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Last Updated: Wednesday, 5 March 2008, 08:57 GMT
Making a profit with a conscience
Money Talk
By Hugo Shaw
Business manager at financial advisers Bestinvest

Hugo Shaw
Hugo Shaw, business manager at financial advisers Bestinvest

Investors wishing to make a profit while retaining a clear conscience now have a bewildering array of options open to them.

Ethical funds, so-called green funds, or dark (and light) green funds are just a few of the products now open to retail investors and, contrary to received wisdom, the performance of many of these funds is admirable.

However, there is a new type of fund which is also worth consideration, which encompasses many of the benefits of the ethical funds but combines them with a positive investment ethos - that of looking for sustainability.

Although ethical funds are growing in popularity, investors may feel that the investment strategy of these offerings is somewhat negative.

Ruling in, not ruling out

Ethical funds tend, after all, to be defined more by what they won't do than what they will. For instance, an ethical fund will not invest in tobacco stocks, for instance, or the arms trade.

Sustainable investing takes a more positive approach to these issues. Sustainable investing also avoids investing in companies which may have a negative impact on the environment, human health, safety and the quality of life.

It also entails investing in organisations which are positively involved in the social, economic, environmental and ethical issues that affect their business.

A top sustainable fund should not merely "screen out" companies whose activities are regarded as unsustainable; it should actively seek out those firms that are identifying the key issues and, importantly, how they interact with each other in order so that they can understand how best to break new ground in social and environmental performance.

Sustainability reports

Fund managers are now starting to use sustainability reports issued by companies to make investment decisions. These reports are readily available from many large companies' websites and sustainability reports should now be on retail investors' radar as well.

It is not a case that one has to choose between investing according to values or investing to make a profit

These reports highlight the risks and opportunities to a business of the possible impact of consumer pressure, regulatory pressure, international standards, and environmental and health demands. Such pressures can come from social groups, government, non-governmental organisations or lobbyists.

New funds are investing in businesses that take the sustainability issues seriously. A fund manager who is giving due consideration to the wider business risks should be applauded.

Emotional and philanthropic responses aside, the net result for investors of focusing on sustainability seems to be better management control of the business, which is likely to lead to a better return on investment.

The appeal of a sustainable approach should be clear to investors. It is not a case that one has to choose between investing according to their values or investing to make a profit.

Instead the two are closely related, with the former leading to the latter over the longer term. A business that is assessing and adapting to external risks and pressures on an ongoing basis - and which tends to apply the latest technology to meet its business challenges - is likely to be well-suited to surviving in the modern world.

Celebrity pressure

For instance, 10 years ago, it would not seem credible that every UK supermarket would see organic and Fairtrade as a battle ground for market leadership but celebrity pressure from chefs such as Hugh Fearnley-Whittingstall and Jamie Oliver are changing all that with high-profile TV shows.

Jamie Oliver
Celebrity pressure has changed some attitudes

Supermarkets that are changing the way they work to meet these changing demands are showing a commitment to sustainable practices.

In 1997, there were no Fairtrade bananas on Sainsbury's shelves. Their latest advertising campaign claims that all of its bananas are certified as Fairtrade.

It is vital for companies, fund managers and investors to consider the potential risks to the future of the business in a proactive way.

Identifying the risks allows companies to seize new opportunities and gain advantage over the competition.

Sustainability gives us an indicator of how seriously a company, or indeed a fund, is taking those risks. A fund manager who is aware of all the potential risks to a business should be one to watch.

The end result for investors of focusing on sustainability seems to be better management control of the business, which is likely to lead to a better return on your investment.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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