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SRI: How HNWIs are Getting into the Habit

Ian Allison

6 April 2006

To be included in a socially responsible investment fund still sufficiently bestows a badge of honour for investors in any region of the world, but sacrificing performance is no longer a necessary condition. Big developments, such as the Kyoto treaty, non-smoking legislation, and a variety of environmental issues, have resulted in a mass shifts within social conscience ranging from corporations to individuals. According to recent figures from the UK-based Investment Management Association, assets under management for ethical funds in the fourth quarter of 2005 reached £4 billion ($7 billion), an increase of 18 per cent on the same quarter in 2004. Among a plethora of recent developments in this area is an update by Credit Suisse to its SRI family of fund offerings, by introducing a new investment theme under the marketing banner “Ethical by Nature”. This category will focus on the environmental and on healthcare. Robert Burdett, joint head of multi-manager products at Credit Suisse, said his firm's approach to SRI can be split into screening against what must be avoided on one hand, and actively encouraging change on the other. The rise in interest is demonstrated by independent financial advisors who have been contacting Credit Suisse in increasing numbers, Mr Burdett said. He told WealthBriefing: "Last year was relatively poor because oil and tobacco was excluded, but this year could be vintage, following Kyoto." Under Kyoto, about 40 countries including European Union nations, Russia and Japan have to cut emissions of heat-trapping gases including carbon dioxide by 5.2 per cent below 1990 levels by 2008 in an effort to curb climate change. If a country or company produces more or less carbon emissions than it did in 1990, then it will have to buy or sell them. Recently hedge fund firm Dexion Capital announced a strategy geared for electricity trading and carbon emissions trading, which has quickly evolved as a direct result of the Kyoto Protocol. The SRI evolution is healthier than ever among the most sophisticated investors. This has meant that many private banks are reviewing their products and services in order to adapt trends towards ethical investment, according to a soon to be released Datamonitor report on high net worth individual’s and socially responsible investing. David Morrow, an SRI products specialist at ABN Amro, said that demand for SRI products has become insatiable among the wealthy investors. "This is an interesting, because traditionally the people who give the most to charity are not wealthy people. There is often a convention that doing well in terms of returns means sacrificing doing good. If that is the case then how much do you have to give up? "Our business proposition is the exact opposite to this: you are not going to do well unless you start to do what is good. "It is simply disingenuous to argue that environmental issues are not material. Look at the costs to Exxon caused by the Exxon Valdez oil spill disaster. The scandal over child labour cost Nike a fortune," he added. There can be no doubt that the drive to ameliorate global poverty is now deeply ensconced within the collective consciousness of developed countries. Cynics might add that HNWI’s can afford to have a conscience, but actually SRI funds is where the smart money is gravitating in any case, say many analysts. Many SRI experts say that what is required in this fast-moving area is concentrated analysis into governance of countries, sectors, individual companies; things that are often over-looked. What, for example, would the next Michael Moore, the US polemist, expected forthcoming assault on the US pharmaceutical industry mean for the SRI investor? Lee Coates, an advisor with specialist group Ethical Investor, said: "We work by asking a client what they want to avoid, what their objectives are, what they have to invest and when they want their money. There are a number of specialist funds available and we are usually able to find one that will match most clients' criteria." Often referred back to is the first ever SRI fund which was launched by Friends Provident way back in 1984. If, for example you had invested £1,000 in F&C’s Stewardship Growth fund then, that would have grown into £8,400 today, which is only slightly under the return you would expect to get from a typical plain vanilla UK growth fund. Christine Foyster, head of investment marketing, Friends Provident, told WealthBriefing: "After our SRI operation hit the £1 billion mark, we decided to commission some research into this area. It turned out that two thirds of those people we spoke to said they would like to be given the opportunity to invest ethically." Ms Foyster explained that Friends Provident's SRI funds operate in much the same way as Credit Suisse's proactive/screening methodology. The screening part, or stewardship, removes all the so-called "sin stocks" from the investments. The screening process for Friends Provident is done by an independent committee, she said. Aegon's Ethical Income Fund, managed by Phil Milburn, is another favourite among investors. This fund is fifth out of 75 in recent corporate bond performance tables, which shows that its ethical commitment has not held it back. Also popular with advisers is the Jupiter Ecology Fund, which invests in firms that have a policy of protecting the environment. It has 50 per cent exposure to UK stocks and 22 per cent in North America. Mr Morrow added that ABN Amro plans to appeal to HNWI’s attraction to tax breaks with the launch of three SRI funds based in Luxembourg later this year. "There is a plan to set up a fund that gives to charity and offers tax breaks on certain given percentages. We are also planning an SRI fund in Brazil which will be the first emerging market SRI fund in Europe for the energy market," he said.