By Ron Robins

In most Western countries between 40 to 80 per cent of investors want to invest ‘ethically.′ They desire to make money and create a better society. However, the funds screening investments for ethical conduct usually make up less than 3 per cent of total mutual fund, unit trust, or ETF assets in those countries. These ‘ethically screened′ funds frequently focus on investments related to the environment and sustainability, social responsibility, or are faith-based, and so on.

Investing ethically, for some investors, is important as they believe it also impacts their personal or spiritual development. They believe they ultimately share in the responsibility for the activities of the company, companies or funds that they invest in.

In many Muslim countries ethical investors invest in Islamic financial products such as sukuk—Islamic bonds. These assets sometimes represent a significant proportion of total financial system assets in these countries.

The discrepancy in Western nations between investors desiring to invest ethically and how they actually invest is because: investors fail to discuss with their advisor what ethical values are important to them; the investment advisor is not interested or does not ask clients about their values; or the advisor is not familiar with, or is averse to, ethically screened investments.

Advisors are often averse to ethically screened investments as they believe they lower returns due to restricting the universe of investments. However, dozens of academic and investment industry studies generally conclude that the long term results of ethical and conventional funds are similar. In fact, funds that focus on environmental, social and governance (ESG) screens sometimes outperformed. (See my web page Ethical Investing Studies/Research.)

Fortunately though, the majority of US advisors are at least starting to recommend green and sustainable investments, says a survey released in April 2010 by TerraVerde Capital Management. It seems that a similar trend could be occurring in other developed countries as well, especially in the UK, Germany, Canada and Australia.

If, as an investor you are looking to invest in ethical investments, it is wise to find an advisor who is favourable to them. Of course, the advisor should be properly registered or licensed and have the requisite education too. However, in many countries advisors are frequently salespeople and not necessarily required to act in the investor′s best interest.

For instance, in the US, brokers are legally third-party salespeople whereas registered investment advisors must always put the client′s interest first. So, get to know the rules of the game where you live before placing your funds with an advisor. The next thing is to see if the advisor you are considering is, or has been, involved in any legal problems. Also, ask what trade and professional organizations they belong to.

The advisor should preferably have been in business for five or more years. Ask him or her for at least three references from other clients who have been with him/her for at least two years. Friends, family or business associates might be helpful in finding a suitable advisor as well.

Be sure to find out how advisors are compensated. Many are now moving to a fee-based approach. New regulations in the UK, Australia, and even in the US, point in this direction. Often the fee is a percentage of the assets you bring to them and is usually anywhere from 0.25 to 3.00 per cent per year. However, the case for paying higher than 1.00 or 2.00 per cent annual fees is generally hard to justify. Also, some advisors may even charge a fixed per visit fee.

In many countries, advisors are paid various commissions from the mutual fund/unit trust companies on the funds they sell to their clients. It is best to understand very clearly what fees you are paying. Consider not only the upfront and possible redemption fees, but most especially the total annual fees.

Over the long term high annual fees can eat up most of your gains—or even most of the original sum invested! If you pay 2 per cent in annual fees, after 25 years you are left with around 60 per cent of your possible portfolio. At 5 per cent you are left with close to 20 per cent!

Also, ask who will actually be servicing your account and dealing with you. If it is to be a junior person, request the same information that you have for the advisor. Beware of ‘bait and switch′ when it comes to these services. Furthermore, ask the advisor to show you investment plans he/she has completed for other ethically oriented clients.

For most of humanity, many of our ethical values are alike, no matter where we may live or what religion we follow. Therefore, if most investors apply their ethical values to their investments, then over the long-term only companies embodying these values could truly prosper. So if this sounds good to you, find an advisor who can help transform your values into suitable investments for you.

Investors applying their ethical values to their investments may not only enjoy good profits, but also help create a more sustainable and ethical world.

September 30, 2011

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