
follow this route.
6. Economic Psychology
Economics tries to explain and predict economic consequences from economic antecedents.
Economic psychology attempts to illuminate the "black box" of the decision maker who lies
between the two. In so doing researchers in this area believe actors are driven by mixed
motives and not self interest and wealth maximization alone. Ethical investing provides an
excellent case study. These investors are not cranks, nor are they saints. Neither can these
preferences be dismissed as mere fad or fashion; they are likely instead to be part of a
growing movement and an ideological shift away from the notion that pursuit of self interest
(in a narrow sense) somehow benefits society in a way that moral intentions cannot. This is
not an instance where individual differences mysteriously cancel one another out: there is no
symmetrical "anti-ethical" or "anti-green" movement. People are increasingly putting their
money where their morals are and this is changing, albeit slowly, the nature of the market
(including the Stockmarket) and challenging the reductionist assumptions of neo-classical
economics.