Report warns ethical investments may not be so green

Investors putting their money into ethical funds in the hope they are contributing to environmental protection and helping to tackle climate change could well be disappointed, according to new research from investment advisory firm Holden & Partners.

The study looked at the range of ethical and climate change funds available to UK investors and found that while many people regard the two terms as synonymous the different types of funds have widely varying means of deciding which companies to include.

It revealed that ethical funds' top 10 holdings were "surprisingly mainstream" with some even investing in oil giants such as BP, Shell and Total, and relatively few backing cleantech companies that are dedicated to tackling climate change. In contrast, the report found that the emerging generation of climate change or environmental funds tended to set out narrower investment criteria that ensure they only back firms that have a substantial interest in developing environmental solutions.

"For too long ethical and SRI [sustainable and responsible investment] funds have been deemed the same thing," said Mark Hoskins, a partner at Holden & Partners. "But they are not and the message needs to get out."

Hoskins insisted confusion over the definitions of different funds was not the fault of ethical funds, which he said had never pretended to be explicitly focused on the environment and have made it clear they also look at other criteria such as human rights records, animal testing policies and involvement in the arms trade.

However, he did advise green investors to assess ethical funds investment criteria closely before making a decision. "Ethical funds are more likely than conventional funds to back green firms but they will also invest in mainstream firms," he said. "Green and ethical funds have got lumped together in many people's minds and there is confusion in the market."

Hoskins also claimed that some ethical funds had "lagged the market" in their response to growing demand for cleantech investments and allowed the new generation of dedicated environmental funds to exploit a market that they could have addressed.

The report comes just a week after Standard Life Investments announced its ethical funds would no longer invest in aviation stock, after 30 per cent of its investors in the funds expressed concern about the aviation industry's environmental record.

In related news, research this week from Co-operative Insurance has found that demand for ethical funds has increased in the last year. The survey found that 85 per cent of people planning to invest in an ISA before the April deadline will consider an ethical scheme compared to 67 per cent last year. The research also calculates that the overall amount invested in ethical personal financial products has increased 15 per cent in the last year to £13.3bn.