SSIA - Spend it or save it: Investing in socially responsible funds has become more popular, especially as the returns are improving, writes Caroline Madden.
In 2001, when Special Savings Incentive Accounts (SSIAs) were first launched, concerns over the environment were still associated with "loony left" activists and tree-hugging hippie types. Over the past six years, the environment has moved from the political fringes to become a mainstream issue, with the Stern Report, Al Gore's stark documentary An Inconvenient Truth and erratic weather all driving home the urgency of the situation.
Ireland has also clamped down on a number of "social vices" during this period - random breath testing is now the norm, and our smoking ban is being copied by other countries.
Nevertheless, ethical consumers who scrupulously separate their plastics from their cardboard, swear by organic products and shun SUVs for a Prius (which of course they would never dream of driving while drunk), may inadvertently be funding unsavoury activities such as tobacco production or animal testing.
Many equity SSIA holders, for example, will be blissfully unaware which companies their savings have been invested in over the past five years.
Given that 75 per cent of the top 100 global shares are believed to have some unethical link in terms of the companies, products and practices they support, it is quite conceivable that they may find their investments may not have been completely in line with their principles.
The world of investing has also moved on since SSIAs were launched, and the concept of ethical investing - or socially responsible investing (SRI) - has steadily gained traction in the market.
Although we still lag some way behind Britain and other overseas markets, several ethical funds are now available on the Irish market.
Ethical funds only invest in companies that meet certain standards and are likely to screen out corporations involved in arms; nuclear power; tobacco; animal abuse; pornography; pollution; environmental damage, gambling and trade with oppressive regimes.
They may also apply "positive screening", where the fund managers seek out well-run, environmentally friendly and community minded companies.
Because ethical funds deliberately exclude many potentially profitable sectors, SRI was once viewed as compromising on returns. However, the performance of such funds has shown that this is not necessarily the case.
"In the past, there was a feeling that if you went into ethical funds, you were playing the game with one hand tied behind your back," says Noel Collins, senior consultant at Mercer Investment Consulting.
"Generally speaking, returns don't seem to have been worse for the ethical funds.
"Now people are beginning to see investing ethically as something that can add to performance," Collins continues. "Whereas a few years ago, people thought of it as 'well, it's very worthy, but you're giving up some return', it's becoming more mainstream.
"It doesn't look as if performance particularly suffered, and you can even put a case forward that maybe it might even enhance performance.
"Ethical funds have been in the top quartile of [Irish] performers in Ireland," notes Ray McNicholas, founder of financial advisory firm Ethical Financial, adding that they are definitely not "lame duck" funds.
For SSIA customers undecided as to how best to use their lump sum, ethical funds now present a viable investment option which offers a clear conscience and competitive returns. Friends First's Stewardship Ethical Fund was the first such fund launched on the Irish market.
The company says it "addresses social responsibility by selecting investments that make a positive contribution to society, while avoiding investment in business activities judged to be harmful".
The fund currently invests in a range of international shares such as Toyota, which manufactures the Prius.
The minimum lump sum investment in the fund is €7,000. Alternatively, SSIA customers who wish to continue their savings habit can do so through the Smartsaver option.
Dolmen Stockbroker's Green Effects Fund allows a minimum investment of €5,000. Its mission is to provide a "cost-efficient fund that invests in a basket of ethically screened stocks taken from stock markets around the globe".
The fund invests only in companies which are on the Natural Stock Index (NSI) - an index of 30 shares which have very strong ethical principles. This includes Vestas, one of the world's biggest manufacturers of wind turbines, and Canadian Hydro Developers, which develops water, wind and biomass power facilities for electricity production.
New Ireland has also got in on the ethical act.
Its ethical fund is managed by Bank of Ireland Asset Management (BIAM), whose ethical investment review committee monitors existing stocks on an ongoing basis and screens new stocks to ensure that they meet their ethical criteria.
Areas of exclusion include the defence industry, animal testing for cosmetics and environmental damage. Hibernian Investment Managers also offer a range of SRI funds.
"Using sustainable development as an investment philosophy, we invest in companies that have low or positive environmental impacts, and whose products, services and manner of operation respect or improve the quality of our lives," the company explains.
Management charges levied on ethical funds can be higher than standard funds but, according to McNicholas, they tend to come in around the middle of the market. "Other non-ethical specialist funds could have higher management charges," he says.
He explains that Friends First, for example, charges slightly more for its ethical fund than it does for its managed fund, but higher charges are applied to its specialist funds.
"I don't think people are unnecessarily penalised," he says.
Although only a handful of Irish ethical funds are currently available, British and other overseas funds can be accessed through brokers based here.
So for the SSIA customers prepared to put their money where their mouth is, there's never been a better time to go green.
POSITIVES AND NEGATIVES
Ethical funds are generally managed according to social, environmental and ethical criteria. These criteria determine which companies the fund can invest in, and often include some of the following:
Positive criteria:
• Equal opportunity for employees
• Environmental Protection
• Pollution Control
• Conservation and recycling
• Sanctity and dignity of life
• Medicine and healthcare
• Safety and security
Negative criteria:
• Armaments and nuclear weapons
• Animal exploitation
• Oppressive regimes
• Alcohol and tobacco
• Environmentally damaging
• Embryonic research
• Poor employment practices
• Pornography
• Gambling
(Information provided by Ethical Financial)
IRISH FUNDS
Performance of Irish ethical funds over the five years to March 31st, 2007:
• BIAM
Ethically Managed Fund 5.7%*
• KBCAM
Ethically Managed Fund 5.1%*
• Friends First
Pension Stewardship Equity Fund 4.1%*
• Irish Life
SRI Global Equity Fund - 1.8%*
• Dolmen Stockbrokers
Green Effects Equity Fund 5.2%*
NB: This list is not exhaustive and some funds are only available to institutional investors
*Returns are calculated on an annualised basis.
