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Sustainable investment

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Sustainable investment, also known as 'socially responsible' investment (SRI), has grown enormously in the past decade. In the early days, it was regarded as a fringe interest, mainly for small investors with strong views on the environment and human rights. Since then, the amount of money invested in 'sustainable' funds has increased dramatically, and many of the large financial services firms have begun offering their clients a 'sustainable' option.

Defining SRI

An exact definition of 'sustainable' or 'socially responsible' investment is hard to pin down. For example, some investors are anxious to avoid putting their money into firms that manufacture arms, alcohol or tobacco. Others want to avoid companies that excessively pollute the environment.

For more radically-minded individuals, an SRI fund should not merely 'screen out' companies whose activities are regarded as unsustainable; it should actively seek out those firms that are breaking new ground in social and environmental performance.

For this reason, ethical investors are usually advised to shop around, and to read the small print of the fund manager's literature before committing any money to the fund.

Click the 'Case studies' button at the top of the page for details of three leading indexes used to identify 'sustainable' investments, namely Dow Jones Sustainability Indexes, FTSE4Good, and Innovest Strategic Value Advisors.

Beyond screening

From the fund manager's point of view, SRI can mean more than 'screening out' undesirable companies and 'screening in' those that are judged to be sustainable. Some more active fund managers have begun to play an 'advocacy' role, putting pressure on individual companies to improve their social and environmental performance.

This can take the form of lobbying at companies' annual general meetings, or else private meetings between fund managers and company directors.

Here to stay

In many cases, sustainable funds have substantially outperformed the rest of the market. There is some debate over whether the impressive return of these funds can be attributed to sustainable business practices, or whether it merely reflects the fact that 'sustainable' businesses tend to be larger, high-tech enterprises.

Larry Chen of UBS Warburg stresses that the trend is not strongly positive or negative - at least for the time being. 'While anecdotal evidence exists to suggest that socially responsible investing generates superior returns, most attempts to directly prove the "social effect" have so far been inconclusive,' he says.

Nevertheless, the once-widespread argument that ethical investment was a 'bad bet' has been comprehensively demolished.

A European survey of 300 investment professionals recently revealed that SRI has established itself as an important sector of the investment industry. One in three reported that they or their organization offered clients an SRI option, and a further 15% had plans to do so.

In the USA, there are now around 200 SRI mutual funds available to investors. There, and in much of Europe, SRI has grown at a far higher rate than conventional funds.

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