If you’re not familiar with it, it may sound a bit hoakie. But it’s legit, and that’s what they are celebrating in the UK this week. And although the UK is leading the charge on using private finance to leverage social good, the concept of ethical investing continues to gain greater traction here in the U.S.. Now, one might argue that the only social good a company need provide is a good job and decent rate of return for its investors. And 30 years ago, you would have been right. But these days, companies are being asked to deliver much much more.
Also known as socially responsible investing, or green investing, the underlying purpose is for investors to consider both financial and social good in their investment strategies. Increasingly, the public are supporting companies that conduct business according to the triple bottom line, i.e., considering people, planet and profits. As a growing sector of the public becomes aware of environmental issues and worker safety concerns, increasingly they are demanding more of corporate america, but investing in those companies that align with their ethical values. The global market for impact or socially responsible investing is estimated at $13.6 trillion. In the U.S., in 2012, $8 billion was used for impact investment, and the growth will continue, with nearly $9 billion expected in 2013.
According to Kiplinger,
In 2000, fewer than 75 socially screened funds existed. Today, more than 150 traditional, open-end funds and 17 exchange-traded funds employ various social screens. But socially screened funds are still a speck in the fund universe. As of April 30, investors had only about $55 billion in them, according to Morningstar. That figure represents roughly 0.5% of the fund industry. For perspective, Growth Fund of America — the largest U.S. stock fund — has $163 billion in assets. However, the Social Investment Forum says that in the U.S., socially screened portfolios — which include pension funds, endowments and foundations, as well as mutual funds — held $2.7 trillion at the end of 2007, the trade group’s most recent figure
Many companies have jumped on the bandwagon for ethical investing, but as an article in Forbes points out, recent efforts by environmental groups to ban the use of palm oil, used in everything from cosmetics to chocolates, reinforces the risks that lurk to the unwary.
Green energy is one of those areas where investment opportunities are exploding. Currently, China leads the world in green energy investments, driven largely by its serious air pollution issues. With concerns regarding climate change, the debate continues to rage on whether and how fast to decarbonise the U.S. economy. Banks here in the U.S., as elsewhere, are increaingly faced with the decision of whether to invest in new power plants that rely upon coal as the primary fuel source. These banks are also looking to invest in green technologies.
Investment results for green funds have been mixed. Some funds have out-performed the market, such as the PowerShares WilderHill Clean Energy (PBW), the PowerShares Cleantech (PZD), and the First Trust NASDAQ Clean Edge ETF (QCLN) funds. Others, such as the iShares Select Social (KLD) fund, have closely tracked the market. Below are 1-year charts for these funds compared to the S&P 500.
This is a social movement that will continue to grow in importance, and there is ample money to be made by those who prudently and wisely ride this social curve. So, next time you meet with your financial planner, consider whether your money can be put to good use not only preparing for your retirement, but shaping a better future for your children and grandchildren. Happy ethical investing!