Green and ethical funds
A green or ethical/SRI (socially responsible investment) fund is a fund where the choice of investments is influenced by one or more social, environmental or other ethical criterion.
There are three main approaches to green and ethical investment: screening, best in class and engagement. These strategies can be used in combination as well as on their own.
Screening is where companies may be excluded or ‘screened out’ from investments because of their involvement in certain activities deemed to be negative, such as heavy polluters, arms companies or animal testers. This approach also applies where companies are included and ‘screened in’ for their positive contributions to society and the environment such as those providing renewable energy, waste and recycling services, or organic farming.
A best-in-class approach applies social, environmental and ethical guidelines to give a preferred selection when all other factors are equal. For example, an ethical fund might have criteria which enable it to invest in the oil and gas sector, but only in those oil companies which are ‘best in their class’ as they have a better record on the environment and human rights than others in their sector.
A third approach, engagement, does not necessarily exclude, include or prefer companies but rather the investor or fund manager actively encourages companies to adopt social and environmental best practices. This can involve meetings with senior management and voting at relevant annual general meetings. Many of the larger ethical pension funds tend to concentrate solely on engagement, while retail funds can combine all of the above methods.
