Read more on ethical and sustainable investing in Morningstar's Ethical Investing Week 2013.
Since the global recession investors have – rightly so – been concerned primarily with cash preservation and income paying stocks. While many would like to think of themselves as ethical investors, the common misconception is they would have to do-away with stability in order to support green industry.
But this is not the case. Ethical investing is a considerably broader sector than many imagine. Traditional ethical funds – referred to as “dark green”, do take a very restrictive approach to investing, screening out stocks that are involved in “unethical” industries such as alcohol, animal testing, tobacco, oil and armament firms.
Retailers that do not uphold certain factory conditions or manufacturing companies that do not comply with reduced carbon initiatives also fail to make the grade. The oldest ethical fund F&C Stewardship even originally refused to invest in financial companies because their practices included little consideration of environmental and social impacts.
But light green funds – or socially responsible investment (SRI) – simply invest in best of class, companies across all industries who are more ethically responsible than their peers. Many SRI funds even held 
BP (BP.) before the Gulf of Mexico oil spill, as the energy giant operated in a more socially responsible way than its peers.
While both these funds would describe themselves as “ethical” they will contain companies that investors would not associate with ecological industries – such as the Standard Life UK Ethical fund which invests in Vodafone (VOD), Barclays (BARC) and online retailer Asos (ASC).
This means it is possible to build a stable, well diversified portfolio while investing ethically.
Investors who which to take the remit further can do – some funds only invest in companies that benefit from or are engaged in the reduction of climate change. Investors looking for more concentrated exposure to green industry should consider a targeted ethical fund such Impax Environmental Markets (IEM) or Jupiter Ecology ( Bronze rated). Impax fund manager Hubert Aarts says that far from hindering a portfolio’s success, ethical screening actually protects investors from future losses.
“Well managed companies, committed to strong sustainability and good governance, generally demonstrate superior long term performance. We are all painfully aware of the result of years of poor governance within the UK banks and the far reaching impact this continues to have. The omission of companies that don’t deliver on these practices is simply another layer of risk reduction,” he said.
Aarts also believes that ethical investment is in tune with global drivers for strong long term risk-adjusted returns.
“The world population is growing rapidly,” he said. “We are seeing massive wealth creation in developing countries and subsequent changes in consumption. In future more of us will inevitably live in water stressed areas and water shortages will be further exacerbated by changes in agriculture and an increase in extreme weather patterns and possibly longer term climate change.”
Markets associated with this movement are growing considerably faster than most other sectors, and demand continues to rise.
He continued: “Investors who ignore these fundamental economic drivers could miss out on an enormous opportunity for value creation. The prospect that these markets will outperform the wider economy over the next decade, and beyond, resonates strongly with a broad-based interest in long-term ethical investing.”
