Focus on Ethical Funds

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Sustainable development is a form of growth (including economic improvement) which, by preserving the quality and quantity of the natural heritage and nature reserves, does not compromise the possibility of future generations enjoying the benefits of progress.
For businesses, therefore, the theme of sustainability transmutes into a commitment to achieve the highest possible profit margins while at the same time respecting current laws and regulations and defining strategies that are sensitive to ecological and social issues.
Many people might not know, however, that, if these companies are listed on the stock exchange, it is possible to invest in them by means of mutual funds. The latter have taken on the name of “ethical funds” precisely because of this underlying moral feature.

Put simply, a mutual fund is an investment instrument that groups together the financial resources of a number of people. The savings deposited by the individual subscribers flow into a “mutual cash fund” that goes to make up the sum to be invested on the financial markets. Asset managers then have the task of identifying the most profitable means for investing these resources, choosing the best mix possible between stocks, bonds and liquidities. They must also try to optimise the latter options according to the geographical location, goods sector and capitalisation (value) of the issuing companies.

In Europe, the sum of resources handled in ethical funds has reached 49 billion euro, with 437 financial products available to individual investors (figures updated as of July 2007. Source: Avanzi SRI Research/Vigeo Italia).

Compared to the total “traditional” funds invested in Europe, the percentage of ethical funds is in fact quite low (hovering around 1%), but is nevertheless enjoying a steady increase over time:

- 0.3% in June 2003
- 0.5% in June 2004
- 0.5% in June 2005
- 0.6% in June 2006

Leading the way in SRI (Socially Responsible Investing) funds is Great Britain, with 26% of the total sum, followed by France (18%) and Belgium (14%). Italy is in sixth place and with over 3 billion euro invested in ethical funds accounts for 17% of the Europe based industry (Avanzi SRI Research/Vigeo Italia).

Fig. 1 – Total sums invested in SRI funds broken down into national percentages. Source: Avanzi SRI/ Vigeo Italia (June 2007)

Risk levels and yield

Generally speaking, any decision to invest must be preceded by a careful assessment of several factors (such as risk and return on investment), all of which are likewise applicable to the field of ethics.

Ethical funds may be deemed “more risky” compared to traditional funds, perhaps because of the more restricted range of choices between sectors and shares (hence the greater presence of other sectors and other shares) which leaves them more exposed to the cyclical dynamics of the markets.
However, during a recent study of SRI fund offers in Italy (Avanzi SRI Research/Vigeo Italia), it emerged that there is no direct correlation between ethical investment and risk. Excluding Europe equity funds (i.e. those which invest exclusively in listed shares on the European market), SRI funds are less risky than traditional ones, both within their own category and in relation to the market index. Monitoring and ethical choice, indeed, exclude sectors (and hence investable shares) which are subject to high risk of legal controversy or modification. The greater risk associated with Europe equity funds may derive from the fact that the Europe area is characterised by a weighty presence of financial shares, and that up to a few years ago oil and energy companies were completely excluded from SRI investments on account of the strong environmental impact of their activities. Today the situation has changed, and greater commitment to, and care for, ecological issues on the part of these sectors has allowed companies such as ENI and British Petroleum to be present in the indices of sustainability and in the portfolios of the European SRI funds.

Again as regards Italian stocks, Unicredit and Telecom Italia have been inserted among the first twenty shares most purchased by ethical fund organisers (Avanzi SRI Research/Vigeo Italia, June 2007). Telecom Italia is in 18th position and is the second telephone company share included in the list, lying behind Vodafone and followed immediately by Telefonica. Telecom Italia has been committed to sustainable growth for 10 years, and in 2007 was inserted into the FTSE4Good Environmental Leaders Europe 40 Index, one of the family of share indices for sustainable investment promoted in 2001 by The Financial Times and The London Stock Exchange. 

Moving now to the question of yields (another discriminating factor when it comes to investment choices), over a three-year time horizon (hence up to June 2007) ethical funds in Italy produced lower returns compared to traditional ones. This gap narrows if we consider a longer time period of, say, five years (which, however, consents analysis of only half the financial products). One possible explanation for this lies in the reduced exposure to the better performing shares of the last three years (such as oil), and in the greater presence of a number of companies who have registered weaker performances (i.e. telecommunications). While awaiting the possibility to broaden the horizon of analysis to 10 years in Europe, it might be useful to study precisely that timeframe in another geographical area such as the United States. There, analysis carried out in June 2007 by Morningstar (a leading independent financial research company) highlighted the fact that the gap between SRI and traditional investment funds is bridged completely over 5 years, while over 10 years the ethical fund achieves better performances compared to its traditional counterpart, thus demonstrating that it is a solid long-term option.